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SEC proposes new public company disclosure rules

June 05, 2019

By Dave Thayer

On May 3, 2019, the Securities and Exchange Commission proposed amendments to improve and streamline financial disclosures relating to business acquisitions and dispositions. The proposed amendments are primarily to rules contained in Article 11 of Regulation S-X, but include changes to other related rules and disclosures, such as Form 8-K.

The SEC stated the purpose of the amendments is to:
• Improve the financial information about acquired and disposed businesses available to investors
• Facilitate more timely access to capital
• Reduce the complexity and cost of preparing financial disclosures

Significance test updates

The proposed amendments update the significance tests (Rule 1-02(w) of Reg S-X) by revising the Investment Test, which currently requires a comparison of an acquiring company’s investment in an acquired business to the acquiring company’s total assets. The proposal would instead require a comparison of an acquiring company’s investment in an acquired business to “the aggregate worldwide market value of the acquiring company’s voting and non-voting common equity.” If such market value were not available, the current test based upon the acquiring company’s total assets would apply.

The proposed rule also revises the Income Test, which currently requires a comparison of an acquiring company’s and acquired business’ income from continuing operations before income taxes. The SEC proposes instead using income from continuing operations after income taxes and add a comparison of an acquiring company’s and acquired business’ consolidated total revenue.

Use of pro forma information

The “significance threshold” for dispositions is increased from 10% to 20% with this proposal and the use of pro forma financial information is expanded in measuring significance. This is a departure from the current rules, which generally do not permit pro forma modifications to the financial statements of the company and the target to be used to determine significance.

Additional highlights

The SEC also proposed the following changes:

• Requiring only up to two years of financial statements under Rule 3-05 for acquisitions with a significance exceeding 50% rather than up to three years.

• Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity.

• Clarifying when financial statements and pro forma financial information is required and updating the language used in SEC rules.

• Permitting the use of, or reconciliation to, International Financial Reporting Standards in certain circumstances.

• Updating Significant Oil- and Gas-Producing Activities. Rule 3-05 of Regulation S-X does not currently detail industry-specific disclosures for a significant acquired business that includes “significant oil- and gas-producing activities.” The Proposal would codify the reporting practices in the Financial Accounting Standards Board supplemental disclosures and allow for audited statements of revenues and expenses (excluding depletion, depreciation, amortization, corporate overhead, income taxes and interest expense not comparable to proposed future operations) rather than Financial Statements.

• No longer requiring separate acquired business financial statements under Rule 3-05 once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year.

• Modifying and enhancing the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet returned.

• Aligning Rule 3-14, which is specific to acquiring real estate operations, with Rule 3-05 where no unique industry considerations exist. This includes clarifying the application of Rule 3-14 regarding the determination of significance; the need for interim income statements; special provisions for blind pool offerings; and, the scope of the rule’s requirements.

• Amending the pro forma financial information requirements to improve the content and relevance of such information by replacing the current restrictive criteria imposed on pro forma adjustments with two new categories of adjustments to be presented as separate columns: (i) “transaction accounting adjustments” that would reflect the estimated purchase accounting under U.S. generally accepted accounting principles (GAAP) or IFRS-IASB, and (ii) “management adjustments” that would include reasonably estimable synergies, and other transaction effects that have occurred or are reasonably expected to occur.

• Making corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X.

• Proposing additional regulatory requirements specific to investment companies to address the unique attributes of that group of registrants.

The SEC is accepting comments on proposed changes though July 29, 2019.

David A. Thayer, Esq., is a corporate and transaction attorney, and former CPA, that focuses on being a deal maker, not a deal breaker, as he helps clients achieve their business dreams. He can be reached at

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