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Financial Reporting Manual

Dec. 11, 2017

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TOPIC 2 - Other Financial Statements Required

This topic identifies circumstances in which financial statements of entities other than the registrant (or predecessor(s) of the registrant) are required to be included in filings. The guidance applicable to financial statements of the registrant (in Topic 1) applies also to financial statements of the other entities, unless specified otherwise in this topic.

NOTE to TOPIC 2

The staff may, where consistent with the protection of investors, permit the omission of one or more of the financial statements required by Regulation S-X or the filing in substitution therefor of appropriate statements of comparable character under Rule 3-13 of Regulation S-X.  See “Communications with the Division of Corporation Finance’s Office of Chief Accountant” section for additional information about requesting relief. In addition, the staff may require other financial statements as necessary for a fair presentation of the financial condition of any entity whose financial statements are either required or otherwise necessary for the protection of investors. [S-X 3‑13 and S-X 8-01, Note 5] (Last updated 7/1/2019)

2000BUSINESSES ACQUIRED OR TO BE ACQUIRED (Excluding Target Companies in Form S-4) [S-X 3-05, S-X 8-04]

(Last updated: 9/30/2008)

Overview - In general, S-X 3-05 and S-X 8-04 require the filing of separate pre-acquisition historical financial statements when the acquisition of a significant business has occurred or is probable. A flowchart to assist you is located at Section 2060.

Section Description
2005 Definitions and Requirements
2010 Determination of a Business
2015 Measuring Significance - Basics
2020 Implementation Points - Amounts Used to Measure Significance
2025 Implementation Points - Financial Statements Used to Measure Significance
2030 Financial Statement Periods Required Under S-X 3-05 and S-X 8-04
2035 Individually Insignificant Acquirees
2040 When To Present Financial Statements
2045 Age of Financial Statements - Basics
2050 Age of Financial Statements - Interaction of S-X 3-05(b)(4) and Form 8-K
2055 Foreign Business, Hostile Tender Offers, Troubled Financial Institutions
2060 Flowchart Overview of S-X 3-05
2065 Acquisitions of Selected Parts of an Entity
2070 SAB 80: Application of S-X 3-05 in Initial Registration Statements

2005Definitions and Requirements

2005.1Financial statements of the acquired business are generally the same as those as if the acquired company were a registrant as described in Topic 1, except that the number of years of audited financial statements is determined by the level of significance (Section 2030 below). Refer to Sections 2045 and 2050 regarding age of financial statements.

Exceptions: An acquired business that is a nonpublic entity, as that term is defined in GAAP, need not include disclosures if specifically excluded from the scope of the FASB standard. Examples include:

  1. Segment information under SFAS 131 [SFAS 131, par. 9 / ASC 280-10-15-3],
  2. Certain disclosures about employers' pensions and other postretirement benefits [SFAS 132(R), par. 8 / ASC 715-20-50-5]
  3. Earnings per share under SFAS 128 [SFAS 128, par. 1 / ASC 260-10-05-1]

2005.2Supplemental schedules (S-X Article 12) are not required to be filed.

2005.3"Acquisition" and Equity Method Investee - Acquisition includes acquisition of an interest in a business that is accounted for under the equity method. Refer to Section 2010 regarding definition of a "business".

2005.4"Probable" - Assessment of "probability" requires consideration of all available facts.  Acquisition is probable where registrant's financial statements alone would not provide adequate financial information to make an investment decision. [FRC 506.02(c)(ii)]

2005.5Acquiree of an Acquiree or Investee of an Acquiree - The requirements of S-X 3-05 and S-X 8-04 apply to acquisitions made by the registrant or its predecessor(s). Those rules call for financial statements of the acquiree and its predecessor(s), if applicable. Financial statements of recently acquired businesses of the acquiree or equity method investees of the acquiree need not be filed unless their omission would render the acquiree's financial statements misleading or substantially incomplete. (Last updated: 3/31/2010)

2005.6Acquisition of a "Predecessor" - S-X 3-05 and S-X 8-04 do not apply to the acquisition of a business that is a predecessor of the registrant, as defined in Regulation C, Rule 405. Instead, look to S-X 3-01/3-02 or S-X 8-02/8-03 to determine the financial statement requirements for an acquired business that is a predecessor of the registrant.

2005.7"Shell Company" is both Legal and Accounting Acquirer - If a shell company, other than a "Business Combination Related Shell Company" (both as defined in Exchange Act Rule 12b-2 and Regulation C, Rule 405), acquires an operating entity in a transaction in which the shell company is both the legal and accounting acquirer, the acquired entity will be a predecessor of the shell company and therefore S-X 3-05 and S-X 8-04 do not apply. If a shell company acquires an operating entity in a transaction accounted for as the acquisition of the shell company by the operating entity (i.e., shell company is the legal acquirer, but the accounting acquiree) the transaction is a reverse recapitalization of the operating entity and therefore S-X 3-05 and S-X 8-04 do not apply. See Topic 12 for further discussion of the reporting requirements for reverse recapitalizations.

2005.8Acquisition or Disposition by a Consolidated Variable Interest Entity - An acquisition or disposition by a variable interest entity that is consolidated in the registrant's financial statements pursuant to ASC 810 is subject to the Form 8-K and S-X reporting requirements even if the consolidated variable interest entity does not meet the S-X 1-02(n) definition of "majority-owned subsidiary."
(Last updated: 6/30/2011)

NOTE to SECTION 2005.8

Item 2.01 of Form 8-K refers to acquisitions or dispositions by "the registrant or any of its majority-owned subsidiaries." Because this reference preceded the variable interest entity consolidation model, the staff believes the intent of this reference is to require reporting of significant acquisitions and dispositions made by the registrant or its consolidated subsidiaries, regardless of whether the consolidated subsidiaries are voting interest entities or variable interest entities.  (Last updated: 6/30/2011)

2010Determination of a Business [S-X 11-01(d)]

2010.1Reporting versus Accounting - The determination of what constitutes a business for reporting purposes (e.g., S-X 3-05 and Item 2.01 of Form 8-K) is made by reference to the definition of a "business" in S-X 11-01(d). The determination of what constitutes a business for accounting purposes (e.g., whether acquired net assets constitute a business for purposes of determining whether a business combination as defined in SFAS 141R [ASC-MG] has occurred) is made by reference to SFAS 141R paragraph 3d [ASC-MG]. It is possible for the determination to be different under the two requirements. 
(Last updated: 12/31/2011)

2010.2A separate entity, subsidiary, division or possibly a separate product line - A "business" for purposes of S-X 3-05 is identified by evaluating whether there is sufficient continuity of operations so that disclosure of prior financial information is material to an understanding of future operations. There is a presumption in S-X 11-01(d) that a separate entity, subsidiary, or division is a business. A lesser component, such as a product line, also may be considered a business. In evaluating whether a lesser component is a business, S-X 11-01(d) requires registrants to consider the following:

  • Will the nature of the revenue producing activity generally remain the same?
  • Will the facilities, employee base, distribution system, sales force, customer base, operating rights, production techniques, or trade names remain after the acquisition?

NOTE to SECTION 2010.2

The staff's analysis of whether an acquisition constitutes the acquisition of a business, rather than of assets, focuses primarily on whether the nature of the revenue producing activity previously associated with the acquired assets will remain generally the same after the acquisition. New carrying values of assets, or changes in financing, management, operating procedures, or other aspects of the business are not unusual following a business acquisition. Such changes typically do not eliminate the relevance of historical financial statements. Registrants that have succeeded to a revenue producing activity by merger or acquisition, with at least one of the other factors listed above remaining after the acquisition, are encouraged to obtain concurrence from the staff in advance of a filing if they intend to omit financial statements related to the assets and activity. Registrants may direct requests related to appropriate financial statements of an acquired entity or group of assets to CF-OCA.

2010.3An investment accounted for under the equity method - The staff considers the acquisition of an investment accounted for under the equity method to be a business for reporting purposes.

2010.4A working interest in an oil and gas property - The staff considers the acquisition of a working interest in an oil and gas property to be a business for reporting purposes. Refer to Section 2065.11 "Unique Considerations for Acquisitions of Oil and Gas Properties – General."  (Last updated: 10/20/2014)

2010.5Bank branch acquisitions - The assumption of customer deposits at bank branches may constitute the acquisition of a business if historical revenue producing activity is reasonably traceable to the management or customer and deposit base of the acquired branches, and that activity will remain generally the same following the acquisition.

2010.6Insurance policy acquisitions - Acquisitions of blocks of insurance policies by an insurance company or the assumption of policy liabilities in reinsurance transactions may also be deemed the acquisition of a business because the right to receive future premiums generally indicates continuity of historical revenues. The degree of continuity between historical investment income streams and the assets acquired to fund the acquired policy liabilities should also be considered.

2015Measuring Significance – Basics [S-X 3-05(b)(2)]

NOTE to SECTION 2015

Registrants may request CF-OCA interpretation in unusual situations or relief where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances.

2015.1Registrants must measure the significance of an acquired business under S-X 3-05 and S-X 8-04 using three tests, the:

  • Asset test,
  • Investment test, and
  • Income test.

These tests are described in further detail below.

NOTE to SECTION 2015.1

In certain circumstances, registrants preparing an initial registration statement may consider applying SAB 80 instead of S-X 3-05 or S-X 8-04. See further discussion at Section 2070, "SAB 80: Application of S-X 3-05 in Initial Registration Statements (SAB Topic 1J)."

2015.2Financial Statements Used to Measure Significance - Generally, compare the most recent pre-acquisition annual financial statements of the acquired business to the registrant's pre-acquisition consolidated financial statements as of the end of the most recently completed audited fiscal year required to be filed with the SEC. Financial statements of both the acquired business and the registrant used to measure significance must be prepared in accordance with the comprehensive basis of accounting described in Section 2015.3, "Comprehensive Basis of Accounting Used to Measure Significance."

If a change in the reporting entity or a reorganization will occur at or after effectiveness of an initial registration statement but no later than closing of the IPO, the staff will consider requests for relief to use the combined financial statement amounts as the denominator for purposes of significance calculations in determining other financial statement requirements for the filing (e.g., S-X 3-05 and 3-09). (Last updated: 3/31/2010)

2015.3Comprehensive Basis of Accounting Used to Measure Significance - A registrant that files its financial statements in accordance with or is required to provide reconciliation to U.S. GAAP should determine significance using amounts for both the acquired business and the registrant determined in accordance with U.S. GAAP; that is, both the numerator and denominator of the significance test would be determined in accordance with U.S. GAAP. A foreign private issuer that files its financial statements in accordance with IFRS as issued by the IASB should determine significance using amounts for both the acquired business and the registrant determined in accordance with IFRS as issued by the IASB; that is both the numerator and denominator of the significance test would be determined in accordance with IFRS as issued by the IASB. To illustrate these requirements, if a registrant that files its financial statements in accordance with U.S. GAAP acquires, both legally and for accounting purposes, a foreign private issuer or a foreign business that files its financial statements in accordance with IFRS as issued by the IASB, significance (both the numerator and denominator) must be determined in accordance with U.S. GAAP. This is true even though the acquired business did not reconcile its financial statements to U.S. GAAP.

2015.4Asset Test - Compare registrant's share of acquired business's total assets to the registrant's consolidated total assets.  Ordinary receivables and other working capital amounts not acquired should nevertheless be included as part of the assets of the acquired enterprise in tests of significance relative to the registrant's assets because that working capital is expected to be required and funded after the acquisition.

2015.5Investment Test - Acquisition Accounting under SFAS 141R [ASC 805] and IFRS 3 (Revised 2008) as issued by the IASB - Compare the total GAAP purchase price of the acquired business, as adjusted below, to the registrant's consolidated total assets.

GAAP purchase price in this context means the "consideration transferred", as that term is used in the applicable accounting standard. Thus, the investment test computed for an acquisition accounted for under SFAS 141R [ASC 805] and IFRS 3 (Revised 2008) as issued by the IASB will differ from the investment test computed for an acquisition accounted for under SFAS 141 and IFRS 3 (prior to the 2008 revision) as issued by the IASB in part because it will include the acquisition-date fair value of all contingent consideration and exclude acquisition-related costs.

The adjustment - For purposes of the "investment" test, "consideration transferred" should be adjusted to exclude carrying value of assets transferred by the acquirer to the acquired business that will remain with the combined entity after the business combination.

NOTE to SECTION 2015.5

The numerator of the investment test for the purchase of an equity method investment should include transaction costs, consistent with the accounting under ASC 323-10. The numerator should also include contingent consideration (on a gross basis) if the likelihood of payment is more than remote. (Last updated: 3/31/2010)

2015.6Investment Test – Purchase Accounting under SFAS 141 and IFRS 3 (prior to the 2008 revision) as issued by the IASB - Compare total GAAP purchase price of acquired business, as adjusted below, to registrant's consolidated total assets. GAAP purchase price in this context means the "cost of the acquired entity", as that phrase is used in SFAS 141, or "cost of the business combination" as that term is used in IFRS 3 (prior to the 2008 revision). For purposes of the "investment" test, "cost of the acquired entity" or "cost of a business combination" should be adjusted to:

  • include the liabilities incurred by the acquirer to the former owners of the acquiree, but exclude pre-acquisition debt and other liabilities of the acquired business assumed in the business combination and
  • include any contingent consideration that represents additional purchase price as part of the total investment in the acquiree unless the likelihood of its payment is remote.

NOTES to SECTION 2015.6

  1. IFRS 3 (prior to the 2008 revision) states in part that the cost of a business combination is the aggregate of the fair values of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer. As noted above, liabilities incurred to the former owners of the acquiree are included in the investment test, but pre-acquisition liabilities of the acquired business that are assumed in the business combination are excluded from the investment test.
  2. Generally, contingencies based on security prices do not change the recorded cost of the acquired company under SFAS 141 or the cost of the business combination under IFRS 3 (prior to the 2008 revision) and therefore should be excluded from the investment test. Generally, contingent consideration based on earnings will either be included as part of the cost of the acquired company or compensation. If it is part of the cost of the acquired company, it should be included in the investment test unless the likelihood of payment is remote. If it is compensation, it may be excluded from the investment test.
  3. For U.S. GAAP, see SFAS 141, paragraphs 25-27 for a discussion of the accounting for contingent consideration and EITF 95-8 for determining whether consideration contingent on earnings is part of the cost of an acquired entity or whether it represents compensation.
  4. For IFRS as issued by the IASB, see IFRS 3 (prior to the 2008 revision), paragraphs 32-35 for a discussion of the accounting for contingent consideration.

2015.7Investment Test - Reorganization of Entities Under Common Control -
Compare the net book value of the acquired business to the registrant's consolidated assets and compare the number of shares exchanged to registrant's outstanding shares at the date the combination is initiated.

2015.8Income Test - Compare registrant's equity in the acquired business's income from continuing operations before taxes, extraordinary items and cumulative effect of a change in accounting principle to that of the registrant.

There are three computational notes to the income test included at S-X 1-02(w). The second computational note indicates that if the registrant's income for the most recent fiscal year is 10% or more lower than the average of the registrant's income for the last five fiscal years, then the average income of the registrant should be used for this computation. This computational note also applies if the registrant reported a loss, rather than income. If the registrant reported a loss, the registrant should compare the absolute value of its reported loss to its average income for the last five fiscal years to determine if the registrant is required to use average income. In computing the registrant's average income for the last five fiscal years, loss years should be assigned a value of zero in computing the numerator for this average, but the denominator should be "5". Also, the acquiree's income may not be averaged.  (Last updated: 12/31/2010)

2015.9Significance – Absolute Values - In the case of a single acquisition, if either the registrant or the acquired business reported a pretax loss and the other entity reported pretax income, use the absolute values.

2015.10Significance – Denominator - The acquired business is not considered part of the registrant's denominator in determining significance for purposes of S-X 3-05 [S-X 1-02(w)]

2015.11Significance – Intercompany Transactions- When measuring significance for all three S-X 1-02(w) tests, intercompany transactions between the registrant and acquiree should be eliminated in the same way that would occur if the acquiree were consolidated.  See by analogy S-X 1-02(w)(2).
(Last updated:  9/30/2009)

2015.12Significance – "Related Businesses" - Acquisitions of "related businesses" must be treated as a single business acquisition. Businesses are related under S-X 3-05 if:

  • they are under common control or management, or
  • their acquisitions are dependent on each other or a single common event or condition.

2015.13Significance – Rounding - Do not round the results of the significance tests.

