The Securities and Exchange Commission, on May 3, voted to propose rule amendments to improve the information investors receive regarding the acquisition and disposition of businesses.

The proposed amendments are also intended “to facilitate more timely access to capital and to reduce complexity and compliance costs of these financial disclosures.”

“The proposed rules are, first and foremost, intended to ensure that investors receive the financial information necessary to understand the potential effects of significant acquisitions or dispositions,” said Chairman Jay Clayton. “The staff’s work to eliminate unnecessary costs and burdens of the current rules, which in some cases have been significant and frustrated otherwise attractive transactions, while at the same time improving the disclosures investors receive should be applauded.”

The proposed changes are intended to:

  • improve for investors the financial information about acquired and disposed businesses;
  • facilitate more timely access to capital; and
  • reduce the complexity and cost to prepare the disclosure.

Proposed amendments

The proposed changes would, among other things:

  • update the significance tests under these rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance and conforming the significance threshold and tests for a disposed business;
  • 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;
  • permit disclosure of financial statements that omit 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 in certain circumstances of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board;
  • 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; and
  • amend the pro forma financial information requirements to improve the content and relevance of such information.

More specifically, these improvements would include disclosure of “Transaction Accounting Adjustments,” reflecting the accounting for the transaction; and “Management’s Adjustments,” reflecting reasonably estimable synergies and transaction effects.


When a registrant acquires a significant business, other than a real estate operation, Regulation S-X generally requires a registrant to provide separate audited annual and unaudited interim pre-acquisition financial statements of that business.

The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant.

Regulation S-X addresses the unique nature of real estate operations and requires a registrant that has acquired a significant real estate operation to file financial statements with respect to such acquired operation.

Article 11 of Regulation S-X also requires registrants to file unaudited pro forma financial information relating to the acquisition or disposition. Pro forma financial information typically includes a pro forma balance sheet and pro forma income statements based on the historical financial statements of the registrant and the acquired or disposed business, including adjustments intended to show how the acquisition or disposition might have affected those financial statements.

Rule 3-05 of Regulation S-X also applies to registrants that are registered investment companies and business development companies. Investment company registrants differ from non-investment company registrants in that they principally invest for returns from capital appreciation and/or investment income, are required to recognize changes in value to their portfolio investments each reporting period, and generally do not consolidate entities they control or use equity method accounting.

Due to the nature of investment companies, under the current rules it is often unclear how to apply these reporting requirements to acquired funds.

Comments received to a related, 2015 Request for Comment are available online.

Among questions posed by SEC staff in the new proposal:

  • Are the proposed revisions appropriate? Are there additional revisions we should consider to further improve the significance tests?
  • Are there particular types of transactions for which these measures would lead to a less-informative indicator of significance?
  • Would aggregate worldwide market value of the registrant’s voting and non-voting common equity held by its non-affiliates, a value based on the expected offering price in an initial public offering, enterprise value, or some other market valuation be a more appropriate proxy? Why or why not?
  • Are there practical impediments to our proposed approach to the inclusion of contingent consideration? If so, what are they and how would they best be mitigated?
  • We have proposed to add a revenue component to the Income Test. Would this approach more accurately reflect the significance of the acquisition, or could it result in material acquisitions not triggering financial statement disclosures? Would it reduce incidents of otherwise insignificant acquisitions being deemed significant by registrants that have marginal or break-even net income?
  • Would using different percentage thresholds for the revenue component and the income component mitigate the potential that the proposed Income Test would under-identify transactions?
  • Will our proposal to require recurring annual revenue appropriately limit the circumstances when the revenue component would not provide a meaningful result? Should we instead provide that the revenue component would not apply if either the registrant or tested subsidiary had no or nominal revenue?
  • Should we define nominal revenue, and what definition should we propose?

The new proposal will be subject to a 60-day public comment period.