SEC proposes changes to disclosures on acquisitions and disposals

By Ken Tysiac

The SEC on Friday proposed rules changes designed to provide investors improved information about acquired and disposed businesses while reducing the cost and complexity to businesses preparing disclosures.

Currently, Rule 3-05 of Regulation S-X requires SEC registrants that acquire a significant business other than a real estate operation to provide separate audited annual and unaudited interim pre-acquisition financial statements of that business. The number of years of financial information that must be provided depends on the significance of the acquisition to the registrant. Acquisitions of real estate operations are addressed in this regard in Rule 3-14 of Regulation S-X.

Article 11 of Regulation S-X requires registrants to file unaudited pro forma financial information relating to the acquisition or disposal of a business. This information typically includes a pro forma balance sheet and pro forma income statements based on historical financial statements, including adjustments showing how the transaction might have affected the companies’ financial statements.

Meanwhile, Rule 3-05 applies to registered investment companies and business development companies. But due to the nature of investment companies, it is often unclear how to apply these reporting requirements to acquired funds.

The proposed amendments have arisen from the SEC’s ongoing project to evaluate disclosure requirements. For years, regulators and standard setters such as the SEC and FASB have been trying to find ways to simplify financial reporting without eliminating information that’s useful to investors.

The SEC’s proposed changes would:

  • Update the significance tests under these rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring the significance of a transaction, and conforming the significance threshold and tests for a disposed business.
  • Require 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.
  • Permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity.
  • Clarify when financial statements and pro forma financial information are required.
  • Permit the use of, in certain circumstances, or reconciliation to, IFRS.
  • No longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year.
  • Align Rule 3-14 with Rule 3-05 where no unique industry considerations exist.
  • Clarify 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.
  • Amend the pro forma financial information requirements to improve the content and relevance of such information; more specifically, these improvements would include disclosure of “transaction accounting adjustments” reflecting the accounting for the transaction; and “management’s adjustments,” reflecting reasonably estimable synergies and transaction effects.
  • Make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X.
  • Add a definition of significant subsidiary that is tailored for investment companies.
  • Add a new Rule 6-11 and amend Form N-14 to cover financial reporting for fund acquisitions by investment companies and business development companies.

Comments on the proposal will be accepted for 60 days after its publication in the Federal Register and can be submitted through the SEC website.

Ken Tysiac ( is the JofA’s editorial director.

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