2020Implementation Points – Amounts used to Measure Significance [S-X 1-02(w)]

2020.1Significance Implementation – No Alternative Tests of Significance

The staff generally will not accept alternative significance tests. The tests should be performed based on the requirements of S-X 3-05, 3-09, and 4-08(g), as applicable. If after performing the required significance tests a registrant believes that the tests specify periods beyond those reasonably necessary to inform investors, the registrant may make a written request to CF-OCA to waive one or more years of financial statements. Such requests should set forth the relevant factors considered by the registrant.  In making this request, registrants should consider all facts and circumstances that provide an indication of the relative size of the acquired business. (Last updated: 7/1/2019)

2020.2Significance Implementation - Business Combinations - Measurement Period Adjustments under SFAS 141R [ASC 805] and IFRS 3R

In some circumstances, SFAS 141R [ASC 805] and IFRS 3R require retrospective adjustment of provisional amounts recognized at the acquisition date and the recognition of additional assets or liabilities that were not recognized at the acquisition date. The pre-acquisition financial statements for the most recently completed fiscal year used to measure significance should include measurement period adjustments for acquisitions completed within the most recently completed fiscal year when new information obtained about facts and circumstances that existed at the acquisition date for those acquisitions is known: (A) prior to effectiveness of an IPO for a new registrant or (B) on or before the date the initial Item 2.01 Form 8-K reporting the acquisition must be filed for an existing registrant. (Last updated: 9/30/2009)

2020.3Significance Implementation - Business Combination Achieved in Stages or Step Acquisition of a Rule 11-01(d) Business General

If a registrant increases its investment in a business relative to the prior year, base the tests of significance on the increase in the registrant's proportionate interest in assets and net income during the year, rather than the cumulative interest to date. However, step acquisitions which are part of a single plan to be completed within a twelve month period should be aggregated.

NOTE to SECTION 2020.3

The guidance to base significance on the increase in the registrant's proportionate interest applies even if the registrant must discontinue applying the cost method and start applying the equity method as a result of the increase in investment.

2020.4Significance Implementation - Business Combination Achieved in Stages (a.k.a. Step Acquisition) – Remeasurement

Under SFAS 141R [ASC 805] and IFRS 3 (revised 2008) as issued by the IASB, the acquirer's previously held equity interest in the acquiree is remeasured at its acquisition-date fair value with any resulting gain or loss recognized in earnings. The remeasurement of the previously held equity interest is not included in the asset or the investment test and the resulting gain or loss from remeasurement would be excluded from the income test as it is not included in the registrant's most recently completed fiscal year.

2020.5Significance Implementation - Acquiring an Additional Interest in a Consolidated Entity

(Last updated: 9/30/2011)

When a registrant increases its investment in a company that is already reflected as a consolidated subsidiary in the audited financial statements of the registrant for a complete fiscal year, financial statements of the acquired investment are ordinarily not required. However, pro forma information may be required.

The staff’s view that financial statements are ordinarily not required is premised on S-X 3-05(b)(4)(iii) which states that separate financial statements of the acquired business need not be presented once the operating results of the acquired business have been reflected in the audited consolidated financial statements of the registrant for a complete fiscal year unless such financial statements have not been previously filed or unless the acquired business is of major significance. Illustrative, but not all-inclusive, examples of when historical financial statements of an acquired business may be required in a step acquisition include:

  • acquired business financial statements have not been previously filed for the entire period for which historical financial statements of the acquired entity would be required under S-X 3-05;
  • acquired business is of major significance; or
  • S-X 3-05 does not apply; such as a proxy statement or Form S-4 requirement to present the target’s financial statements for the same periods that would be required in an annual report sent to security holders, if an annual report was required. 

Also, note that while S-X 11-01(c) states that pro forma effects of a business combination need not be presented if the acquired business’ financial statements are not presented, we believe such pro forma financial statements are required pursuant to S-X 11-01(a)(8) when pro forma financial information giving effect to the step acquisition would be material to investors.

2020.6Significance Implementation - Public Offering Proceeds

Registrant's assets may not be increased for purposes of the significance tests by including the pro forma effect of public offering proceeds received after the balance sheet date.

2020.7Significance Implementation - Statements of Revenues and Direct Expenses

A registrant that has received an accommodation from CF-OCA to present a statement of revenue and direct expenses for the acquired business in lieu of full financial statements (See Section 2065) should not adjust the registrant’s pretax income (i.e., the denominator in the income test) to exclude corporate overhead even though the target’s pretax revenues less direct expenses (i.e., the numerator) excludes indirect expenses. If after performing the required significance tests using the target’s pretax revenues less direct expenses and the registrant’s pretax income, a registrant believes that the tests specify periods beyond those reasonably necessary to inform investors, the registrant may make a written request to CF-OCA to waive one or more years of financial statements.

2020.8Significance Implementation - Related Businesses – General

(Last updated: 9/30/2012)

S-X 3-05 requires that related businesses be treated as a single business when measuring significance. Further guidance on this requirement is included below. If S-X 3-05 significance is met, separate financial statements of each of the related businesses are required, except that financial statements of the related businesses that are under common control or management may be, but are not required to be, presented on a combined basis for any annual or interim periods specified in S-X 3-05 for which the businesses are under common control or management. If the registrant believes that application of the significance tests results in a requirement to present financial statements of one or more related businesses that are not reasonably necessary to inform investors, the registrant may make a request to CF-OCA for relief.

NOTES:

  1. If related businesses have different fiscal year ends, a registrant should not conform the fiscal year-ends of the related businesses for purposes of the significance tests.
  2. The reference to “periods specified in S-X 3-05” is meant to clarify that in order to present financial statements of related businesses on a combined basis for an annual or interim period specified in S-X 3-05, the related businesses must be under common control or management for the entirety of that annual or interim period.
  3. S-X 3-05(a)(3) states in part “Acquisitions of a group of related businesses that are probable or that have occurred subsequent to the latest fiscal year-end for which audited financial statements of the registrant have been filed shall be treated under this section [emphasis added] as if they are a single business combination.” The staff interprets this requirement to mean that S-X 1-02(w) Computational Note 3, which indicates that entities reporting losses should not be aggregated with entities reporting income, does not apply to the calculation of significance for related businesses. (Last updated: 9/30/2012

2020.9Significance Implementation - Related Businesses - Asset and Investment Tests

(Last updated: 9/30/2012)

Both the asset test and the investment test should be performed for each related business using the guidance provided in Section 2015. If either the sum of each related business’s asset test significance or the sum of each related business’s investment test significance exceeds the S-X 3-05 significance levels (see Section 2030), separate financial statements should be provided for the periods required by S-X 3-05 for each related business, except that financial statements for the related businesses that are under common control or management may be, but are not required to be, presented on a combined basis for any annual or interim periods specified in S-X 3-05 for which the businesses are under common control or management.  See the Notes at Section 2020.8 for further guidance.

2020.10Significance Implementation - Related Businesses – Income Test

(Last updated: 9/30/2012)

S-X 3-05 indicates that related businesses should be treated as if they are a single business combination. Therefore, calculate the income test significance using the combined income or loss from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle of all of the related businesses. The combined income or loss should be used to measure income test significance irrespective of whether any of the related businesses are under common control or management. If the income test significance exceeds the S-X 3-05 significance levels (see Section 2030), separate financial statements should be provided for the periods required by S-X 3-05 for each related business, except that financial statements of the related businesses that are under common control or management may be, but are not required to be, presented on a combined basis for any annual or interim periods specified in S-X 3-05 for which the businesses are under common control or management. See the Notes at Section 2020.8 for further guidance.

2025Implementation Points – Financial Statements Used to Measure Significance [S-X 1-02(w)]

2025.1Significance Implementation - Discontinued Operations and Changes in Accounting Principle

Subsequent to filing its Form 10-K, a registrant may be required to include (or incorporate by reference) into a registration statement its audited annual financial statements giving retrospective effect to a discontinued operation or a change in accounting principle that was appropriately not reflected in the audited financial statements for the most recently completed fiscal year included in its Form 10-K. See Topic 13 for a discussion of this requirement. In these circumstances, we have interpreted the guidance in S-X 3-05 to require registrants to perform significance tests based on the registrant’s financial statements that reflect retrospective application for the most recently completed fiscal year for:

  • Individual businesses acquired after the date the retrospectively adjusted financial statements are filed;
  • Probable acquisitions; and
  • Aggregate impact of all individually insignificant businesses that have occurred since the end of the most recently completed fiscal year.

NOTES to SECTION 2025.1

  1. Solely for purposes of assessing significance of individual acquisitions completed on or before the date the retrospectively adjusted financial statements are filed (and not, for example, for purposes of assessing the aggregate impact of all individually insignificant businesses that have occurred since the end of the most recently completed fiscal year), significance may be measured based on either (A) the registrant’s audited financial statements for its most recently completed fiscal year that were filed prior to the retrospectively adjusted financial statements giving effect to the discontinued operation or (B) the registrant’s filed financial statements for the most recently completed fiscal year that reflect retrospective application of the discontinued operation. A registrant must consistently use the financial statements it chooses (i.e., either (A) or (B) above) to measure significance of all individual acquisitions completed on or before the date the retrospectively adjusted financial statements are filed. (Last updated: 3/31/2009)
  2. The staff’s rationale for the position above follows. A registrant must report on Form 8-K an acquisition of a significant individual business. For purposes of measuring significance under S-X 3-05 and S-X 8-04, the staff links the acquisition date for a significant individual business to the date retrospectively adjusted financial statements are filed in order to ensure that an appropriate conclusion that an acquired business was not significant for purposes of Form 8-K will not be changed by a subsequent discontinued operation. Such a link is not necessary for either a probable acquisition or an acquisition of an individually insignificant business because the registrant has no Item 2.01 Form 8-K reporting obligation for these events.

2025.2Significance Implementation - Form 10-K Filed Subsequent to Acquisition

(Last updated: 3/31/2009)

Generally, a registrant measures significance using its pre-acquisition consolidated financial statements as of the end of the most recently completed audited fiscal year required to be filed with the SEC. If the acquisition is made after the registrant’s most recent fiscal year end and the registrant files its Form 10-K for the most recent fiscal year before the date financial statements of the acquired business would be required to be filed under Item 9.01 of Form 8-K, the registrant may evaluate significance using the registrant’s financial statements for most recent fiscal year reported in its Form 10-K. Alternatively, the registrant may choose to evaluate significance using the registrant’s financial statements for the most recently completed audited fiscal year required to be on file with the SEC as of the consummation date.

2025.3Significance Implementation - Pro Forma Financial Statements (S-X Article 11) Used to Measure Significance

If the acquisition is made after reporting a previous significant acquisition or disposition on Form 8-K or non-IPO registration statement that includes all information required by Form 8-K, the registrant may evaluate significance using registrant’s pro forma financial information rather than historical pre-acquisition financial statements. For purposes of evaluating significance in this situation:

  • Income Test - Compare income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle for the acquired entity's latest fiscal year to the pro forma income statement for the latest audited annual period provided in the Form 8-K or registration statement.
  • Investment and Asset Tests - Compare the registrant's investment in the acquired entity and the assets of the acquired entity for the latest fiscal year to the pro forma balance sheet comprising the latest audited balance sheet of the registrant. That pro forma balance sheet may or may not have been included in the Form 8-K or registration statement, depending on when the Form 8-K or registration statement was filed.

For example: If a calendar year-end registrant filed a registration statement containing a pro forma balance sheet as of June 30, 2007 giving effect to an acquisition consummated on September 14, 2007 and then made an acquisition on November 30, 2007, the asset and investment test would be based on a pro forma balance sheet as of December 31, 2006 (the last audited balance sheet on file with the SEC).

NOTES to SECTION 2025.3

  1. If the registrant chooses to evaluate significance of an acquisition or disposition using the registrant’s pro forma financial information, the staff would expect the registrant to consistently apply that methodology for evaluating significance to all subsequent acquisitions or dispositions for the remainder of the fiscal year.
  2. If the registrant chooses to compute significance using pro forma information, it must do so for all three significance tests.
  3. The acquired entity’s total assets and income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle should NOT be adjusted for purchase accounting. That is, use the acquired entity’s historical amounts and the registrant’s pro forma amounts.
  4. The registrant’s pro forma amounts should only include those pro forma adjustments directly attributable to the transaction (e.g., purchase price allocation, depreciation, and amortization) in the pro forma income statement and balance sheet.
  5. Use the registrant’s pro forma annual balance sheet to determine significance even if that pro forma annual balance sheet is not presented or required to be presented in the Form 8-K.
  6. The registrant’s pro forma amounts should not give effect to either probable or insignificant acquisitions. S-X 3-05(b)(3) only permits measuring significance using the registrant’s pro forma amounts for (a) completed acquisitions that are (b) significant and (c) for which historical financial statements have been filed on Form 8-K.

2025.4Significance Implementation - Exchange Transaction (Acquisition and Disposition)

If the transaction is an exchange transaction in which the registrant and another party each contribute businesses to a joint venture (or the “Newco”) in exchange for an equity interest in the Newco measure the significance of the disposition (registrant’s contributed business) and the acquisition (other party’s contributed business) separately to determine whether pro forma information about the disposition and receipt of an equity investment is required, and whether audited financial statements of the business contributed by the other party are required.

Significance of the acquisition should be based on the acquired percentage of the other party’s business compared to the registrant’s historical financial statements (without adjustment for the related disposition of the business contributed by the registrant to the joint venture). Whether or not the transaction is accounted for at fair value, the investment test should be based on the fair value of the consideration given up or the consideration received, whichever is more reliably determinable.

If reporting of both the disposition and the acquisition are required by Form 8-K, a registrant may be unable to present a pro forma income statement depicting the joint venture formation because financial statements of the business contributed by the other party are not available. Those financial statements and related pro forma financial statements need not be filed until 71 calendar days after the date that the initial report reporting the transactions on Form 8-K must be filed (that is, the sum of 4 business days after the transaction is consummated plus 71 calendar days). Pro forma financial statements depicting a significant disposition are ordinarily required to be filed within 4 business days of the disposition. In these circumstances, the initial Form 8-K reporting the transaction should include a narrative description of the effects of the disposition, quantified to the extent practicable, and complete pro forma information depicting the effects of the exchange of interests should be filed at the time that the audited financial statements of the acquired business are filed.

2025.5Significance Implementation - In Existence for Less Than One Year

If the registrant and/or the acquiree has been in existence for less than one year, do not annualize the historical income statement; measure significance using the audited historical income statement that complies with the age of financial statement requirements (see Section 2045 for the acquiree and Section 1200 for the registrant), regardless of the number of months it includes. If the registrant or the acquiree has been in existence for more than one year, measure significance using income for full 12 months; do not adjust the audited income statement to equal the same number of months as acquiree or registrant that has been in existence for less than one year.

NOTE to SECTION 2025.5

Registrants may request a waiver from CF-OCA if they believe S-X 3-05 produces anomalous results.

2025.6Significance Implementation - Change in Fiscal Year

(Last updated: 3/31/2009)

If a registrant or acquiree has changed its fiscal year and the transition period (See definition at Section 1360.1) is less than 9 months, measure significance using either (A) the most recently completed audited fiscal year prior to the change or (B) audited financial statements for the 12 months ending on the last day of the transition period. If both the registrant and the acquiree have changed their fiscal years, registrants should measure significance using a consistent approach [either (A) or (B)] for both the registrant and the acquiree [not (A) for one and (B) for the other]. If the transition period is greater than 9 months, use the audited financial statements for that period.

2025.7Significance Implementation - Acquisition after a Reverse Acquisition

If an acquisition is made after a transaction accounted for as a reverse acquisition of the registrant but before the registrant’s audited financial statements for the fiscal year in which the reverse acquisition occurred are filed and the audited financial statements for the accounting acquirer have been filed with the SEC then measure significance against the accounting acquirer’s financial statements.

2025.8Significance Implementation - Acquisition after a Reverse Recapitalization

If an acquisition occurs after a reverse recapitalization of the legal target (see Topic 12) but before the registrant’s audited financial statements for the fiscal year in which the reverse recapitalization occurred are filed and the audited financial statements for the legal target have been filed with the SEC then measure significance against the legal target’s financial statements.

2025.9Significance Implementation - Acquisition after Shell Company Acquires Predecessor

If an acquisition is made subsequent to the acquisition by a shell company, as defined in Exchange Act Rule 12b-2, of an entity deemed the registrant’s predecessor (but not accounted for as a reverse acquisition or reverse recapitalization), then measure significance against the historical financial statements of the registrant.

