SEC Proposes Registrant Friendly Changes | FTI Consulting

SEC Proposes “Registrant Friendly” Changes to Reporting Requirements

Acquired and Disposed Businesses - Action Alert

Forensic & Litigation Consulting

June 18, 2019

On May 3, 2019, the SEC issued a proposed rule1 that would amend the financial statement requirements for acquisitions and dispositions of businesses, including real estate operations, and related pro forma financial information. These changes are intended to improve the information investors receive regarding acquired or disposed businesses, reduce complexity and costs of preparing the required disclosures, and facilitate timely access to capital.


The proposed amendments include changes to improve the disclosure requirements for: (1) acquired or to be acquired businesses in SEC Regulation S-X, Rule 3-05;2 (2) real estate operations in SEC Regulation S-X, Rule 3-14;3 and (3) pro forma financial information in SEC Regulation S X, Article 11,4 as well as modifications to the significance tests in SEC Regulation S-X, Rule 1-02(w).5 In addition, the proposed rule includes amendments to financial disclosures specific to smaller reporting companies6 (SRCs) and investment companies.7

Key Provisions

Rule 3-05 requires registrants, including entities undertaking an initial public offering (IPO), to file the separate preacquisition/disposition financial statements for a significant acquired/disposed or to be acquired/disposed business. Similarly, Rule 3-14 requires a registrant to provide preacquisition financial statements for a significant acquired or to be acquired real estate operation (real estate acquiree). The number of periods of the acquiree’s or disposal business results that are required to be filed are based on the significance levels determined after performing the applicable significance tests in Rule 1-02(w) (i.e., the investment, asset, and income tests).

Further, Article 11 requires a registrant to provide pro forma financial information depicting the impact of a significant acquisition or disposition.

1. SEC Proposed Rule Release No. 33-10635, “Amendments to Financial Disclosures About Acquired and Disposed Businesses”. Public comments on the proposed amendments are due July 29, 2019, and can be submitted online via by referencing S7-05-19.
2. SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
3. SEC Regulation S-X, Rule 3-14, “Special Instructions for Real Estate Operations to Be Acquired.”
4. SEC Regulation S-X, Article 11, “Pro Forma Financial Information.”
5. SEC Regulation S-X, Rule 1-02(w), “Definitions of Terms Used in Regulation S-X: Significant Subsidiary.”
6. SRCs, as defined in SEC Regulation S-K, Item 10(f)(1), “General: Smaller Reporting Companies,” and issuers relying on SEC Regulation A (collectively referred to as SRCs).
7. Investment companies registered under the Investment Company Act and business development companies (collectively referred to as investment companies).

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