These amendments affect financial disclosure requirements in Rules 3-05, 3-14, and Article 11 of Regulation S-X, as well as related rules and forms. The changes would apply to the financial statements of businesses acquired or to be acquired by the registrant and business dispositions. In addition, the proposed changes include new Rule 6-11 of Regulation S-X and amendments to EDGAR Form N-14 for financial reporting of acquisitions involving investment companies.

Numerous rules would be affected by these changes. Rule 3-05 of Regulation S-X generally requires a registrant to provide financial statements when it acquires a significant business other than a real estate operation. These statements include separate audited annual and unaudited interim pre-acquisition financial statements of the business to be acquired. The number of years of financial statements that must be provided depends on the relative significance of the acquisition to the registrant. In addition, Rule 3-14 of Regulation S-X addresses the uniqueness of real estate operations and requires a registrant that has acquired significant real estate operations to file financial statements with respect to such acquired real estate operations. Article 11 of Regulation S-X also mandates that registrants file unaudited pro forma financial information (pro forma balance sheets and income statements) relating to acquisitions and dispositions. Finally, Rule 3-05 applies to registrants that are registered investment companies and business development companies. Because these companies differ from non-investment companies in that they principally invest for returns from capital appreciation and/or investment income and therefore generally do not consolidate entities they control or use equity method accounting, the current rules are often unclear in how reporting requirements apply to acquired funds.

Specifically, the proposed changes aim to:

• update the significance tests underlying these rules,
• 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,
• allow omissions in disclosures of 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, or reconciliation to, International Financial Reporting Standards in certain circumstances,
• 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,
• bring Rule 3-14 into alignment 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,
• change the pro forma financial information requirements to improve the content and relevance of this information; more specifically, these improvements would include disclosure of “Transaction Accounting Adjustments” (which reflect the accounting for the transaction) and “Management’s Adjustments” (which reflect reasonably estimable synergies and transaction effects),
• change corresponding smaller reporting company requirements in Article 8 of Regulation S-X,
• add a definition of a significant subsidiary that is tailored for investment companies, and
• 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

The amendments are the result of the SEC’s ongoing comprehensive evaluation of disclosure requirements, including the Commission’s 2015 Request for Comment on the Effectiveness of Financial Disclosures About Entities Other Than the Registrant. These proposed changes will be open for public comment for 60 days after publication in the Federal Register. The proposed rule changes can be read here. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the reference number (S7-05-19) in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, please remember to include reference number S7-05-19.

Sources:

SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses (www.sec.gov)
Amendments to Financial Disclosures about Acquired and Disposed Businesses (www.sec.gov)