2025.10Significance Implementation - Registrant is a Successor to a Predecessor Company

In certain cases, a registrant that is a successor to a predecessor company may not have a full year of income statement information available to use as the denominator in the calculation of the income test. In these cases, the significant subsidiary income test should be calculated using only the results of operations of the successor company in the denominator.

If the results are anomalous, CF-OCA will consider a request by the registrant to perform the significance test using pro forma amounts determined in accordance with S-X Article 11 as if the predecessor had been acquired at the beginning of the fiscal year being measured. The staff generally believes that combining the historical results of the successor and predecessor without S-X Article 11 pro forma adjustments is not an appropriate surrogate for the significance test. (Last updated: 3/31/2010)

2025.11Significance Implementation - Acquisition of a Business that is a Successor to a Predecessor Company

For the acquisition of a business that is the successor to a predecessor company (not the registrant), or when an acquiree’s historical financial statements include predecessor and successor periods, the measurement of significance under the income test will depend on the particular facts and circumstances.

If audited successor financial statements of the acquiree include twelve months of successor results, the income test should be applied in the normal fashion.

If audited successor financial statements of the acquiree include less than twelve months of successor results, it will generally be necessary to use pro forma amounts of the successor for the year determined in accordance with S-X Article 11. The objective of this process is to determine a surrogate for the annual historical income statement of the acquired business. Thus, the pro forma amounts would be determined using the basis of the acquired successor business – not the registrant’s subsequent new basis. The staff generally believes that combining the historical results of the successor and predecessor without S-X Article 11 pro forma adjustments is not an appropriate surrogate for the significance test. The convention of “9 months equals 12 months” in S-X 3-06 is not applicable in this situation. In these situations, CF-OCA should be consulted prior to filing.

If the most recent audited financial statements of the acquiree include only predecessor results, use the historical predecessor period income statement information as the numerator for calculating the income test. Pro forma information should not be used. (Last updated: 3/31/2010)

2025.12Significance Implementation - SAB 97 “Put-Together” Transactions

In transactions in which more than two entities combine concurrent with an IPO, measure significance against the accounting acquirer (regardless of whether or not the accounting acquirer is a Newco). All of the acquired businesses are considered related under S-X 3-05(a)(3) and S-X 8-04(a)(2) and therefore must be grouped and assessed for significance against the accounting acquirer as a single acquisition. See Section 2015.12. Because related businesses must be treated as a single business acquisition under S-X 3-05 and S-X 8-04, SAB 80 may not be applied to SAB 97 “put together” transactions. Upon written request, the staff will consider whether relief from the literal application of S-X 3-05 is appropriate.

2025.13Significance Implementation - Tests of significance after a SAB 97 “put-together” IPO

If a new acquisition takes place after an IPO but before the filing of the registrant’s first Form 10-K, measure significance against the audited financial statements of the accounting acquirer for the most recent fiscal year that was included in the IPO registration statement. If a new acquisition takes place after the filing of the registrant’s first Form 10-K, measure significance against the audited financial statements of the registrant for the most recent fiscal year in the Form 10-K. In some cases, such as when the IPO occurs close to the registrant’s year end, the registrant’s financial statements presented in Form 10-K may only include operations for a very short period of time. Upon written request, and depending on the proximity of the SAB 97 transaction to the balance sheet date, the staff will consider whether relief from the literal application of S-X 3-05 is appropriate.

2030Financial Statement Periods Required Under S-X 3-05 and S-X 8-04

2030.1See the table below for general requirements. Below the table are exceptions to the general requirements relating to: (Last updated: 7/1/2019)

  1. Omitting Acquiree Balance Sheet
  2. Form 10 and Smaller Reporting Company Registrant
  3. Initial Public Offerings – Using Pre-Acquisition and Post-Acquisition Audited Results
If the Greatest of the Three Calculations Described in Section 2015 S-X 3-05 S-X 8-04
Does not exceed 20% No financial statements required No financial statements required
Exceeds 20% but not 40% Financial statements for the most recent fiscal year (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited) Financial statements for the most recent fiscal year (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited)
Exceeds 40% but not 50% Financial statements for the two most recent fiscal years (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited) Financial statements for the two most recent fiscal years (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited)
Exceeds 50% Financial statements for full three years (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited)
Exception:  Financial statements for the earliest of the three fiscal years may be omitted if net revenues of the acquired business in its most recent fiscal year are less than $50 million. See also exception for EGCs in Section 10220.5.
Financial statements for the two most recent fiscal years (audited) and the latest required interim period (unaudited) that precedes the acquisition (See FRM 2045), and the corresponding interim period of the preceding year (unaudited)
 

2030.2Omitting Acquiree Balance Sheet - Balance sheet of the acquired company is not required when the audited annual balance sheet of registrant is as of a date after consummation of the acquisition.

2030.3[Reserved]  (Last updated: 7/1/2019)

2030.4Initial Registration Statements – Using Pre-Acquisition and Post-Acquisition Audited Results - Registrants filing initial registration statements may apply the period of time in which the operations of an acquired business are included in the audited income statement of the acquirer to reduce the number of periods for which pre-acquisition income statements are required. However, registrants applying such an approach can have no gap between the audited pre-acquisition and audited post-acquisition periods. For example, if an acquisition is consummated on April 15, 2007 and the acquiree’s highest level of significance was 45%, S-X 3-05 would require the acquiree’s audited annual financial statements to be filed for the two years ended December 31, 2006 (assuming both registrant and acquiree have calendar year-ends). In lieu of financial statements for those periods, the staff will accept audited financial statements of the acquiree for the year ended December 31, 2006 and the period from January 1, 2007 through April 14, 2007 provided that audited financial statements of the registrant for the year ended December 31, 2007 have been filed.

2030.5Financial Statements in a Registration Statement of a Non-reporting Business Acquired, or to be Acquired, when One of the Combining Entities Meets the Smaller Reporting Company Criteria and the Other Does Not - 

If the registrant/acquirer is subject to S-X 3-05, the non-reporting business’ financial statements must comply with S-X reporting requirements applicable to entities that are not smaller reporting companies.  If the registrant/acquirer is subject to S-X Rule 8-04, the non-reporting business’ financial statements may comply with scaled reporting requirements for a smaller reporting company. These are the same requirements for filing financial statements of an acquired non-reporting business in a Form 8-K (see Section 2200.2), except for reverse acquisitions.  There are different requirements for filing financial statements of a non-reporting target in an S-4 registration statement (see Section 2200.2). (Last updated: 12/31/2011)

2035Individually Insignificant Acquirees

2035.1Applicability - The requirement under S-X 3-05 to file financial statements of individually insignificant businesses under certain circumstances is applicable only to registration statements and proxies. Form 8-K does not require audited financial statements of insignificant acquirees unless they are "related businesses" and significant on a combined basis. See Section 2015.12, “Significance – Related Businesses”.

2035.2Definition - The reference in S-X 3-05 to individually insignificant acquisitions includes:

  1. any consummated acquisitions whose significance does not exceed 20% that were consummated after the balance sheet date of the most recent annual audited financial statements included in the registration or proxy statement through the effective date of the registration statement or the date the proxy statement is mailed;
  2. any probable acquisitions whose significance does not exceed 50%; and
  3. any consummated acquisitions whose significance exceeds 20%, but does not exceed 50%, for which financial statements are not yet required because of the 75-day rule in S-X 3-05(b)(4). (Last updated: 10/20/2014)

NOTE TO SECTION 2035.2

Why does the staff require the inclusion of significant acquired businesses for which financial statements are not yet required because of the 75-day rule [S-X 3-05(b)(4)] in the test of the aggregate significance of individually insignificant acquired businesses consummated since the most recent audited balance sheet date? [S-X 3-05(b)(2)]

In 1996, S-X 3-05 was amended to permit the exclusion of historical financial statements for certain significant acquisitions which did not exceed 50% significance [S-X 3-05(b)(4)(i)]. However, S-X 3-05(b)(4) was not intended to circumvent the requirement in S-X 3-05(b)(2) to consider the aggregate significance of all acquired businesses which were not yet filed. Therefore, even though a literal read of S-X 3-05(b)(4) might suggest that registrants may omit financial statements of significant businesses for which financial statements are not yet required because of the 75-day rule, the staff believes it is necessary to include those significant businesses in the analysis of the aggregate significance of individually insignificant acquisitions under S-X 3-05(b)(2). To do otherwise could lead to the presentation of financial statements for less than a mathematical majority of businesses acquired since the most recent audited balance sheet that have an aggregate significance in excess of 50%.

2035.3Financial Statements Required – Mathematical Majority - If the aggregate of either the asset, investment or income significance test of all insignificant acquisitions (i.e., (A), (B) and (C) above) exceeds 50%, provide financial statements for the mathematical majority (combined if appropriate) for the most recent fiscal year and the latest interim period preceding the acquisition. For purposes of determining the mathematical majority, audited financial statements should be provided for those probable and acquired entities that constitute more than 50% of the aggregate asset, income, or investment test determined to be the most significant.  Consider the following example.

Example:

Example Facts: A registrant with a calendar year end files a registration statement which is effective October 2, 2008. The following individually insignificant business acquisitions, for which no audited financial statements were filed on Form 8-K, and significant businesses for which financial statements are not yet required because of the 75-day rule in S-X 3-05(b)(4) have occurred since the registrant’s audited financial statements were filed in its 2007 Form 10-K:

Date Acquired Investment Test % Asset Test % Income Test %
Business A 1/21/2008 10 19 8
Business B 2/24/2008 10 7 6
Business C 4/11/2008 11 6 5
Business D 7/7/2008 13 11 5
Business E 8/18/2008 17 10 21
Probable F N/A 9 6 4
Aggregate 70 58 49

Example Analysis: Since the investment test yields the greatest significance on an aggregate basis (70%), financial statements of the businesses adding up to in excess of 35% under the investment test column must be provided. In this case, financial statements for any combination of three businesses that includes Business E or any combination of four businesses would meet the requirement. No combination of three that excludes Business E would meet the requirement. Financial statements of Business E are not yet required to be filed because of S-X 3-05(b)(4); therefore in this fact pattern, it is possible to use a combination of more than three businesses that excludes Business E even though Business E is significant under the income test. As shown in the example above, even though the registrant is not required to file a Form 8-K with audited financial statements of Business E until 11/3/2008, those financial statements may need to be included in the registration statement.

2035.4Significance – Financial Statements Used to Measure Significance

The aggregate significance of the individually insignificant acquisitions described in Section 2035.3 should be measured for each acquisition using the financial statements described in Section 2015.2 at the registration statement effective date. Measuring significance using the financial statements described in Section 2015.2 at the registration statement effective date may require the use of either financial statements for a more recent fiscal year than the annual financial statements used to measure significance at the acquisition date, or financial statements for the same fiscal year that have been retrospectively adjusted after the acquisition date for a change in accounting principle or a discontinued operation (see Section 2025.1). Therefore, the significance of an individually insignificant acquisition measured using the annual financial statements described in Section 2015.2 at the registration statement effective date may differ from the significance of that individually insignificant acquisition measured using the annual financial statements described in Section 2015.2 at the acquisition date. (Last updated: 3/31/2010)

NOTE TO SECTION 2035.4

An appropriate conclusion that an acquisition was not individually significant at the acquisition date is not changed by the measurement of the aggregate significance of individually insignificant acquisitions. For example, measuring the aggregate significance of individually insignificant acquisitions using the financial statements described in Section 2015.2 at the registration statement effective date may cause an acquisition that was appropriately determined to be individually insignificant at the acquisition date to have significance in excess of 20%. This calculated significance is used only to determine the aggregate significance of the individually insignificant acquisitions in accordance with the guidance in Section 2035.3; it does not change the conclusion of individual insignificance appropriately determined at the acquisition date. (Last updated: 3/31/2010)

2035.5Significance – Income Test – Entities with Pre-Tax Loss versus Entities with Pre-Tax Income - For purposes of the income test, S-X 1-02(w) Computational Note 3 indicates that entities reporting losses should not be aggregated with entities reporting income. Therefore, significance must be determined separately for both the group of individually insignificant acquisitions with income and the group of individually insignificant acquisitions with losses. The absolute values of the results of operations of the two groups should not be aggregated for purposes of determining significance. If the income test significance of either the group of individually insignificant acquisitions with income or the group of individually insignificant acquisitions with losses is higher than the significance computed under either the investment or asset tests in S-X 1-02(w), the absolute values of the income test significance of the two groups would be aggregated for purposes of selecting the mathematical majority.

For example: Assume registrant has $100 of income from continuing operations before income taxes, extraordinary items, and cumulative effect of a change in accounting principle for the year ended December 31, 2007. Registrant made the following acquisitions in 2008 and files a registration statement in December 2008.

Date Acquired Income (Loss) Significance Aggregate Acquirees with Income Aggregate Acquirees with Loss
Business A 1/18/2008 $(8) 8% 8%
Business B 2/4/2008 9 9% 9%
Business C 3/17/2008 (13) 13% 13%
Business D 6/13/2008 16 16% 16%
Business E 7/3/2008 (11) 11% 11%
Business F 8/4/2008 10 10% 10%
Probable G N/A 18 18% 18%
Aggregate 21 21% 53% 32%

Because some individually insignificant acquirees have income and some have losses, significance must be determined separately for both the group of individually insignificant acquisitions with income and the group of individually insignificant acquisitions with losses. Aggregate significance for purposes of S-X 3-05 is 85% (i.e., the sum of the absolute values of 53% and (32%)). Financial statements of a mathematical majority of all individually insignificant acquisitions, regardless of whether they had income or loss, must be filed. In this example, in order to compute the mathematical majority, the aggregate significance determined on an absolute value basis of the individually insignificant acquisitions filed must be at least 42.6% (i.e.50.1% of the 85% aggregate significance). For example, filing separate financial statements for Business C, Business D and Probable G would satisfy this requirement.

2035.6Significance – Using Pro Forma Financial Statements - S-X 3-05 permits a registrant to evaluate significance of acquirees using the pro forma financial information filed on Form 8-K in connection with a previous significant acquisition. However, a registrant may not circumvent the requirement to file audited data of a majority of individually insignificant acquirees by filing a Form 8-K containing financial statements of one or more insignificant acquirees and testing significance of the remaining unaudited acquirees, against either the historical or resulting pro forma financial statements. If a registrant has filed a Form 8-K for a previous significant acquisition, the 50% aggregation test may be applied against the pro forma financial statements included in that Form 8-K.

For example: A registrant files a registration statement on July 14, 2008 that includes audited financial statements for the year ended December 31, 2007 and interim period statements for the three months ended March 31, 2008. The registrant had total assets of $1,000 at December 31, 2007 and reported income from continuing operations before taxes of $100 for the year then ended. The registrant had, or expects to have, the following acquisitions since December 31, 2007

See computational note below Date Acquired Investment
$
Investment
%
Assets
$
Assets
%
Income
$
Income
%
Highest Significance
Significant acquisitions:
Business A* 4/7/2008 210 21 100 10 30 30 30%
Insignificant acquisitions:
Business B 2/4/2008 40 3 20 2 9 7 N/A
Business C 3/17/2008 60 5 40 3 13 10 N/A
Business D 6/13/2008 160 13 80 7 15 12 N/A
Business E 7/3/2008 50 4 20 2 11 9 N/A
Probable F N/A 205 17 100 8 18 14 N/A
Aggregate 515 42 260 22 66 52 52%

* Computational note:  In this example, audited financial statements and pro forma financial information were filed on Form 8-K for Target A on 6/16/2008.  Significance percentages in chart above are based on registrant’s election to measure significance using pro forma financial information giving effect to the acquisition of Business A.  For purposes of this example, assume the pro forma financial information as of and for the year ended December 31, 2007 reflects purchase accounting as follows:

Assets Income
Registrant historical $1000 $100
Adjustments 210 25
Pro forma $1210 $125

In this example, the income test yields the highest aggregate significance test (52%).  The registration statement must include financial statements for acquired businesses that total to more than 26% (50% * 52%) to meet the S-X 3-05 requirement. Had the aggregate significance under each test been less than 50% using pro forma information, no financial statements for any of the individual entities would be required in the registration statement.

