SEC Proposes Amendments to Disclosures about Acquired and Disposed Businesses

May 2019

On May 3, 2019, the SEC proposed amendments to the financial disclosure requirements for acquired and disposed businesses. The proposal is part of the SEC’s Disclosure Effectiveness Initiative and follows the SEC’s Request for Comment on the Effectiveness of Financial Disclosures about Entities Other Than the Registrant[1] published in September 2015. The proposed changes are intended to enhance the financial information about acquired and disposed businesses for investors, facilitate access to capital, and reduce the complexity and cost to prepare the required disclosures.

Some of the significant proposed amendments compared to the current requirements are as follows:
Topic Proposed Amendments Current Guidance
Measuring the significance of an acquired business
  • Revise the investment test to compare the registrant’s investment in and advances to the acquired business to the registrant’s “aggregate worldwide market value”[2]
  • Revise the income test to:
    • Add a measure of significance based on revenue (significance would be based on the lower of the income or revenue tests)
    • Use income from continuing operations after income taxes
    • Use the absolute values for loss years in the income averaging calculation
  • Permit the use of certain pro forma financial information to measure significance
  • The investment test compares the registrant’s investment in and advances to the acquired business to the carrying value of the registrant’s total assets
  • The income test is based on income from continuing operations before income taxes and often produces anomalous results under certain circumstances (for example, when the acquired business has a large loss and the registrant has minimal income). The income averaging calculation uses “zero” for loss years.
  • The significance tests do not permit the use of pro forma financial information
Measuring the significance of a disposed business
  • Conform the significance tests for a disposed business with those of an acquired business (where applicable) and raise the significance threshold to 20%
  • Permit the use of certain pro forma financial information to measure significance
  • A disposed business is considered significant using a 10% threshold under S-X Rule 1-02(w)
  • The significance tests do not permit the use of pro forma financial information
Financial statement requirements for a significant acquired business
  • Limit the required historical annual financial statements for an acquired business to two years even when significance exceeds 50%
  • Remove the requirement to provide the comparative prior period interim financial statements when significance is less than 40%
  • Remove the requirement for separate financial statements of a significant acquired business in a registration or proxy statement once the business has been included in the registrant’s financial statements for a complete fiscal year
  • Permit the use of abbreviated financial statements if certain requirements are met
  • Three years of historical annual financial statements are required for an acquired business if significance exceeds 50%
  • The comparative prior period interim financial statements are  required when significance thresholds are met
  • Financial statements of a significant acquired business are generally required to be provided in a registration statement or proxy statement when they have not been previously filed or the acquired business is of major significance
  • Requests to provide abbreviated financial statements in lieu of full or carve-out financial statements must be cleared by the SEC staff prior to filing (except for certain acquisitions that include significant oil and gas producing activities)
Financial statement requirements for individually insignificant businesses
  • Revise the disclosure requirements for “individually insignificant businesses” that are significant in the aggregate to disclose the impact of all acquired businesses in the pro forma financial information, but only require financial statements for those that are more than 20% significant
  • Historical financial statements (and the related pro forma financial information) are required for a substantial majority of individually insignificant but significant in the aggregate businesses
Financial statement requirements for acquired real estate operations
  • Generally align S-X Rule 3-14 with S-X Rule 3-05 (which includes eliminating the requirement for three years of financial statements for acquisitions from related parties and revising S-X Rule 3-06 to allow a period of nine to twelve months to satisfy the requirement to provide one year of financial statements for an acquired/to be acquired real estate operation)
  • The significance thresholds and financial statement requirements (including timing) differ under S-X Rule 3-14 for acquired real estate operations and S-X Rule 3-05 for acquired businesses
Pro forma financial statements presented in accordance with Article 11 of Regulation S-X
  • Permit two categories of pro forma adjustments:
    • “Transaction Accounting Adjustments” (to reflect the accounting for the transaction), and
    • “Management’s Adjustments” (to reflect certain synergies and other transaction effects of the acquired business within the pro forma financial statements)
  • Pro forma adjustments are limited to those adjustments directly attributable to the transaction, factually supportable, and as it relates the income statement, expected to have a continuing impact. Synergies and other actions taken or to be taken by management to integrate the acquired business after consummation of the transaction may not be reflected, although a discussion of such facts is allowed with transparent disclosure. 

The proposed amendments also include updates to:
  • Clarify when historical financial statements and pro forma financial information is required;
  • Make corresponding changes to the requirements for smaller reporting companies;
  • Permit the use of, or reconciliation to, IFRS as issued by the IASB in the financial statements of an acquired business in certain circumstances;
  • Define a significant subsidiary tailored to business development companies and other investment companies; and
  • Address financial reporting for fund acquisitions by business development companies and other investment companies. 
The proposal is subject to a 60-day public comment period after its publication in the Federal Register.


[1] BDO’s comment letter on the Request can be found here.
[2] The current investment test would continue to apply to registrants with no publicly traded common equity.