SEC Proposes Improvement to Disclosures for Acquisitions and Dispositions

The SEC is proposing for public comment amendments to improve information investors receive regarding the acquisition and disposition of businesses. The proposal facilitates more timely access to capital and reduces complexity and compliance costs of these financial disclosures.

The Proposal

The proposal amends the following guidance for financial statements of businesses acquired or to be acquired and business disposals:

-Rule 3-05, Financial statements of businesses acquired or to be acquired;

-Rule 3-14, Special instructions for real estate operations to be acquired; and

Article 11 of Regulation S-X.

The SEC also proposes new Rule 6-11 of Regulation S-X and amends Form N-14 for acquisitions involving investment companies.

Among other things, the proposal:

-Updates the significance tests by revising the investment test and the income test, expands the use of pro forma financial information in measuring significance, and conforms the significance threshold and tests for disposed businesses;

-Requires the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years;

-Permits disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;

-Clarifies the requirement fo financial statements and pro forma financial information;

-Permits the use in certain circumstances of, or reconciliation to, International Financial Reporting Standards issued by the IASB;

-No longer requires separate acquired business financial statements once the business is included in the registrant’s post-acquisition financial statements for a complete fiscal year;

-Aligns Rule 3-14 with Rule 3-05 where no unique industry considerations exist;

-Clarifies the application of Rule 3-14 on the determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule’s requirements; and

-Amends the pro forma financial information requirements to improve the content and relevance of such information. These improvements include disclosure of “Transaction Accounting Adjustments,” reflecting the accounting for the transaction and “Management’s Adjustments,” reflecting reasonably estimable synergies and transaction effects.

Comment Period

The proposal has a 60-day public comment period following its publication in the Federal Register.

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