2040When to Present Financial Statements

2040.1Financial statements of acquired businesses are required as follows:

Form Financial Statement Requirements
Registration Statements and Proxies
  1. If less than or equal to 50% significant, financial statements of a recent or probable acquisition need not be included unless the registration statement (or post-effective amendment) is declared effective (or proxy statement is mailed) 75 days or more after the acquisition is consummated. Refer to Section 2015, “Measuring Significance – Basics [S-X 1-02(w)],” and Sections 2020 and 2025, “Implementation Points” for tests of significance. This rule does not apply to “blank check” issuers.
  2. If significance exceeds 50%, financial statements of a recent or probable acquisition must be included in a registration statement (or post-effective amendment) at the effective date.
  3. Major Significance - See Section 2040.2 for requirement to continue to present financial statements if acquisition is of major significance.
Form 8-K
  1. Item 2.01, Form 8-K reporting the transaction is required within 4 business days of the consummation of any business acquisition exceeding 20% significance or for any asset purchase exceeding 10% significance that does not meet the definition of a business.
  2. A registrant that was a shell company, other than a business combination related shell company (both as defined in Exchange Act Rule 12b-2 and Regulation C, Rule 405) immediately before it acquires a business, as defined in S-X 11-01(d), must file the acquired business financial statements and related S-X Article 11 pro forma information required by Item 9.01(c) of Form 8-K with the Item 2.01 Form 8-K reporting the acquisition. The 71 calendar day extension is not available.
  3. If the required financial statements of the business acquired are not required to be provided with the initial report, they must be filed by amendment within 71 calendar days after the date that the initial report on Form 8-K must be filed.

NOTE: While an Item 2.01 Form 8-K is not required for business acquisitions at or below 20% significance, registrants may elect to report business acquisitions at or below 20% significance pursuant to Item 8.01 of Form 8-K even if financial information is not provided.

2040.2“Major Significance” and Previously Filed Acquiree Financial Statements Generally, previously filed financial statements of an acquired business need not be presented once the acquired operations are included in at least nine months of post-acquisition audited results unless the acquisition is of major significance [S-X 3-05(b)(4)(iii)]. Although the acquisition may be of major significance at lower thresholds due to factors specific to the registrant, the staff presumes that the acquisition is of such major significance that investors need previously filed financial statements of the acquired company in a registration or proxy statement if:

  • the acquired business is included in audited results of the registrant for less than 21 months and its significance was equal to or greater than 70% and less than 80%; or
  • the acquired business is included in audited results of the registrant for less than 33 months and was significant at the 80% or greater level.

If the acquired business is of major significance, the financial statements of the acquired business should continue to be presented in a registration or proxy statement for the number of periods prior to the acquisition such that the combination of pre- and post-acquisition periods presented cover the equivalent number of periods specified in S-X 3-02. [S-X 3-05(b)(4)(iii)]. The requirement to present the equivalent number of periods specified in S-X 3-02 does not mean that the audited periods presented must be continuous. Also, registrants should include the complete financial statements of the acquired business notwithstanding the reference to the income statement in the example provided in S-X 3-05(b)(4)(iii); however the balance sheets of the acquired business may be excluded by the registrant if the audited balance sheet of the registrant is as of a date after consummation of the acquisition.

2045Age of Financial Statements - Basics

2045.1This section covers three broad components:

  1. 1933 Act registration statements,
  2. Proxy statements, and
  3. Form 8-K.

See Section 2050 for a discussion of “Age of Financial Statements - Interaction of S-X 3-05(b)(4) and Instruction to Item 9.01 of Form 8-K”

2045.21933 Act Registration Statement - Age of Financial Statements – General

(Last updated: 6/30/2009)

The registrant should comply with age-of-financial-statement rules with respect to itself and all completed and probable acquirees at the effective date. Any updated financial statements required to be included or incorporated by reference as appropriate in the registration statement but which were not required to be filed previously in a specific Exchange Act report may be filed under cover of Form 8-K pursuant to Item 8.01.

For example: A registrant files a Form 8-K on August 6 (i.e., the 4th business day subsequent to consummation) reporting the acquisition of a business on July 31 that is not an accelerated filer or a large accelerated filer. That Form 8-K included unaudited financial statements for the 3 months ended March 31. If a registration statement is filed after August 12, the financial statements of the acquired entity must be updated through June 30 so that the acquired entity's financial statements meet the age of financial statement requirements of Regulation S-X. If the acquisition was consummated on or prior to June 30, updated financial statements would not be required.

2045.31933 Act Registration Statement - Age of Financial Statements - Delayed and Continuous Offerings

(Last updated: 3/31/2009)

After effectiveness, a domestic registrant has no specific obligation to update the prospectus except as stipulated by 1933 Act Section 10(a)(3) and S-K 512(a) with respect to any fundamental change. If an acquisition would be significant under S-X 3-05, management should consider whether the probability of consummation of the transaction would represent a fundamental change. It is the responsibility of management to determine what constitutes a fundamental change.  The registrant should also consider whether individually insignificant acquisitions occurring subsequent to effectiveness, when combined with individually insignificant acquisitions that occurred after the most recent audited balance sheet in the registration statement but prior to effectiveness, may be of such significance in the aggregate that an amendment is necessary. Notwithstanding the guidance in Section 2045.3, offerings pursuant to effective registration statements cannot proceed if the significance of an acquisition exceeds 50% and financial statements have not been filed. See Section 2050.3.

2045.41933 Act Registration Statement - Age of Financial Statements - Well-Known Seasoned Issuers

“Well-known seasoned issuer” is defined in Regulation C, Rule 405. Automatic shelf registration statements and post-effective amendments of well-known seasoned issuers become effective immediately upon filing [Regulation C, Rule 462(e) and (f)]. Immediate effectiveness does not exempt a well-known seasoned issuer from the requirement to comply with the age of financial statement requirements with respect to itself and all completed and probable acquirees at the time of effectiveness. Consider the following examples.

Example 1: Consummated Acquisition in Excess of 50% Significant; Probable Acquisition in Excess of 50% Significant; or Aggregate of Individually Insignificant Acquisitions since the End of Registrant’s Most Recently Completed Fiscal Year is in Excess of 50% Significant

Financial statements of the acquired or to be acquired businesses for the periods specified by S-X 3-05 must be included or incorporated in the automatic shelf registration statement prior to filing the automatic shelf registration statement or post-effective amendment, even if such financial statements are not yet required to be filed on Form 8-K.

Example 2: Consummated or Probable Acquisition in Excess of 20% But Not in Excess of 50%

Financial statements of an acquired or to be acquired business that is significant in excess of 20% but not in excess of 50% need not be filed prior to the effective date (i.e., the filing date) of an automatic shelf registration statement or post-effective amendment filed by a well-known seasoned issuer if the effective date occurs during the 4 business days plus 71 calendar day period subsequent to consummation.

2045.51933 Act Registration Statement - Age of ANNUAL Financial Statements -

Acquiree’s Filing Status Effective date of Registration Statement Acquiree Financial Statements
NOT an Accelerated Filer, and NOT a Large Accelerated Filer Registrant’s filing is effective after 45 days but not more than 89 days after the acquiree’s fiscal year end Updating requirement dependent on the registrant’s (not the acquiree’s) eligibility for relief under S-X 3-01(c). After a reverse acquisition accounted for as a business combination, consider the accounting acquirer's ability to meet the requirements of S-X 3-01(c) in determining the need to update.
Filing is effective after 89th day after acquiree’s fiscal year end Acquiree’s most recent fiscal year must be audited
Accelerated Filer Registrant’s filing is effective after 45 days but not more than 74 days after the acquiree’s fiscal year end Updating requirement dependent on the registrant’s (not the acquiree’s) eligibility for relief under S-X 3-01(c). After a reverse acquisition accounted for as a business combination, consider the accounting acquirer's ability to meet the requirements of S-X 3-01(c) in determining the need to update.
Filing is effective after 74th day after acquiree’s fiscal year end Acquiree’s most recent fiscal year must be audited
Large Accelerated Filer Registrant’s filing is effective after 45 days but not more than 59 days after the acquiree’s fiscal year end Updating requirement dependent on the registrant’s (not the acquiree’s) eligibility for relief under S-X 3-01(c). After a reverse acquisition accounted for as a business combination, consider the accounting acquirer's ability to meet the requirements of S-X 3-01(c) in determining the need to update.
Filing is effective after 59th day after acquiree’s fiscal year end Acquiree’s most recent fiscal year must be audited

NOTE TO SECTION 2045.5

For purposes of evaluating the financial statement updating requirements relating to a significant acquired or probable-to-be-acquired business, the reference in S-X 3-01(c)(2) to the registrant’s (or in a reverse acquisition, the accounting acquirer’s) “most recent fiscal year for which audited financial statements are not yet available” should be replaced with “the most recently completed fiscal year prior to the acquisition date” irrespective of whether or not those financial statements are available. (Last updated: 3/31/2010)

2045.61933 Act Registration Statement Age of Financial Statements- Requirement to File Acquiree’s ANNUAL Financial Statements that are More Recent than Registrant’s Financial Statements - In limited circumstances involving a registrant that would be required to update after the 45th day, applying this rule results in a requirement to file audited financial statements of the acquiree as of a date more recent than is required for the registrant. If the registrant believes providing updated audited financial statements would impose an unreasonable burden under the circumstances, the registrant may request CF-OCA to consider granting relief if the acquiree's financial statements are updated on an unaudited basis through either the registrant's latest balance sheet date or the acquiree's year-end. Requests for relief should be made in writing prior to filing.

For example: A registrant with a December 31, 2007 year end is required under S-X 3-01(c) to update its audited financial statements after February 14, 2008 in a registration statement.  The registrant is acquiring a business with a November 30, 2007 year end. The acquired business is neither an accelerated filer nor a large accelerated filer. If the registration statement is effective February 1, 2008, the registration statement would require audited financial statements of the registrant for the year ended December 31, 2006 and unaudited financial statements for the nine months ended September 30, 2007. Unless relief is obtained, the target’s audited financial statements would be required for the year ended November 30, 2007 since February 1 is beyond 45 days after target’s year end and the registrant is not eligible for relief under S-X 3-01(c).

2045.71933 Act Registration Statement - Age of INTERIM Financial Statements - For interim period financial statements in a 1933 Act registration statement, age requirements are the same as if the acquiree were the registrant (see Section 1200), however the requirement to audit interim period information depends on whether the acquired business is a predecessor and, if not a predecessor, whether the registrant applied S-X 3-05 or SAB 80, which is discussed at Section 2070.

2045.81933 Act Registration Statement Age of INTERIM Financial Statements - Predecessor If the acquired business is a “predecessor” of the registrant (See Section 1170), and the acquisition date is on or before the registrant’s most recent audited balance sheet required to be included in the registration statement, then interim financial statements of the predecessor should be presented and audited through the date of acquisition. If the acquired business is a “predecessor” of the registrant and the acquisition date is after the registrant’s most recent audited balance sheet required to be included in the registration statement, then interim financial statements of the predecessor should be presented for the same periods as if the predecessor were the registrant and may be unaudited. In this circumstance, the predecessor period between registrant’s latest balance sheet and acquisition date would need to be audited in registrant’s next Form 10-K.

2045.91933 Act Registration Statement Age of INTERIM Financial Statements S-X 3-05 Acquiree– If significance is measured using S-X 3-05, interim financial statements of an acquired business need not be audited. Age requirements are the same as if the acquiree were the registrant. See Section 1200. Consequently, financial statements of an acquired business need not be updated if the omitted period is less than a complete quarter. However, disclosure of significant events occurring during the omitted interim period may be necessary.

For example:  If an acquisition subject to S-X 3-05 or S-X 8-04 (i.e., not a predecessor) was consummated on September 29, the staff generally would not require that the financial statements of the acquired entity be updated past June 30. However, disclosure of significant events occurring during the omitted interim period may be necessary.

2045.101933 Act Registration Statement Age of INTERIM Financial Statements S-X 3-05 Acquiree and Updating Form 8-K - In some cases, the financial statements provided in Form 8-K may need to be updated in a registration statement to comply with the 135-day rule (for an acquired business that is neither an accelerated filer nor a large accelerated filer) or the 130 day rule (for an acquired business that is either an accelerated filer or a large accelerated filer). See Section 1200.

For example: A registrant files a Form 8-K reporting an acquisition of a business that is neither an accelerated filer nor a large accelerated filer which occurred on July 10. The registrant and the acquiree have calendar fiscal year ends. The Form 8-K includes the acquiree’s interim financial statements as of March 31. The staff is likely to not accelerate the effective date of a registration statement filed in December of the same year unless the acquiree’s financial statements are updated through at least June 30.

2045.111933 Act Registration Statement Age of INTERIM Financial Statements - SAB 80 Acquiree- If significance is measured using SAB 80, see Section 2070, “SAB 80: Application of S-X 3-05 in Initial Registration Statements,” and the discussion in Section 2070.9, “Interim Financial Statements.”

2045.12Proxy Statements - Age of Financial Statements - For purposes of proxy statements, the staff interprets the updating requirements in the same manner as under the 1933 Act.

2045.13Form 8-K Age of Financial Statements - General. The staff believes that the age of financial statements in a Form 8-K should be determined by reference to the filing date of the Form 8-K initially reporting consummation of the acquisition. If no filing is made timely (on or prior to the 4th business day following the acquisition date), the age of financial statements required to be filed should be determined by reference to the 4th business day after the consummation of the acquisition. See Section 2045.17 for an exception to this position.

2045.14Form 8-K - Age of ANNUAL Financial Statements

  • Acquired company is NOT an Accelerated Filer or Large Accelerated Filer: For purposes of Form 8-K, the staff would not require audited statements of the acquiree's most recently completed year unless the Form 8-K reporting the acquisition was filed 90 days or more after the acquired company's fiscal year-end.
  • Acquired company is an Accelerated Filer: For purposes of Form 8-K, the staff would not require audited statements of the acquiree's most recently completed year unless the Form 8-K reporting the acquisition was filed 75 days or more after the acquired company's fiscal year-end.
  • Acquired Company is a Large Accelerated Filer: For purposes of Form 8-K, the staff would not require audited statements of the acquiree's most recently completed year unless the Form 8-K reporting the acquisition was filed 60 days or more after the acquired company's fiscal year-end.
  • Acquired Company is a Foreign Private Issuer or a Foreign Business:  For purposes of Form 8-K, the staff would not require audited statements of the acquiree's most recently completed year unless the Form 8-K reporting the acquisition was filed more than three months after the acquired company's fiscal year-end. [S-X 3-01(h), S-X 3-02(d), Item 8.A.4 of Form 20-F] (Last updated: 12/31/2010)

2045.15Form 8-K - Age of INTERIM Financial Statements

  • Acquired company is NOT an Accelerated Filer or Large Accelerated Filer: For purposes of Form 8-K, interim financial statements must be within 135 days of the date that the initial Form 8-K reporting the acquisition is filed, except that a filing with the acquired business’s year-to-date interim financial statements that include its third quarter is timely through the 90th day after the acquired business’s most recently completed fiscal year end.
  • Acquired company is an Accelerated Filer or a Large Accelerated Filer: For purposes of Form 8-K, interim financial statements must be within 130 days of the date that the initial Form 8-K reporting the acquisition is filed, except that a filing with the acquired business’s year-to-date financial statements that include its third quarter is timely for an acquired business that is an accelerated filer through the 75th day after its most recently completed fiscal year end and for an acquired business that is a large accelerated filer through the 60th day after its most recently completed fiscal year end.
  • Acquired Company is a Foreign Private Issuer or a Foreign Business: For purposes of Form 8-K, interim financial statements must be filed if the date that the initial Form 8-K reporting the acquisition is filed is more than nine months after the end of the acquired company’s most recently completed year.  The interim financial statements must cover at least the first six months of the year. [S-X 3-01(h), S-X 3-02(d), Item 8.A.5 of Form 20-F] (Last updated: 6/30/2013)

2045.16Form 8-K Age of Financial Statements - Effect of Previously Filed Financial Statements - General Instruction B.3. to Form 8-K states in part: “If the registrant previously has reported substantially the same information as required by this form, the registrant need not make an additional report of the information on this form.” Financial statements of an acquiree are not required in Form 8-K if they were previously filed by the registrant. Examples of when previously filed acquiree financial statements will not be deemed "substantially the same" pursuant to this instruction include:

  • the previously filed acquiree financial statements would not satisfy the required age of financial statements in the Form 8-K because operating results for two or more interim quarters are omitted. See Example 1 below.
  • the previously filed acquiree financial statements are interim financial statements and the Form 8-K requires filing of updated audited annual financial statements of the acquiree. See Example 2 below.
  • the previously filed acquiree financial statements were prepared in accordance with the requirements for smaller reporting companies in S-X Article 8, but the registrant is not a smaller reporting company. See Example 3 below.

