SEC Eases Financial Disclosure Requirements Relating to Acquisitions and Dispositions

The US Securities and Exchange Commission (the “SEC”) recently adopted amendments that will reduce the burden on public companies with respect to financial statement disclosure of recent acquisition and disposition activity. The changes are effective January 1, 2021, but companies can rely on the new rules immediately, as long as the new rules are applied in their entirety from the date of early compliance. We expect to see the changes reflected in disclosures in the Rule 144A market as well.

The changes principally focus on Rule 3-05 (Financial Statements of Businesses Acquired or to be Acquired) and Article 11 (Pro Forma Financial Information) of Regulation S-X, and their related forms and regulations. Among other things, the amendments:

  • Revise the tests for significance to make it less likely that an acquisition will be deemed significant, or for an acquisition’s significance level to exceed certain thresholds;
  • Require at most two years, rather than three years, of financial statements of the acquired business to be filed;
  • No longer require separate acquired business financial statements once the business has been included in the company’s post-acquisition financial statements for a complete fiscal year (or nine months for significance levels below 40%);
  • Permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) in certain circumstances;
  • Simplify the adjustments allowed in pro forma financial information; and
  • Raise the significance threshold for the disposition of a business from 10% to 20%.

The SEC has also amended Rule 3-14 (Special Instructions for Real Estate Operations to be Acquired) and adopted new rules and amendments to specifically govern financial reporting for acquisitions involving investment companies. These changes are not addressed in this note.

Read the full note here