SEC Staff Updates the Financial Reporting Manual

SEC Staff Updates the Financial Reporting Manual

The staff of the SEC’s Division of Corporation Finance published an update to the Division’s Financial Reporting Manual (FRM) on December 1. Like previous updates, the inside cover of the FRM lists a summary of the paragraphs that were updated. The updates include:

  • Revisions to guidance related to the impact of adopting new accounting standards on pro forma financial statements:[1]

    • If a registrant adopts a new accounting standard as of a different date or using a different transition method than a significant acquired business, the registrant should conform the adoption dates and transition methods of the acquired business to its own in the registrant’s pro forma financial statements that reflect the acquisition. The staff noted that it will consider requests for relief from this requirement.

    • If a registrant retrospectively adopts a new accounting standard at the beginning of its fiscal year, and later acquires a significant business for which pro forma financial statements are required, the pro forma income statement for the last completed fiscal year need not reflect the new accounting standard before it is reflected in the historical financial statements of the registrant.  For example, if a calendar year end registrant adopts ASC 606 on January 1, 2018 using a full retrospective approach and acquires a significant business in September 2018, the registrant’s pro forma income statement for the year ending December 31, 2017 included in the registrant’s Form 8-K need not reflect the adoption of ASC 606.[2] However, registrants should make appropriate disclosure in the notes to the pro forma financial statements if the adoption of the new standard is expected to be material.

  • Revisions to address the adoption of new accounting standards when EGC status is lost:

    • An EGC may elect to use an extended transition period for complying with any new or revised accounting standards.  If an EGC that makes this election loses its EGC status after it would have been required to adopt a new standard absent the extended transition period, the company should generally adopt the standard in its next filing after losing status.  The staff expects that EGCs should plan appropriately to adopt new accounting standards if they have taken advantage of the extended transition period provision.  However, the guidance also indicates that the staff may consider other alternatives upon the loss of EGC status depending on facts and circumstances.      

  • Conforming and non-substantive revisions to Topic 11, Reporting Issues Related to the Adoption of New Accounting Standards

    • Conforming edits were made to address the guidance above and the issuance of ASU 2017-13 (which permits certain public business entities to adopt the new revenue and leasing standards using the effective dates applicable to private entities).[3] 

[1] The updates are consistent with previously published guidance on how to think about the adoption of the new revenue standard (ASC 606) in the context of pro forma financial statements.  However, the FRM update relocates and expands this guidance so that it now applies more broadly to all new accounting standards. 

[2] This fact pattern assumes that the registrant has not already filed revised financial statements as of and for the year ending December 31, 2017 reflecting the adoption of the new accounting standard. A registrant that has already filed such financial statements reflecting the new accounting standard (e.g., on a Form 8-K or with a new or amended registration statement filed prior to the acquisition) would be required to reflect the new accounting standard in the pro forma income statement for the year ending December 31, 2017.

[3] Refer to our SEC Flash Report for further information about this guidance.