Example 1: Form S-4 included unaudited financial statements for the three months ended March 31 for a business to be acquired. The business combination was consummated on October 1, and a Form 8-K reporting the acquisition was timely filed. No financial statements are required in the Form 8-K, unless there were significant subsequent events that would materially affect an investor's understanding of the target company. However, if the business combination had been consummated on November 20, the financial statements would have had to be updated through September 30.

Example 2:  Form S-4 contained unaudited financial statements of the entity to be acquired for the nine months ended September 30. Updated audited financial statements of the acquired entity are required in a Form 8-K if the business combination is consummated, and the Form 8-K is filed after the 89th day subsequent to December 31. Note that in a registration statement, updated audited financial statements of the acquired entity may be required before the 90th day, if either the acquired business is an accelerated filer or a large accelerated filer or the registrant does not meet the requirements under S-X 3-01(c). Refer to Section 2045.5, “1933 Act Registration Statement - Age of ANNUAL Financial Statements”  regarding the requirements to provide audited financial statements of an acquired entity.

Example 3: If a registrant included financial statements of a previously nonpublic smaller reporting company-eligible target in a Form S-4 and those financial statements complied with smaller reporting company reporting requirements instead of S-X reporting requirements for companies other than smaller reporting companies (see Section 2200.2), those financial statements would not be deemed “substantially the same” pursuant to Form 8-K; Gen. Instruction B.3. Financial statements that comply with S-X would need to be filed in a Form 8-K if the S-X 3-05 significance threshold is met.

2045.17Form 8-K Age of Financial Statements- EXCEPTION to use of the date Form 8-K must be filed to determine age of acquired business financial statements in a Form 8-K

(Last updated: 3/31/2009)

When the effective date of a registration statement occurs subsequent to filing the initial Form 8-K reporting the acquisition, but within the 71 calendar day extension to file the acquired business financial statements and the acquired business is significant in excess of 20% but less than 50%, the age of the acquired business financial statements presented in the Form 8-K should be based on the effective date of the registration statement, not the Form 8-K filing date. This is true even though S-X 3-05(b)(4) and S-X 8-04(c)(4) permit a registrant to exclude from its registration statement financial statements of an acquired business if its significance does not exceed 50% and the registration statement is declared effective (or immediately effective for well-known seasoned issuers) not more than 74 days after consummation of the acquisition. S-X 3-05(b)(4) and S-X 8-04(c)(4) were not intended to change the age of financial statements, simply the timing of filing them. Consider the following example.

Example:

Example - Assumptions
Acquired Business Significance: 21%
Acquired Business Most Recent Year End 12/31/2007
Acquisition consummated: 4/4/2008
Form 8-K reporting acquisition filed: 4/10/2008 (4 business days)
Registration effective date: 5/16/2008
Form 8-K with acquired business financial statements filed: 6/20/2008

Example – Analysis: If the age of financial statements were based on the date the Form 8-K reporting the transaction was filed (i.e., 4/10/2008), acquired business financial statements for the year ended 12/31/2007, but no interim financial statements of the acquired business, would be required. If age of financial statements were based on the effective date of the registration statement, acquired business financial statements for the year ended 12/31/2007 and the three months ended 3/31/2008 and 3/31/2007 would be required. The staff interprets the requirements of S-X 3-05 and S-X 8-04 to mean that the acquired business financial statements for the year ended December 31, 2007 and the three months ended 3/31/2008 and 3/31/2007 would be required in the Form 8-K.

2050Age of Financial Statements - Interaction of S-X 3-05(b)(4) and Instruction to Item 9.01 of Form 8-K

2050.1Overview

Item 9.01 of Form 8-K requires a registrant to provide financial statements required by S-X 3-05 for any business acquisition required to be described in answer to Item 2.01 of Form 8-K. These financial statements may be provided in the initial Form 8-K or by amendment not later than 71 calendar days after the date that the initial Form 8-K is required. We refer to this as the “grace period.”

Item 9.01 of Form 8-K permits certain offerings and sales of securities to occur during the grace period even if the acquiree’s financial statements have not been filed. See Sections 2050.2 through 2050.5 for a discussion of the implications of the grace period on securities offerings and Securities Act registration statements.

CF-OCA generally will not waive the requirements of Form 8-K. If the financial statements and pro forma financial information required by Form 8-K are not filed within the grace period, then the filing will be considered deficient and, therefore, not filed in a timely manner for purposes of Form S-3 eligibility. Once the registrant has filed its audited financial statements that include the post-acquisition results of operations of the acquired entity for at least one year, CF-OCA, at the request of the registrant, will consider a request to accept audited financial statements for the acquired entity for a period of time less than that required by S-X 3-05/S-X 8-04. At a minimum, CF-OCA would expect audited pre- and post-acquisition financial statements to equal the periods required under S-X 3-05/S-X -8-04 and to have no break between the pre-acquisition and post-acquisition audited results.

A registrant may be unable to provide the financial statements required by Item 9.01 of Form 8-K. Sections 2050.6 and 2050.7 discuss some of the implications of failing to file the required financial statements during the grace period on securities offerings and Securities Act registration statements.

NOTE to SECTION 2050.1

Is “not more than 74 calendar days” in S-X 3-05(b)(4) the same as not more than 4 business days plus 71 calendar days in Items 2.01/9.01 of Form 8-K?

The filing requirements in Item 2.01/9.01 of Form 8-K are based on 4 business days plus 71 calendar days. The exception in S-X 3-05(b)(4) for financial statements of an acquired business that exceeds 20%, but does not exceed 50% significance relates to registration statements declared effective no more than 74 calendar days after consummation of the acquisition. In some circumstances, the sum of 4 business days plus 71 calendar days may exceed 75 calendar days. Solely for purposes of evaluating whether financial statements of an acquired business for which the registrant timely filed an Item 2.01 Form 8-K are required in a not-yet-effective registration statement or not-yet-effective post-effective amendment, the staff will consider “not more than the sum of 4 business days and 71 calendar days” to be substantially equivalent to “not more than 74 calendar days.”

2050.2Securities Offerings During the Grace Period Using a Registration Statement that became Effective Prior to Acquisition - Significance Does Not Exceed 50%

If significance does not exceed 50% and the financial statements of the acquired business have not been filed, S-X 3-05(b)(4)(i) permits use of effective registration statements during the grace period provided that the offering is not made by a blank check company pursuant to Regulation C, Rule 419.

2050.3Securities Offerings During the Grace Period Using a Registration Statement that became Effective Prior to Acquisition – Significance Exceeds 50%

If significance exceeds 50% and the financial statements of the acquired business have not been filed, registrants should not make offerings pursuant to effective registration statements, or pursuant to Rules 505 and 506 of Regulation D if any purchasers are not accredited investors under Rule 501(a) of that Regulation, until the required audited financial statements are filed; provided however, that the following offerings and sales of securities may proceed during the grace period notwithstanding that the financial statements of the acquired business have not been filed:

  1. offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights;
  2. dividend or interest reinvestment plans;
  3. employee benefit plans;
  4. transactions involving secondary offerings; and
  5. sales of securities pursuant to Rule 144.

2050.4New Registration Statements or Post-Effective Amendments Filed During the Grace Period - Significance Does Not Exceed 50%

If significance does not exceed 50% and the financial statements of the acquired business have not been filed, then S-X 3-05(b)(4)(i) permits registration statements and post-effective amendments to registration statements, which do not relate to offerings by blank check companies pursuant to Regulation C, Rule 419, to become effective without financial statements of the acquired business.

2050.5New Registration Statements or Post-Effective Amendments Filed During the Grace Period - Significance Exceeds 50%

If significance exceeds 50% and the financial statements of the acquired business have not been filed, registration statements and post-effective amendments to registration statements will not be declared effective. WKSIs should also not make offerings pursuant to registration statements that became effective during the grace period. See Section 2045.4 which describes a WKSI’s obligation to comply with the requirements of S-X 3-05 at the time of filing of an S-3ASR.

2050.6New Registration Statements or Post-Effective Amendments Filed After the Grace Period if Required Financial Statements Not Filed

Securities Act registration statements and post-effective amendments should include audited financial statements reporting on the operations of the acquired business for a time span equal to the periods for which audited financial statements are required by S-X 3-05 and pro forma financial information is required by S-X Article 11 at the effective date. WKSIs should also not make offerings pursuant to registration statements that became effective during the grace period. See Section 2045.4 which describes a WKSI’s obligation to comply with the requirements of S-X 3-05 at the time of filing of an S-3ASR.

NOTE to SECTION 2050.6

Under S-X 3-05(b)(4) registration statements may be declared effective during the grace period even if the financial statement of the acquired business have not been filed provided that the significance of the acquired business does not exceed 50%. This accommodation does not apply after this period.

2050.7Securities Offerings After the Grace Period Using a Registration Statement that became Effective Prior to Acquisition if Required Financial Statements Not Filed

After the grace period, registrants should not make offerings pursuant to effective registration statements, or pursuant to Rules 505 and 506 of Regulation D if any purchasers are not accredited investors under Rule 501(a) of that Regulation, until the required audited financial statements are filed; provided, however, that the following offerings and sales of securities made pursuant to registration statements that were effective prior to the acquisition may proceed notwithstanding that the financial statements of the acquired business have not been filed:

  1. offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights;
  2. dividend or interest reinvestment plans;
  3. employee benefit plans;
  4. transactions involving secondary offerings by parties unrelated to the acquired business for which financial statements are not provided; and
  5. sales of securities pursuant to Rule 144.

NOTE to SECTION 2050.7

During the grace period provided by Item 9.01 of Form 8-K certain transactions involving secondary offerings, whether by related or unrelated parties, may proceed notwithstanding that financial statements of the acquired business have not been filed. In evaluating requests to conduct secondary offerings (i.e., pursuant to an effective registration statement) subsequent to the grace period when the acquired business financial statements have not been filed, CF-OCA historically has limited its accommodation to secondary offerings by parties unrelated to the acquired business.

2055Foreign Business, Hostile Tender Offers, and Troubled Financial Institutions

2055.1Foreign Business - The financial statements of an acquired foreign business [as defined in S-X 1-02(l)] presented to comply with S-X 3-05/S-X 8-04 may be prepared on a comprehensive basis other than U.S. GAAP. If the financial statements of an acquired foreign business are prepared in accordance with IFRS as issued by the IASB, they need not be reconciled to U.S. GAAP. If the financial statements of an acquired foreign business are prepared on a comprehensive basis other than U.S. GAAP or IFRS as issued by the IASB, they must be reconciled to U.S. GAAP only when the significance of the foreign business to the registrant exceeds 30%. The reconciliation need only comply with Item 17 of Form 20-F and is subject to the updating requirements under Item 8 of Form 20-F. Reconciliation and Form 20-F updating requirements are described at Topic 6. Measuring significance of a foreign business is discussed in Section 2015.3, “Comprehensive Basis of Accounting Used to Measure Significance.”

2055.2Hostile Tender Offers - Modified registration statement requirements may apply to some registration statements covering hostile tender offers to shareholders of a company that will not provide its financial statements. However, if the target of the tender offer is a public company, financial statements of the target that are filed with the SEC may be incorporated by reference. A consent of the auditor may be required. Registrants intending to rely on Regulation C, Rule 409 should consider the guidance in SAB Topic 1A. and consult with CF-OMA and CF-OCA as to whether such reliance is appropriate in the circumstances.

2055.3Troubled Financial Institutions - If a financial institution is acquired in a federally assisted transaction and constitutes a significant business having material continuity of operations, the staff will likely not object to the omission of audited historical financial statements required by S-X 3-05 if the statements are not reasonably available. Requests for waivers should be directed to CF-OCA. If a waiver is granted, an audited statement of assets acquired and liabilities assumed reflecting the purchase basis of accounting as of the acquisition date will be required, as well as Industry Guide 3 data and various additional disclosures. [SAB Topic 1K] (Last updated: 9/30/2010)

2060Flowchart Overview of S-X 3-05

(Last updated: 9/30/2009)

Are S-X 3-05 Financial Statements Required in a Registration Statement for an Acquisition that has Occurred or is Probable?
(Excludes S-4 Target Companies)

Flowchart Overview of S-X 3-05

2065Acquisition of Selected Parts of an Entity may Result in Less than Full Financial Statements.

(Last updated: 8/25/2017)

NOTE to SECTION 2065

S-X 3-05 applies to the acquisition of selected parts of an entity when that acquisition represents the acquisition of a “business” as defined in S-X 11-01(d) and the business acquired does not represent a predecessor of the registrant.

Except for acquisitions of certain oil and gas properties discussed in Section 2065.11, requests to substitute statements of assets acquired and liabilities assumed and statements of revenues and direct expenses (abbreviated financial statements) in lieu of full financial statements or carve-out financial statements should be directed to CF-OCA prior to filing. In addition, requests to provide abbreviated financial statements for an acquired business identified as a predecessor of the registrant should be directed to CF-OCA prior to filing.

2065.1Acquire Substantially All of an Entity - If the registrant acquires or succeeds to substantially all of the entity's key operating assets, full audited financial statements of the entity are presumed to be necessary in order to provide investors with the complete and comprehensive financial history of the acquired business. In these circumstances, elimination of specified assets and liabilities not acquired or assumed by the registrant is depicted in pro forma financial statements presenting the effects of the acquisition.

2065.2Acquire Less than Substantially All of an Entity - In some circumstances, a registrant does not acquire or succeed to substantially all of the assets and liabilities of another entity. For example, the selling entity may retain significant operating assets, or significant operating assets that comprised the seller may be operated by an entity other than the registrant. In these circumstances, financial statements of the larger entity of which the acquired business was a part may not be informative. In that case, audited financial statements usually should be presented for the acquired component business, excluding the continuing operations retained by the larger entity. Registrants should evaluate their facts and circumstances to determine whether to apply the guidance in Section 2065.3 (carve-out financial statements) or in Sections 2065.4 through Section 2065.12 (abbreviated financial statements). 

2065.3Carve-out Financial Statements - Applicability - The staff will accept carve-out financial statements if it is impracticable to prepare the full financial statements required by Regulation S-X, and explanation of that impracticability is included in the filing. Carve-out financial statements may be appropriate when the acquired business represents a discrete activity of the selling entity for which assets and liabilities are specifically identifiable and a reasonable basis exists to allocate items that are not specifically identifiable to the acquired business, such as debt and indirect expenses not directly involved in the revenue producing activity. Carve-out financial statements should reflect all assets and liabilities of the acquired business even if they are not acquired/assumed as part of the acquisition. The staff would expect carve-out financial statements to comply with the guidance in SAB Topic 1B.1.

2065.4Abbreviated Financial Statements - Statements of Assets Acquired and Liabilities Assumed and Statements of Revenues and Direct Expenses - Applicability- The staff may allow audited statements of assets acquired and liabilities assumed and statements of revenues and direct expenses (abbreviated financial statements) if it is impracticable to prepare the full financial statements required by Regulation S-X. For example, it may be impracticable to prepare full financial statements in an acquisition of a product line where the acquired product line is not a stand-alone entity; separate, audited financial statements of the product line have never been prepared; and the seller has not maintained the distinct and separate accounts necessary to present the full financial statements of the product line. Except for acquisitions of certain oil and gas properties discussed in Section 2065.11, requests to substitute abbreviated financial statements in lieu of full financial statements or carve-out financial statements should be directed to CF-OCA prior to filing.

2065.5Abbreviated Financial Statements - Statements of Assets Acquired and Liabilities Assumed - General Requirements - Present a statement of assets acquired and liabilities assumed as of the end of each period required to be provided under S-X 3-05, not just as of the end of the most recent period, on the basis of seller’s historical GAAP carrying value.  If the registrant is unable to obtain statements of assets acquired and liabilities assumed prepared on the basis of seller’s historical GAAP carrying value for each of the reporting dates required by S-X 3-05 (or, if applicable, S-X 8-04), CF-OCA will consider a registrant’s request to present a statement of assets acquired and liabilities assumed prepared on the basis of the allocation of the registrant’s purchase price as of the acquisition date. Registrants would still need to present the statement of revenues and direct expenses for the periods indicated by S-X 3-05 and S-X 8-04, as applicable.

