SEC Issues Final Amendments to Reporting Requirements
In May 2019, the Securities and Exchange Commission (“SEC”) proposed changes to reporting for acquisitions and dispositions by registrants.
The proposed amendments resulted from an ongoing, comprehensive evaluation of the existing disclosure requirements and concerns that they were overly cumbersome and slowed access to the capital markets. In May 2020, the SEC issued the final amendments substantially as originally proposed with some changes and clarifications.
The amendments should be welcomed by acquisitive registrants as these changes will likely reduce the number of acquisitions deemed significant as well as reduce the amount of required financial information for significant acquisitions.
Under SEC Rule 3-05, a registrant that acquires a business is generally required to provide separate audited annual and unaudited interim pre-acquisition financial statements of the business if it is significant to the registrant.
Significance is measured using a sliding scale and if the acquisition is deemed significant, the registrant must file separate audited annual financial statements and unaudited interim abbreviated income statements of the acquired business.
Most notably, these final amendments modify the tests of significance, limit the required annual financial statements of the acquired entity to two years, revise the required proforma financial information for acquisitions, allow for the use of abbreviated financial statements of a significant acquisition, align the criteria of Rule 3-05 with acquisitions by real estate entities, and include other minor changes.
However, despite the SEC’s desire to improve the reporting for acquisitions, they did not revise their definition of a business to reconcile with Generally Accepted Accounting Principles (“GAAP”). GAAP and the SEC each have their own unique framework to determine what is a business combination versus an asset acquisition.
The financial reporting requirements differ considerably between an asset acquisition and a business combination and yet it remains possible that an acquisition may be considered a business combination under the SEC but an asset acquisition under GAAP.