On May 21, 2020, the Commission adopted amendments to the ﬁnancial statement disclosure requirements for business acquisitions and dispositions by Commission registrants that also apply to companies undertaking an initial public offering. The amendments resulted from the Commission staff’s ongoing evaluation of Regulation S-X and Regulation S-K as part of its Disclosure Effectiveness Initiative and were proposed by the Commission in May 2019.
When a Commission registrant acquires a signiﬁcant business, other than a real estate operation, Rule 3-05 of Regulation S-X requires the ﬁling of certain pre-acquisition ﬁnancial statements of the business. Whether an acquired business is signiﬁcant is determined by applying the signiﬁcance tests set forth in the deﬁnition of a “signiﬁcant subsidiary” in Rule 1-02(w) of Regulation S-X, referred to as the Investment Test, the Asset Test, and the Income Test. If any of these three tests exceeds the 20 percent signiﬁcance threshold, then separate audited annual and unaudited interim pre-acquisition ﬁnancial statements of the acquired business (“Rule 3-05 Financial Statements”) must be ﬁled. The significance tests in Rule 1-02(w) also determine whether unaudited pro forma ﬁnancial information is required under Article 11 of Regulation S-X for both acquisitions and dispositions of signiﬁcant businesses.
The signiﬁcance tests and disclosure requirements related to an acquisition or disposition of a business in Regulation S-X are technical in many respects. Compliance can be costly and burdensome, and has historically resulted in a number of requests to the Commission staff for relief. The amendments discussed in this part are intended to facilitate more timely access to capital by registrants and reduce the complexity and costs of preparing these disclosures, while at the same time, improving ﬁnancial information available to investors.
The amendments became effective January 1, 2021. Voluntary compliance was permitted in advance of the effective date, provided that the amendments were applied in their entirety.
Republished with permission. The full article for, "Commission Amends Financial Disclosure Requirements for Business Acquisitions and Dispositions," was published in the American Bar Association's The Business Lawyer; Vol. 76, Summer 2021, Section C.