2065.6Abbreviated Financial Statements - Statement of Revenues and Direct Expenses - General Requirements -The staff would expect the statement of revenues and direct expenses to exclude only those costs not directly involved in the revenue producing activity, such as corporate overhead, interest and taxes. All costs directly associated with producing revenues reflected in the statement, including, but not limited to all related costs of sales and other selling, general and administrative, distribution, marketing, and research and development costs, must be included in the statement. The statement should include a reasonable allocation of expenses incurred by the seller on behalf of the business sold. The reasons for omitting any historical corporate overhead, interest, or tax expense should be explained in a note to the statements. If the type and historical amounts of these omitted expenses are known or reasonably available on an unaudited basis, they should be disclosed in an unaudited footnote. An explanation of the impracticability of preparing the full financial statements required by Regulation S-X should be provided. Also, the notes should describe how the financial statements presented are not indicative of the financial condition or results of operations of the acquired business going forward because of the omission of various operating expenses.

NOTE to SECTION 2065.6

If granted, the accommodation from CF-OCA to present abbreviated financial statements is premised on the registrant’s ability to identify all costs directly associated with producing revenues of the acquired product line.

2065.7[Reserved]

2065.8Cash Flows - When abbreviated financial statements are presented, preparation of full statements of cash flows may not be practicable. However, registrants are required to provide information about the business’s operating, investing and financing cash flows, to the extent available, in the notes to the financial statements or in unaudited supplemental disclosures.

2065.9Abbreviated Financial Statements - Statements of Assets Acquired and Liabilities Assumed and Statements of Revenues and Direct Expenses - Calculating Significance - Registrants should compute all three S-X 3-05 significance tests as written. For the asset test, this will require comparing the book value of the assets acquired to the registrant’s total assets. For the income test this will require comparing the excess/deficiency of revenue over direct expenses to the registrant’s pre-tax earnings. Historically, some registrants have requested to adjust the S-X 1-02(w) income test denominator (i.e., the registrant’s pre-tax earnings) to exclude costs not directly involved in the registrant’s revenue producing activity, such as corporate overhead, interest and taxes, when those costs are excluded from the numerator used to calculate income test significance. While such a calculation may help facilitate a registrant’s analysis of whether the application of the S-X 3-05 income test produces anomalous results, such a calculation should not be done in lieu of the income test specified in S-X 3-05. If a registrant’s management believes the application of the S-X 3-05 tests as written produces anomalous results, CF-OCA will, upon receipt of the registrant’s written request and supporting analysis, consider a registrant’s request to waive one or more of the periods specified by S-X 3-05. In making this request, registrants should evaluate all relevant facts and circumstances in determining what number of periods are necessary for an investor’s understanding of the acquired business. Generally, CF-OCA will not waive all audited periods required by S-X 3-05.

2065.10Pro Forma Financial Statements and Forward-Looking Disclosures - S-X Article 11 applies to the acquisition of selected parts of an entity.

Pro Forma Condensed Balance Sheet Guidance - If the historical financial statements of the acquired business are full financial statements (see Section 2065.1), the pro forma balance sheet should include adjustments to remove assets and liabilities that were not acquired or assumed provided the criteria described in Section 3220.3 are met.

Pro Forma Condensed Income Statement Guidance - The pro forma condensed income statement should comply with the criteria at Section 3230.4 and should not include forward-looking information.  If the historical financial statements of the acquired business are abbreviated financial statements, the pro forma footnotes should explain how the pro forma condensed income statements are not indicative of the acquired business’s operations going forward because of the changes in the business and the omission of various operating expenses.

Forward-Looking Information - If the registrant includes forward-looking information, it should clearly be identified as forward-looking rather than as pro forma. If the forward-looking information is in the form of an S-X 11-03 forecast, the pro forma condensed income statements may be omitted (see Section 3510). If the forward-looking information provided is not in the form of an S-X 11-03 forecast, it should nonetheless disclose how revenues and operating efficiencies may vary given the assumptions underlying the forward-looking information as if the business had been acquired at the beginning of the periods presented.

2065.11Unique Considerations for Acquisitions of Oil and Gas Properties - General - An acquisition of an interest in a producing oil or natural gas property is considered by the staff to be the acquisition of a business pursuant to S-X 11-01(d) for which pre-acquisition financial statements are required if significant. If the property acquired represents substantially all of the selling entity’s key operating assets, see Section 2065.1. If the property acquired represents less than substantially all of the selling entity’s key operating assets, the registrant should provide the carve-out financial statements described in Section 2065.3, except that the staff will accept (i.e. pre-clearance with CF-OCA is not required) the abbreviated financial statements described in Sections 2065.4 through 2065.8 and in Section 2065.12 if the following three circumstances exist:

  • The interest in the acquired oil or natural gas property constitutes only a portion of the assets of the seller and is not a segment or division of an entity or contained in a separate legal entity.
  • Separate financial statements for the acquired business have not previously been prepared, and the seller has not maintained the distinct and separate accounts necessary to present the full financial statements or full carve-out financial statements of the property.
  • It is impracticable to prepare the full financial statements required by Regulation S-X.

If abbreviated financial statements are provided, significance should be calculated in accordance with Section 2065.9.

2065.12Unique Considerations for Acquisitions of Oil and Gas Properties - Additional Guidance - Registrants that present abbreviated financial statements in the circumstances described in Section 2065.11:

  • May omit the statement of assets acquired and liabilities assumed if the business acquired consists solely of interest(s) in one or more oil or natural gas properties (e.g. working interests, net profit interests, etc.).
  • Should include in the statement of revenues and direct expenses, income statement effects of all derivative contracts related to the property that existed during the historical financial statement periods presented if the registrant acquires or assumes any derivative contracts related to the acquired oil and natural gas property.
  • Should furnish the supplementary disclosures described in ASC 932-235-50-3 through 50-11 and ASC 932-235-50-29 through 50-36 for each full year of operations presented for the acquired property. If prior year reserve studies were not made, the staff will not object to computing the reserves for prior years using only production and new discovery quantities and valuation, in which case there will be no “revision of prior estimates” amounts. Registrants may develop these disclosures based on a reserve study for the most recent year, computing the changes backward. If disclosures are developed in this manner, the method of computation should be disclosed in a footnote.
  • Should consider the guidance in Section 2065.10 regarding pro forma financial statements and forward-looking disclosures.

2070SAB 80: Application of S-X 3-05 in Initial Registration Statements (SAB Topic 1J)

2070.1Background - S-X 3-05 and S-X 8-04 identify the financial statements of businesses recently acquired and likely to be acquired that must be included in a registration statement. In some cases involving IPOs, strict application of S-X 3-05 or S-X 8-04 can result in provision of financial statements that are clearly not significant. SAB 80 is an interpretation of S-X 3-05 for application in initial registration statements of first-time registrants that have been built by the aggregation of discrete businesses that remain substantially intact after acquisition. First-time registrants that meet the conditions in Section 2070.2 may apply SAB 80 instead of S-X 3-05 or S-X 8-04 in their initial registration statement. If a registrant chooses to use SAB 80 to measure significance of its acquired and likely to be acquired businesses for purposes of its initial registration statement, it must use SAB 80 for all such acquisitions.

2070.2Conditions Precedent to Applying SAB 80 - A registrant must meet the following conditions in order to apply SAB 80:

  • Condition 1: The acquired and likely to be acquired businesses must be discrete and substantially intact after the acquisition. Footnote 2 of SAB 80, which is partially reproduced in the notes below, provides an example to clarify. This condition exists because SAB 80 measures significance using the acquired businesses’ post-acquisition assets and post-acquisition pretax income.
  • Condition 2: SAB 80 can only be applied by a first-time registrant in its initial registration statement, irrespective of whether that initial registration statement involves a public offering.

NOTES to SECTION 2070.2

  1. Generally, all of the registrant’s acquired and likely to be acquired businesses must meet the two conditions above in order to apply SAB 80. However, footnote 2 of SAB 80 states in part that SAB 80 “does not address all possible cases in which similar relief may be appropriate but, rather, attempts to describe a general framework within which administrative policy has been established. In distinguishable situations, registrants may request relief as appropriate to their individual facts and circumstances.”
  2. As noted in Section 2070.1, if a registrant chooses to use SAB 80 to measure significance of its acquired and likely to be acquired businesses for purposes of its initial registration statement, it must use SAB 80 for all such acquisitions.
  3. Condition 1: When identifying acquired businesses, related businesses should be treated as a single business acquisition. See Section 2015.12.
  4. Condition 1: Footnote 2 of SAB 80 states in part: “For example, nursing homes, hospitals, or cable TV systems. [SAB 80] would not apply to businesses for which the relative significance of one portion of the business to the total business may be altered by post-acquisition decisions as to the allocation of incoming orders between plants or locations. …”
  5. Condition 2: SAB 80 only references initial public offerings, however the staff will not object to the application of SAB 80 by first-time registrants in an initial registration statement not related to a public offering (e.g., a Form 10), provided Condition 1 above is met.
  6. Condition 2: A subsidiary is not precluded from applying SAB 80 in its initial registration statement simply because its parent is a public company. (Last updated: 6/30/2010)

2070.3Significance under SAB 80 - Basics - SAB 80 permits first-time registrants to consider the significance of each acquired and likely to be acquired business based on pro forma financial statements for the registrant's most recently completed fiscal year. The registrant’s pro forma financial statements used for purposes of measuring significance under SAB 80 should give effect to all acquisitions that were probable or completed as of the effective date of the registration statement as if they had been acquired at the beginning of the registrant’s most recently completed fiscal year for the income test and at the end of the registrant’s most recently completed fiscal year for the asset and investment tests.

2070.4Significance under SAB 80 -Asset Test -As described in Section 2015, the SX 3-05 and 1-02(w) asset test requires calculation of the ratio of (A) the registrant’s and its other subsidiaries’ proportionate interest in the total assets of the acquired or likely to be acquired business to (B) the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant’s pro forma financial statements.

  1. Numerator for the Asset test: Use the pro forma balance sheet for the acquired or likely to be acquired business as of the end of its most recently completed fiscal year that gives effect to any new cost basis arising from acquisition accounting irrespective of whether pushdown accounting is applied. If the fiscal year-end of the acquired or likely to be acquired business differs from the registrant’s fiscal year-end by more than 93 days, the acquired or likely to be acquired business’s fiscal year-end should be brought up to within 93 days of the registrant’s most recent fiscal year-end. [S-X 11-02(c)(3)] (Last updated: 1/12/2015)
  2. Denominator for the Asset test: Use the registrant’s pro forma balance sheet as of the end of the most recently completed fiscal year included in the registration statement. The registrant’s pro forma balance sheet should give effect to (A) acquisitions completed after the most recent year end and (B) probable acquisitions.

2070.5Significance under SAB 80- Investment Test -As described in Section 2015, the S-X 3-05 and 1-02(w) investment test requires calculation of the ratio of (A) the registrant’s and its other subsidiaries’ investments in and advances to the recently acquired or to be acquired businesses to (B) the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant’s pro forma financial statements.

  1. Numerator for the Investment test: Use same amount as S-X 3-05 investment test.
  2. Denominator for the Investment test: Use the registrant’s pro forma balance sheet as of the end of the most recently completed fiscal year included in the registration statement. The registrant’s pro forma balance sheet should give effect to (A) acquisitions completed after the most recent year end and (B) probable acquisitions.

2070.6Significance under SAB 80-Income Test -As described in Section 2015, the S-X 3-05 and 1-02(w) income test requires calculation of the ratio of (A) the registrant’s and its other subsidiaries’ equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of accounting changes of the recently acquired or to be acquired businesses to (B) such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant’s pro forma financial statements.

  1. Numerator for the Income test: Use the pro forma income statement for the acquired or likely to be acquired business for its most recently completed fiscal year that gives effect to any new cost basis arising from acquisition accounting irrespective of whether pushdown accounting is applied. If the fiscal year-end of the acquired or likely to be acquired business differs from the registrant’s fiscal year-end by more than 93 days, the acquired business’s fiscal year-end should be brought up to within 93 days of the registrant’s most recent fiscal year-end. See S-X 11-02(c)(3). (Last updated: 1/12/2015)
  2. Denominator for the Income test: Use the registrant’s pro forma income statement for the most recent fiscal year included in the registration statement. The registrant’s pro forma income statement should give effect to (A) acquisitions completed both during and after the most recent year end and (B) probable acquisitions.

2070.7Financial Statement Requirements - Initial Registration Statement - SAB 80 is intended to ensure that the registration statement includes:

  • at least 33 months of audited financial statements of at least 60% of the constituent businesses that will comprise the registrant on an ongoing basis, and
  • at least 21 months of audited financial statements of at least 80% of the constituent businesses that will comprise the registrant on an ongoing basis, and
  • at least 9 months of audited financial statements of at least 90% of the constituent businesses that will comprise the registrant on an ongoing basis.

NOTES to SECTION 2070.7

  1. Significance Thresholds - These significance thresholds are lower than those included in S-X 3-05. In 1996, the S-X 3-05 significance thresholds were increased from 10%, 20% and 40% to 20%, 40% and 50%. Similar changes were made to S-X 8-04. However, to ensure sufficient inclusion of constituent business financial statements in initial registration statements, corresponding amendments were NOT made to SAB 80.
  2. Application of S-X 3-06 - SAB 80 incorporates the concept in S-X 3-06 that a registrant may use one 9 to 12 month period to satisfy a requirement to provide annual financial statements. Thus, financial statements will be required for either: at least 9 to 12 months (equivalent of 1 year under S-X 3-06), at least 21 months (equivalent of 2 years under S-X 3-06), or at least 33 months (equivalent of 3 years under S-X 3-06)
  3. Unaudited Interim Financial Statements- Depending on the acquisition date, unaudited interim financial statements of the acquired or to be acquired business may be required. See Section 2070.9.

2070.8Requirement for Continuous Audited Period - SAB 80 uses a combination of pre-acquisition audited results of the acquired or likely to be acquired business and post-acquisition audited results of the registrant to satisfy the minimum financial statement requirements. Audited financial statements required to be filed to satisfy the requirements of SAB 80 should be for continuous periods, with no gap or overlap between pre-acquisition and post-acquisition audited periods.

2070.9Interim Financial Statements – Whether interim financial statements of an acquired or to be acquired business measured using SAB 80 need to be audited depends on the acquisition date. If the acquisition date is on or before the registrant’s most recent audited balance sheet required to be included in the registration statement, the interim financial statements of the acquired or to be acquired business should be presented and audited through the date of acquisition. If the acquisition date is after registrant’s most recent audited balance sheet required to be included in the registration statement, then the interim financial statements of the acquired or to be acquired business should be presented for the same periods as if the acquiree were the registrant and may be unaudited.

2070.10Determining Number of Pre-Acquisition Historical Financial Statement Periods Required for Completed and Probable Acquisitions:

  1. Identify for each completed and probable acquisition the highest level of significance resulting from the asset, investment and income test.
  2. Identify for which completed and probable acquisitions financial statements are required and for what number of months by reference to the chart in Section 2070.11 entitled “Minimum Financial Statement Requirement” and the highest level of significance for each acquisition identified in (A) above.
  3. As noted in Section 2070.8, SAB 80 uses a combination of pre-acquisition audited results of the acquired or likely to be acquired business and post-acquisition audited results of the registrant to satisfy the minimum financial statement requirements. Determine the number of months of pre-acquisition financial statements needed for each completed and probable acquisition identified in (B) above by subtracting (1) the number of months the acquisition is included in the registrant’s post-acquisition audited financial statements from (2) the Minimum Financial Statement Requirement described in Section 2070.11.
  4. File pre-acquisition audited financial statements for each completed and probable acquisition for at least the number of months that the acquisition is not included in the registrant’s audited financial statements with no gap or overlap between pre-acquisition and post-acquisition audited periods.

2070.11Financial Statement Requirements – Initial Registration Statement

Minimum Financial Statement Requirement Minimum Financial Statement Requirement
Year 1 (most recent fiscal year)
Businesses not included for at least 9 months in the registrant’s financial statements:

Year 1 (most recent fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 10%.


Thus, identify completed and probable acquisitions whose highest level of significance sums to 10% or less. If there is more than one combination of entities whose highest level of significance sums to 10% or less, the registrant may choose one combination. Financial statements for this combination may be omitted.


For all other completed and probable acquisitions, the registrant must present at least 9 months of audited financial statements for each acquisition with no gap or overlap between the acquired business’ pre-acquisition audited periods and the registrant’s post-acquisition audited periods.

Year 2 (preceding fiscal year)
Businesses not included for at least 21 months in the registrant’s financial statements:

Year 2 (preceding fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 20%.


