By Servando A. Osornio Portillo

In May 2020 the Securities Exchange Commission (“SEC”) issued final rule to amendment SEC rules and forms to improve their application, assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses, including real estate operations and investment companies. The changes are intended to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.

The final rules are effective on January 1, 2021, but voluntary early compliance with the final amendments is permitted.

Significant tests

  • Rule 1-02(w) of Regulation S-X was amended to modify the investment and income tests (The SEC did not propose to revise the asset test substantively) that are used to determine whether a subsidiary is “significant”.

Abbreviated financial statements

  • SEC recognized the difficulty registrants face in obtaining and the cost of preparing Rule 3-05 Financial Statements and thus, allows registrants to provide abbreviated financial statements when an acquired business was part of a larger selling entity and all the following conditions are met:
    • The total assets and total revenue (after intercompany eliminations) of the acquired business constitute no more than 20% of the total assets and total revenue of the seller for the most recently completed fiscal year.
    • The acquired business was not a separate entity, subsidiary, operating segment (as defined by US GAAP or IFRS) or division during the periods for which financial statements are required
    • Separate financial statements for the business have not previously been prepared and the seller has not maintained the separate accounts necessary to present full financial statements of the business, and it is impracticable to prepare such financial statements.

Presentation: number of audited and interim periods

The SEC adopted amendments to revise Rule 3-05 to require up to two years of Rule 3-05 Financial Statements for an acquisition that exceeds 50% significance. The 20% and 40% significance thresholds for one- and two-year presentations remain as legacy rules.

Pro forma financial information

The SEC amended Article 11, to replace the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction and to provide the option to depict synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given. The revised pro forma adjustment criteria we are adopting are broken out into three categories: a) Transaction Accounting Adjustments; b) Autonomous Entity Adjustments; and c) Management’s Adjustments.

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