SEC Adopts Amendments to Improve M&A Disclosures in SEC Filings

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In This Article

• Overview of Amendments

On May 21, 2020, the SEC adopted amendments to existing rules on the acquired and disposition of business disclosures required in SEC filings to help provide better financial information to investors, early access to capital, and a reduction of the complexity of the entire process. The amended regulations will allow investors to assess the significance of acquired/disposed businesses, including real estate operations and investment companies. Although the changed rules will be effective on January 1, 2021, voluntary compliance is permitted.

Overview of Amendments

The amendments apply to Rules 3-05, 3-14, 8-04, 8-05, 8-06, and Article 11, as well as in other related rules and forms of Regulation S-X. Together with this, the SEC has adopted amendments to the significance tests in the “significant subsidiary” definition in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2. The SEC has also adopted new requirements regarding fund acquisitions specific to registered investment companies and business development companies.

“Significant Subsidiaries” here refers to any direct or indirect Subsidiary of the Company within the meaning of Section 1-02(w) of Regulation S-X.

Until now, Rule 3-05 of Regulation S-X applies to the financial statements of acquired/disposed businesses except for real estate, and Rule 3-14 of Regulation S-X defines rules specific for real estate covering details on the number of years and types of required financial statements. Rule 3-05 also includes registered investment companies and business development companies. Investment companies differ from the non-investment companies as they invest for returns from capital appreciation and/or investment income. Besides, they show portfolio investments change every reporting period and generally do not consolidate entities they control or use equity method accounting. Until now there was no clarity on applying these reporting requirements to acquired funds for investment and non-investment companies.

Article 11 of Regulation S-X also requires a pro forma balance sheet and income statement. This financial information based on the earlier financial statements of the registrant, and the acquired or disposed of business includes adjustments reflecting the final effect on the financial statements after the business’ acquisition or disposition.

Amendments Adopted

Discussed below is a list of changes as described in the press release of the SEC:

• There is an update in the significance tests in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2:
  • • Revision in Investment Test
    • Revision in Income Test
    • expanding the use of pro forma financial information in measuring significance
    • conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses.
• The new rules will eliminate historical financial statements for insignificant businesses and expand the pro forma financial information to show the aggregate effect in all material respects.
• The companies will only be required to disclose financial statements of two recent fiscal years.
• The financial statements that omit certain expenses for certain acquisitions of a component of an entity are permitted.
• Under certain circumstances, the new rules allow following International Financial Reporting Standards issued by the International Accounting Standards (“IFRS-IASB”)
• According to the new rules, after the acquired business’ financial statements have been incorporated in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year (depending on significance) separate financial statements for acquired business will not be required
• Under new rules, in cases where no unique industry considerations exist, Rule 3-14 will be aligned with Rule 3-05
• There will be clarity in the application of Rule 3-14 in
  • • the determination of significance;
    • the need for interim income statements;
    • special provisions for blind pool offerings; and
    • the scope of the rule’s requirements;
• Amendment of the pro forma financial information specifying:
  • • Transaction Accounting Adjustments
    • Autonomous Entity Adjustments
    • Optional Management’s Adjustments
• There will be changes to the smaller reporting company requirements as given in Article 8 of Regulation S-X, and Regulation A
• Final rules also include an amended definition of “significant subsidiary.
• A new Rule 6-11 is included, and Form N-14 is revised, which defines financial reporting requirements for investment companies and business development companies.

Here is a consolidated review of the adopted changes in a tabular form as given by the SEC