Add to combination of acquisitions selected by the registrant that had a combined highest level of significance of 10% or less additional completed and probable acquisitions such that the combined highest level of significance sums to 20% or less.


For all other completed and probable acquisitions that were not included in the registrant’s combination of completed and probable acquisitions whose highest level of significance sums to 20% or less, present at least 21 months of audited financial statements for each acquisition with no gap or overlap between the acquired business’ pre-acquisition audited periods and the registrant’s post-acquisition audited periods.

Year 3 (second preceding fiscal year)
Businesses not included for at least 33 months in the registrant’s financial statements:

Year 3 (second preceding fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 40%


Add to the registrant’s combination of acquisitions that had a combined highest level of significance of 20% or less additional completed and probable acquisitions such that the combined highest level of significance sums to 40% or less.


For all other completed and probable acquisitions that were not included in the registrant’s combination of completed and probable acquisitions whose highest level of significance sums to 40% or less, present at least 33 months of audited financial statements for each acquisition with no gap or overlap between the acquired business’ pre-acquisition audited periods and the registrant’s post-acquisition audited periods.

2070.12Age of Financial Statements - Subsequent registration statements- The updating requirements of S-X 3-05 (and S-X 8-04 for a smaller reporting company) should be followed in subsequent registration statements. No updating is required for 1934 Act periodic reporting. Consider the following example.

Example:

Example Facts - A calendar year-end registrant has an IPO Form S-1 registration statement which will be effective February 1, 2008 that includes the registrant’s audited financial statements for the three years ended December 31, 2006 and the registrant’s unaudited interim financial statements for the nine months ended September 30, 2007 and September 30, 2006. The registrant acquired the businesses identified in the chart below during 2006 and 2007. Registrant chose to evaluate the need to include historical financial statements for the businesses it acquired using SAB 80 and appropriately concluded that the following annual and interim period financial statements of the acquired businesses must be included in the IPO Form S-1 at the February 1, 2008 effective date:

Entity Fiscal Year End Date Acquired Audited Annual Financial Statements Unaudited Interim Financial Statements Audited Interim Financial Statements
Registrant 12/31 N/A 12/31/2006 1/1/2007 – 9/30/2007 N/A
Target A  6/30 12/15/2006 6/30/2006 N/A 7/1/2006 - 12/14/2006
Target B 6/30 1/31/2007 6/30/2006 7/1/2006-1/30/2007 N/A
Target C 12/31 3/1/2007 12/31/2006 N/A N/A
Target D 1/31 2/8/2008 1/31/2007 2/1/2007-10/31/2007 N/A

Example Analysis - In a subsequent registration statement declared effective June 16, 2008, the following financial statements related to the same entities would be required for the most recent fiscal year and interim period:

Entity Fiscal Year End Date Acquired Audited Annual Financial Statements Unaudited Interim Financial Statements Audited Interim Financial Statements
Registrant 12/31 N/A 12/31/2007 1/1/2008 - 3/31/2008 N/A
Target A 6/30 12/15/2006 6/30/2006 N/A 7/1/2006 - 12/14/2006
Target B 6/30 1/31/2007 6/30/2006 N/A 7/1/2006 - 1/30/2007
Target C 12/31 3/1/2007 12/31/2006 N/A 1/1/2007 – 2/28/2007
Target D 1/31 2/8/2008 1/31/2008 N/A N/A

2070.13Tests of Significance After an Initial Registration Statement in which SAB 80 was Applied – SAB 80 can only be used in an initial registration statement of a first-time registrant. It is not used to evaluate significance for acquisitions that occur after the effective date of the initial registration statement. However, if the provisions of SAB 80 were used in an initial registration statement to obtain relief from the reporting requirements of S-X 3-05, the staff would allow that registrant to separately evaluate the significance of each acquisition that occurs after the effective date of the initial registration statement using the pro forma financial statements that were used to evaluate significance under SAB 80 in the initial registration statement. However, those pro forma financial statements should be adjusted to eliminate:

  • pro forma effects of acquisitions for which no audited financial statements are presented in the initial registration statement,
  • the pro forma effects of acquisitions that were probable at the time the initial registration statement was declared effective but which have yet to be consummated, and
  • pro forma adjustments not directly attributable to the acquisitions.

Once the registrant files audited annual financial statements (either in a Securities Act or Exchange Act filing) for the fiscal year following the audited fiscal year presented in the initial registration statement on which pro forma financial statements were based, the registrant should measure significance of acquisitions using the audited financial statements of the registrant as required by S-X 3-05. Upon written request, the staff will consider whether relief from the literal application of S-X 3-05 is appropriate.

Financial statements of an individually insignificant business acquired subsequent to the effective date of an initial registration statement (but prior to filing audited annual financial statements for the fiscal year following the audited fiscal year presented in the initial registration statement) may also be required in a subsequent registration statement if the significance of that acquisition, plus other acquisitions for which no audited financial statements were provided in the initial registration statements, aggregate 50% or more of adjusted pro forma financial statements described above. See Section 2035 which describes how to measure aggregate significance for individually insignificant businesses.

2100DISPOSITION OF A BUSINESS

(Last updated: 3/31/2010)

2110Definitions

2110.1Disposition” – See Instruction 2 of Item 2.01, Form 8-K for the definition of “disposition.” Under this definition, a disposition would include, but not be limited to, a requirement to deconsolidate a subsidiary.

2110.2Business – See S-X 11-01(d) for the definition of a “business.”

2120When are Financial Statements Required?

2120.1Form 8-K - Item 2.01, Form 8-K reporting the disposition is required to be filed within four business days if either an asset disposition or a business disposition exceeds 10% significance. (See Section 2130 for guidance on measuring significance.) Historical financial statements of the disposed business are not required in the Item 2.01 Form 8-K, but may be required in proxy statements as described in Section 2120.2. Pro forma financial statements depicting the disposition are required to be included in the Item 2.01 Form 8-K filed within four business days of the disposition. The 71 calendar day grace period described in Item 9.01 of Form 8-K does not apply to business dispositions. [Instruction 4(ii) to Item 2.01 Form 8-K and S-X 11-01(b)(2) and C&DI for Exchange Act Form 8-K, Question 129.01] (Last updated: 6/30/2013)

2120.2Proxy and Information Statements - If authorization is sought from shareholders for disposition of a significant business (including spin-offs), unaudited financial statements of that business should be provided in the proxy statements for the same periods as are required for the registrant (along with pro forma information); however, audited financial statements for each of the 2 most recent fiscal years of that business should be provided if they are available. See the Division of Corporation Finance’s July 2001 Interim Supplement to Publicly Available Telephone Interpretations, Section H6. Also, see related discussion in Section 1140.6.

The same financial statement content described above for proxy statements also applies to Schedule 14C Information Statements. (Last updated: 6/30/2012)

2120.3Registering Shares of Disposed Business - If disposition of a business is being accomplished through the registrant’s distribution to shareholders of its ownership interests in that business, audited financial statements of the separate legal “spinee” (which may not be the spinee for accounting purposes) for the same periods required for the registrant are required in a Form 10 or 1933 Act registration statement filed in connection with the spin-off.

2130Form 8-K - Measuring Significance of a Disposed Business

NOTES to SECTION 2130

  1. See Section 2120 for a discussion of the Form 8-K reporting requirements when a disposed business is significant.
  2. Registrants may request CF-OCA interpretation or relief in unusual situations where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances.

2130.1General– Measure significance of a disposed business using the three significance tests in S-X 1-02(w). If any of the three tests exceeds 10%, the business is significant. [Instruction 4(ii) Item 2.01, Form 8-K and S-X 11-01(b)(2)]

2130.2Implementation Point – Investment Test [S-X 1-02(w)(1)]

  1. Numerator of the Investment Test:
    Use the greater of:
    1. The carrying value of the disposed business (or if a portion of the business is disposed, the carrying value of the portion disposed) as of the end of the registrant’s most recently completed fiscal year prior to the disposal date; or
    2. The fair value of the consideration received for the portion of the business disposed.
  2. Denominator of the Investment Test:
    Use the registrant’s consolidated total assets as of the end of the registrant’s most recently completed fiscal year prior to the disposal date.

NOTES to SECTION 2130.2

  1. Numerator of the Investment Test – Impact of Noncontrolling Interest - The numerator of the investment test should not be impacted by the existence of or accounting for noncontrolling interest.
  2. Numerator of the Investment Test – Registrant Retains either a Controlling or a Noncontrolling Investment in Disposed Business - Because the numerator includes only the portion of the business disposed, the numerator should not include either the carrying value or the fair value of the registrant’s retained investment in the disposed business.
  3. Numerator of the Investment Test - Nonreciprocal Transfers to Owners - In a nonreciprocal transfer to owners, whether accounted for at fair value or based on recorded amounts, the registrant does not receive consideration; therefore the numerator equals the carrying value of the disposed business (or if a portion of the business is disposed, the carrying value of the portion disposed) as of the end of the registrant’s most recently completed fiscal year prior to the disposal date.
  4. Denominator of the Investment Test – Because the denominator of the investment test includes the registrant’s consolidated total assets for its most recently completed fiscal year prior to the disposal date, the accounting for the disposition does not affect the denominator of the investment test.

2130.3Implementation Point – Asset Test [S-X 1-02(w)(2) and Income Test [S-X 1-02(w)(3)]

(Last updated: 9/30/2010)

Asset Test - The numerator of the asset test should be the total assets of the disposed business as of the end of its most recently completed fiscal year prior to disposal. The denominator of the asset test should be the registrant’s total assets as of the end of its most recently completed fiscal year prior to disposal. A registrant’s total assets as of the end of its most recently completed fiscal year will include assets related to both its continuing operations and its discontinued operations.

Income Test - The numerator of the income test should be the pre-tax income or loss from continuing operations of the disposed business for its most recently completed fiscal year prior to disposal. The denominator of the income test should be the historical pre-tax income or loss from continuing operations of the registrant for its most recently completed fiscal year prior to disposal. Because S-X 1-02(w) specifies that the denominator equals the registrant’s pre-tax income or loss from continuing operations, the denominator will not include the results of a disposed business which was previously appropriately reported as a discontinued operation.

Because the asset test and the income test include only amounts reflected in both the disposed business’s and the registrant’s consolidated financial statements for their most recently completed fiscal year prior to the disposal date, the accounting in the period of disposal does not affect either the asset test or the income test.

2200FINANCIAL STATEMENTS OF TARGET COMPANIES IN FORM S-4

(Last updated: 6/30/2013)

2200.1Form S-4 - General- Form S-4 registers securities being offered to security holders of a business to be acquired. The Form S-4 requirements for target company financial statements vary based on a number of facts and circumstances, as summarized below. The determination of the target company should be based on the legal form of the transaction. The fact that the target company may be the acquiring company for accounting purposes does not change that analysis. For example, in both a reverse acquisition between two operating companies and the acquisition by a shell company, as defined in Exchange Act Rule 12b-2 and Regulation C, Rule 405, of an operating company, the target company financial statements for purposes of Form S-4 are those of the legal target, which in these cases is also the accounting acquirer.

As described in Sections 2200.4 and 2200.5, the target company financial statement periods to present depend on whether the:

  • target is a reporting company;
  • target is a non-reporting company and the issuer’s shareholders are voting; or
  • target is a non-reporting company and the issuer’s shareholders are not voting.
  • target is a smaller reporting company.
  • acquirer is an EGC.
  • acquirer is a shell company.

As described in Sections 2200.6 and 2200.7, the need to audit target company financial statements depends on whether the:

  • target is a reporting company or the
  • target is a non-reporting company (irrespective of whether the issuer’s shareholders’ are voting)

2200.2Form S-4 - How Financial Statement Requirements Differ from Form 8-K

The form and number of periods of a target’s financial statements required in a Form S-4 may differ from the form and number of periods of a target’s financial statements required in a Form 8-K reporting consummation of the business combination.

Item 17 of Form S-4 requires inclusion of the target’s financial statements that would be required in an annual report sent to security holders if an annual report was required. A non-reporting target that would meet the S-K 10(f) requirements to be a smaller reporting company if it were an issuer (i.e., applying the revenue test) may apply the scaled reporting requirements for a smaller reporting company (i.e., S-X Article 8) in the Form S-4 even if the registrant is not a smaller reporting company. Similarly, a non-reporting target that would not meet the S-K 10(f) requirements to be a smaller reporting company if it were an issuer may not apply the scaled reporting for a smaller reporting company in the Form S-4, but instead must comply with S-X reporting requirements applicable to entities that are not smaller reporting companies, even if the registrant is a smaller reporting company. See Section 10220.6 regarding financial statement requirements in a Form S-4 when the transaction involves an EGC. 

Form 8-K requires the registrant to file the acquired business’ financial statements required by S-X 3-05 or, if the registrant is a smaller reporting company, S-X 8-04. If the registrant is subject to S-X 3-05, the non-reporting acquired business’ financial statements must comply with S-X reporting requirements applicable to entities that are not smaller reporting companies in a subsequent Form 8-K reporting the business combination. If the registrant is subject to S-X 8-04, the non-reporting acquired business’ financial statements may comply with scaled reporting requirements for a smaller reporting company. [Form 8-K, Item 9.01] Registrants that qualify as EGCs may be able to present fewer periods than those required by S-X 3-05 in the circumstances described in Section 10220.5.

2200.3Form S-4 - Periods to be Presented General

The determination of the number of periods for which target company financial statements need be included in the Form S-4 should be made by reference to the requirements of Form S-4, not S-X 3-05 or S-X 8-04.  See 2200.7 below for audit requirements.

2200.4Form S-4 - Periods to be Presented – Reporting Target OR Non-Reporting Target with Issuer’s Shareholders Voting

If the target is a reporting company (whether or not the issuer’s shareholders are voting), or the target is a non-reporting company and the issuer’s shareholders are voting, the registration statement must include:

  1. Balance sheets as of the two most recent fiscal years.
  2. Statements of income and cash flows for each of the three most recent fiscal years (two most recent fiscal years for a smaller reporting company target (see S-K 10(f) and S-X Article 8) or a non-reporting target who would meet the smaller reporting company requirements if they were an issuer). See Section 10220.6 regarding financial statement requirements in a Form S-4 when the transaction involves an EGC.
  3. Interim financial statement requirements differ depending on whether the target is a reporting company or a non-reporting company. See Items 15, 16, 17(a) and 17(b) of Form S-4.
  4. Financial statements of a business recently acquired or probable of being acquired by a reporting target under S-X 3-05. This requirement is included in Form S-4 Item 15, which cross-references Form S-4 Item 10(b)(1); Form S-4 Item 16, which cross-references Form S-4 Item 12(a)(3); and Form S-4, Item 17(a), which cross-references Form S-4, Item 14(e). See also 10220.5.
  5. Financial statements of a business recently acquired or probable of being acquired by a non-reporting target under S-X 3-05 if the omission of those financial statements renders the target company’s financial statements substantially incomplete or misleading. See also 10220.5.

2200.5Form S-4 - Periods to be Presented – Non-Reporting Target with Issuer’s Shareholders NOT Voting

If the target is a non-reporting company and the issuer’s shareholders are not voting and:

Significance Financial Statement Requirement
Significance of target under S-X 3-05 or S-X 8-04 does not exceed 20% No target financial statements required in the registration statement, subject to the following:
Registrants continue to have the obligation under S-X 3-05 to evaluate the individually insignificant acquisitions in the aggregate, including the insignificant target. If, in the aggregate, the 50% significance level is reached, the registrant must present audited GAAP financial statements for a mathematical majority of those acquisitions for the most recently completed fiscal year and interim period.
Significance of target under S-X 3-05 or S-X 8-04 exceeds 20% level AND S-4 to be used for resales to the public by any person who is deemed an underwriter within the meaning of Securities Act Rule 145(c) with respect to the securities being reoffered. GAAP financial statements for the periods required by S-X 3-05(b)(2) or S-X 8-04(b), as applicable [Instruction 3 to Item 17(b)(7) of Form S-4]. See Section 10220.6 regarding financial statement requirements in a Form S-4 when the transaction involves an EGC.
Note: Instruction 3 to Item 17(b)(7) of Form S-4 only references S-X 3-05, however a non-reporting target who would meet the smaller reporting company requirements (i.e., S-K 10(f)) if they were an issuer may provide the financial statements required by S-X 8-04(b).
Significance of target under S-X 3-05 or S-X 8-04 exceeds 20% level AND S-4 NOT to be used for resales to the public by any person who is deemed an underwriter within the meaning of Securities Act Rule 145(c) with respect to the securities being reoffered. GAAP financial statements for the latest fiscal year and interim information as recent as would have been filed on Form 10-Q had the target company been subject to the Exchange Act, except that interim information need include only cumulative year-to-date interim information of the target for the latest and comparable interim periods. [Item 17(b)(7)(i) of Form S-4]
Prior years’ financial statements are also required if the target’s GAAP financial statements were previously furnished to its security holders. [Item 17(b)(7)(i) of Form S-4]. See also Section 10220.6 regarding prior year financial statement requirements in a Form S-4 when the transaction involves an EGC.
  • Example 1: Target’s latest fiscal year ended 12/31/07. Target previously furnished 2006, but not 2005, GAAP financial statements to its security holders. Target’s 2006 and 2007 annual financial statements are required in the Form S-4
  • Example 2: Target’s latest fiscal year ended 12/31/07. Target previously furnished 2005, but not 2006, GAAP financial statements to its security holders. Only Target’s 2007 annual financial statements are required in the Form S-4.

