Division of Corporation Finance Updates the Financial Reporting Manual

December 2020

In November, the Division of Corporation Finance updated the Financial Reporting Manual (FRM) to include rule amendments adopted by the Securities and Exchange Commission (SEC), incorporate updated guidance released by the SEC staff, Division of Corporation Finance, Office of Chief Accountant, and PCAOB, and to remove outdated guidance and GAAP references in other areas of the FRM. While the updates are reflected as of October 31, 2020, there are various SEC rule amendments from 2020 that are not yet incorporated or included in the updates.
The below is a summary of the published updates along with the pending updates.
SEC Rule Amendments Reflected in the FRM Updates SEC Rule Amendments NOT Reflected in the FRM Updates
Definition of a Smaller Reporting Company Financial Disclosures about Acquired and Disposed Businesses
Definition of an Accelerated Filer and a Large Accelerated Filer Financial Disclosures about Guarantors and Issuers of Guaranteed Securities
Disclosure Update and Simplifications Qualification of Accountants
Additionally, the following updates were made to the FRM:
Description Summary
Audit requirements for the target of a special purpose acquisition company (SPAC)
Relevant sections: 1140.5, 2200.7 and 4110.5
The guidance now explicitly states that the financials statements of a target of a SPAC included in a proxy statement or a Form S-4/F-4 should be audited in accordance with PCAOB standards as the staff considers the filing to be akin to the target’s initial public offering.
Rule 3-13 waivers under Regulation S-X
Relevant section: 2050.1
S-X Rule 3-13 allows the staff to provide relief for certain financial statements otherwise required by S-X Rule 3-05. Guidance is now included to state the relief from providing historical financial statements for a significant acquired business does not extend to the registrant’s requirement to report the business acquisition within four business days in accordance with Item 2.01 of Form 8-K. 
Qualified audit reports
Relevant section: 4220
Guidance is now included to note that even if the staff does not object to the inclusion of a qualified audit report in a filing (which is a rare occurrence), the registrant is not considered to be a “timely filer.” As a result, such registrant is not in compliance with certain rules and becomes ineligible to use certain forms, such as Forms S-3 or S-8 to register securities.
“To-be-issued” audit report for financial statements included in a registration statement
Relevant section: 4710
In a registration statement, certain transactions occur at or prior to effectiveness for which retroactive presentation of the transaction is required in the audited financial statements (e.g., a stock split). The staff may accept a “draft report” in these circumstances and revised the FRM to include another example of when the “to-be-issued” auditor’s report may be accepted. This draft report is sometimes referred to as a “legend opinion.”
Income test calculation under S-X Rule 3-09 when there are multiple equity method investees
Relevant section: 2410.4
Clarifies that the calculation of the denominator in the income test is to include the registrant’s equity in the earnings (or loss) of all investees.
Additionally, updates to various sections of the FRM were made to:
  • Incorporate guidance released by the SEC staff, Division of Corporation Finance, Office of Chief Accountant, and the PCAOB over the past several years;
  • Remove outdated GAAP references and the related guidance; and
  • Update relevant GAAP adoption dates.