2200.6Form S-4 - Audit Requirements - Target is a reporting company (whether or not the issuer’s shareholders are voting) - All target company fiscal years presented must be audited.

2200.7Form S-4 Audit Requirements - Target is a non-reporting company (whether or not the issuer’s shareholders are voting) - The requirement to audit depends on whether or not the Form S-4 is to be used for resales by persons considered underwriters under Securities Act Rule 145(c). See Item 17(b) of Form S-4.

S-4 to be used for resales S-4 not to be used for resales

Required to be audited for the periods specified in S-X 3-05(b)(2) or S-X 8-04(b), as applicable.

Latest Fiscal Year
Need be audited only if practicable to do so. To determine whether an audit is practicable, consider the feasibility of completing the audit on a timely basis. Since the target’s audited financial statements will be required to be included in a Form 8-K filed 71 calendar days after the 4th business day following consummation of the acquisition, the registrant should be able to explain why audited financial statements cannot be completed in time for the Form S-4, but can be completed in time to meet the Form 8-K requirements.


Fiscal years before the latest fiscal year
Need not be audited if they were not previously audited.

NOTES to SECTION 2200.7

  1. The relief from the audit requirement for a target company’s financial statements applies only to merger proxies and transactions registered on Form S-4. It is not applicable to other forms. If the acquisition is significant, audited financial statements will ordinarily be required in a Form 8-K after consummation.
  2. Although relief from obtaining an audit of financial statements may be available as described above, the registrant would still be required to include all financial statements specified by Item 17 of Form S-4 on an unaudited basis.
  3. If financial statements are not audited for the periods required by S-X 3-05 /S-X 8-04, the registrant should supplementally provide to the staff representation that the Form S-4 will not be used for resales by underwriters.

2200.8Form S-4 - Updating Target Company Financial Statements

The requirement to update target company financial statements (both reporting and non-reporting target companies) is based on the registrant’s obligation to update under S-X 3-12 (or S-X 8-08 for a smaller reporting company). See Section 2045.5 for target updating requirements.

2200.9Form S- 4 – Target Company is a Foreign Business - Reconciliation Requirement

If the foreign business is a non-reporting company and its financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP or IFRS as issued by the IASB, the reconciliation to U.S. GAAP in accordance with Item 17 of Form 20-F is not required if it is unavailable or not obtainable without unreasonable cost or expense. If a reconciliation is not available, the filing should contain, at a minimum, a narrative description of all material variations in accounting principles, practices, and methods used in preparing the non-U.S. GAAP financial statements from those accepted in the U.S. This guidance also applies to smaller reporting companies. Registrants should consider all relevant facts and circumstances in determining whether the U.S. GAAP reconciliation is unavailable or not obtainable without unreasonable cost or expense.  For example, the staff has objected to the omission of the U.S. GAAP reconciliation in circumstances where the non-reporting target company was a subsidiary (or investee) of a larger reporting company, and considerable reconciling information for the subsidiary would have already been necessary to prepare the parent company’s U.S. GAAP reconciliation.  Registrants are encouraged to consult with CF-OCA in advance of filing if they intend to omit the U.S. GAAP reconciliation on the basis of unavailability or unreasonable cost. (Last updated: 12/31/2010)

2200.10Form S-4 - Pro forma financial information depicting the acquisition(s) is only required if the acquisition is significant under S-X 3-05 or S-X 8-04 individually or in the aggregate.

2300REAL ESTATE ACQUISITIONS AND PROPERTIES SECURING MORTGAGES

(Last updated: 9/30/2008)

Section Description
2305 Real Estate Operations – Overview
2310 Real Estate Operations - When to Present Financial Statements
2315 Real Estate Operations – Measuring Significance
2320 Real Estate Operations - Individually Insignificant Acquisitions
2325 Real Estate Operations - Special Requirements for "Blind Pool" Offerings
2330 Real Estate Operations - Required Financial Statements
2335 REIT Formation Transactions
2340 Properties Subject to Triple Net Lease
2345 Properties Securing Loans, which in Economic Substance Represent an Investment in Real Estate, including Acquisition Development and Construction (ADC) Arrangements
2350 Properties Securing Loans that Represent an Asset Concentration [SAB Topic1I]
2355 Gains/Losses on Sales or Disposals by Real Estate Investment Trusts
2360 Proxy Statements for Acquisitions of Real Estate Operating Properties

2305Real Estate Operations - Overview [S-X 3-14]

(Last updated: 3/31/2013)

2305.1Applicability of S-X 3-14 - Application of S-X 3-14 is limited to the acquisition or probable acquisition of real estate operations.

2305.2Nature of Real Estate Operations

S-X 3-14, which is premised on the continuity and predictability of cash flows ordinarily associated with leasing real property, applies to the acquisition or probable acquisition of real estate operations. For purposes of S-X 3-14, the term “real estate operations” refers to properties that generate revenues solely through leasing. Examples include office, apartment and industrial buildings as well as shopping centers and malls. “Real estate operations” excludes the acquisition of properties that generate revenues from operations other than leasing real property, such as nursing homes, hotels, motels, golf courses, auto dealerships, and equipment rental operations, which are more susceptible to variations in costs and revenues over shorter periods due to market and managerial factors. S-X 3-05 rather than S-X 3-14 is applicable to the acquisition of these types of businesses. Acquired properties subject to triple net leases, whether involving leasing or other activities, should be evaluated under Section 2340.

2305.3Investment in a Pre-Existing Legal Entity

When a registrant acquires an equity interest in a pre-existing legal entity (such as a partnership, LLC or corporation) that only holds real estate under lease and related debt, financial statements of the underlying property meeting the requirements of S-X 3-14 should be provided instead of S-X 3-05 financial statements, if the acquisition is significant. When a registrant acquires an equity interest in a pre-existing legal entity that engages in other activities, such as property management or development, financial statements of that entity meeting the requirements of S-X 3-05 generally are required if the acquisition is significant. A registrant should consult with CF-OCA to the extent it believes S-X 3-14 financial statements are more appropriate than S-X 3-05 financial statements due to the limited degree of operations other than leasing real estate. If S-X 3-14 financial statements are more appropriate due to the limited degree of operations other than leasing real estate, financial statements are required if the 10% or more significance level applicable to S-X 3-14 financial statements is met. (Last updated: 10/20/2014)

2305.4Investment in a Newly Formed Partnership or Corporation

For purposes of applying S-X 3-14, the staff views an investment in a newly formed partnership or corporation (either consolidated or accounted for using the equity method) that will acquire properties under lease simultaneous with or soon after its formation as, in substance, the acquisition of properties by the registrant. In these circumstances, the staff will require S-X 3-14 financial statements of the underlying property being acquired instead of S-X 3-05 financial statements of the newly formed entity. This assumes that the new entity has no other activities besides leasing real property.

2305.5Summary - 1933 Act Real Estate Financial Statements and Significance Thresholds

The following table summarizes general financial statement requirements in 1933 Act registration statements with respect to the acquisition of real estate operations. Refer to the sections below the summary for details in applying these requirements:

Acquisition Type Significance Threshold % Significance Measured Against
General Rule:
Regular Property Acquisition and Probable Acquisitions 3-14s required at 10% or more (also significant in aggregate test triggers) Registrant’s assets as of last audited balance sheet
Triple Net Leased See Section 2340
Blind Pool Offerings Subject to Guide 5 (During Distribution Period):
Regular Property Acquisition 3-14s required at 10% or more Registrant’s assets as of the date of the acquisition plus the proceeds (net of commissions) in good faith expected to be raised in the registered offering over the next 12 months
Triple Net Leased See Section 2340

2310Real Estate Operations - When to Present S-X 3-14 Financial Statements

(Last updated: 3/31/2013)

Sections 2310-2320 do not apply to “blind pool” offerings subject to Industry Guide 5, Item 20.D Undertakings. See Section 2325 for guidance related to “blind pool” offerings.

2310.1Registration Statements and Proxy Statements – Requirement

(Last updated: 3/31/2013)

Financial statements of each operating real estate property (or group of related properties) acquired or probable of acquisition that is significant individually or in the aggregate at the 10% level or higher are required to be filed in all transactional filings (i.e., proxy statements requiring financial information, 1934 Act registration statements, 1933 Act registration statements (except registration statements filed under Rule 462(b)) and post-effective amendments filed to reflect a fundamental change). The filing of a Rule 424 prospectus is not a transactional filing. S-X 3-14 financial statements must be provided for:

  1. each completed purchase of an individually significant property made during each year presented and subsequent to the end of the most recently completed fiscal year for which the registrant’s financial statements have been filed, or
  2. any probable acquisition of an individually significant property, or
  3. completed and probable acquisitions of individually insignificant properties that are significant in the aggregate, made or to be made subsequent to the end of the most recently completed fiscal year for which the registrant’s financial statements have been filed.

NOTE 1 to SECTION 2310.1

A registrant (including a WKSI) must either provide these financial statements in the registration statement or, if permitted by the form, in a previously filed Form 8-K that is incorporated by reference into the registration statement.
(Last updated: 3/31/2010)

NOTE 2 to SECTION 2310.1

“Related” Properties - Properties are related if they are under common control or management, the acquisition of one property is conditioned on the acquisition of each other property, or each acquisition is conditioned on a single common event.
(Last updated: 3/31/2013)

2310.2Registration Statements and Proxy Statements - S-X 3-05 Exception Does Not Apply

(Last updated: 3/31/2013)

For registration and proxy statements, the 74-day rule in S-X 3-05(b)(4) does not apply to S-X 3-14 financial statements. However, see Section 2325.2 for special provisions applicable to “blind pool” registration statements during the distribution period.

2310.3Form 8-K

Financial statements of each operating real estate property (or group of related properties) acquired that is individually significant at the 10% level or higher are required to be filed in a Form 8-K.

NOTE to SECTION 2310.3

The purchase of real estate by companies engaged in real estate activities is not considered to be an acquisition in the ordinary course of business.  Item 2.01 Form 8-Ks are required to report these transactions.

2315Real Estate Operations - Measuring Significance

2315.1Significance - General

Compare the registrant's investment in the property to the registrant's total assets at the latest audited fiscal year end filed with the SEC (except as noted in Section 2320 for individually insignificant acquisitions and Section 2335 for REIT formation transactions). The investment includes any debt secured by the property that is assumed by the purchaser.

2315.2Significance Implementation - In Existence for Less Than One Year

If the company has not completed its first fiscal year, use the most recent audited balance sheet filed with the SEC.

2315.3Significance Implementation - Form 10-K Filed Subsequent to Acquisition

If the acquisition was made after the most recent fiscal year and the registrant files its Form 10-K for that year before the due date of the Form 8-K (including the 71 calendar day extension), the staff has not objected if significance is evaluated relative to the most recently completed fiscal year.

2315.4Significance Implementation – Using Pro Forma Financial Statements

(Last updated: 3/31/2013)

If the acquisition was made after reporting an individually significant acquisition in an Item 2.01 Form 8-K that included historical audited S-X 3-14 financial statements, the registrant may evaluate significance using the registrant’s pro forma financial information included in that Form 8-K for the acquisition rather than historical pre-acquisition financial statements. The pro forma effects of any other transaction should be excluded. If the registrant chooses to compute significance using pro forma information, the staff would expect the registrant to consistently apply that methodology for evaluating all subsequent acquisitions for the remainder of the fiscal year.

2320Real Estate Operations - Individually Insignificant Acquisitions

(Last updated: 3/31/2013)

2320.1Individually Insignificant Acquisitions - Applicability

The requirement under S-X 3-14 to file financial statements of individually insignificant properties that are significant in the aggregate is applicable only to registration and proxy statements. Form 8-K does not require audited financial statements of insignificant properties unless they are "related properties" and significant on a combined basis. See Note 2 to Section 2310.1.

2320.2Individually Insignificant Acquisitions - Measuring Significance

To compute significance, combine individually insignificant properties acquired subsequent to the end of the most recently completed fiscal year for which the registrant’s financial statements have been filed and probable acquisitions. Property acquisitions which would not require S-X 3-14 financial statements even if individually significant, such as triple net leased properties covered by Section 2340 and newly constructed properties covered by Section 2330.10, should be excluded from this calculation. Compute significance based on the registrant’s total assets as of the latest audited fiscal year balance sheet date preceding the acquisition except when Section 2315.4 is applicable.

2320.3Individually Insignificant Acquisitions - Financial Statements Required

If the aggregate of all insignificant real estate properties described in Section 2320.2 exceeds 10% of the registrant’s total assets, financial statements are required for certain of these properties. Determine what financial statements to provide as follows:

  1. The registrant should provide S-X 3-14 financial statements for each property acquisition that is 5% or more significant.
  2. Then it should assess whether it has provided financial statements for the majority (> 50%) of the aggregated property acquisitions based on the purchase price. If it has provided over 50% of the aggregate purchase price, it need not provide additional financial statements. If it has not provided financial statements for over 50% of the aggregate purchase price, it should provide the S-X 3-14 financial statements of other acquired properties below the 5% level in order to provide financial statements for over 50% of the aggregate purchase price.
  3. If the registrant is unable to obtain audited financial statements of a property that is 5% or more significant or of properties sufficient to provide financial statements for over 50% of the aggregate purchase price, it should request relief from CF-OCA in writing.

2325Real Estate Operations - Special Requirements for "Blind Pool" Offerings

2325.1“Blind Pool” Offerings – Overview

“Blind Pool” offerings subject to Industry Guide 5 have different 1933 and 1934 Act reporting requirements with respect to real estate acquisitions both during and after the distribution period.

NOTE to SECTION 2325.1

Distribution Period - The distribution period is the period during which the registrant is conducting a continuous 1933 Act registered offering through a registration statement subject to Industry Guide 5. (Last updated: 3/31/2013)

2325.2“Blind Pool” Offerings – During the Distribution Period - Undertakings

(Last updated: 6/30/2010)

Registration statements for "blind pool" offerings by real estate companies subject to Industry Guide 5 are required to include undertakings to:

  1. file a sticker supplement during the distribution period describing each significant property that has not been identified in the prospectus whenever a reasonable probability arises that a property will be acquired (the disclosure should include the information required for significant properties in Items 14 and 15 of Form S-11), and
  2. consolidate all stickers in a post-effective amendment filed at least once every 3 months during the distribution period. The post-effective amendment must include or incorporate by reference audited financial statements in the format described in S-X 3-14 that have been filed or should have been filed on Form 8-K for all significant property acquisitions that have been consummated. Pro forma information is also required. [Guide 5, Item 20.D. Undertakings]

A post-effective amendment filed to consolidate stickers or to update the financial statements under Section 10(a)(3) of the Exchange Act does not need to include financial statements for significant property acquisitions during the 71-day extension period allowed by Item 9.01 of Form 8-K.
(Last updated: 6/30/2010)

A post-effective amendment filed for a fundamental change, pursuant to the registrant’s undertakings under Item 512(a)(1) of Regulation S-K, should include financial statements for all significant acquisitions, including any financial statements not yet filed during the 71-day extension period provided by Item 9.01 of Form 8-K.
(Last updated: 6/30/2010)

Post-effective amendments that consolidate supplements are not considered new filings for purposes of updating the registrant’s financial statements if the duty to file a post-effective amendment is triggered solely by the Item 20.D undertakings.

The prospectus updating regime in the Item 20.D undertakings is intended solely for real estate companies and not for other types of companies that may be subject to other parts of Industry Guide 5. If a real estate company subject to the Item 20.D undertakings acquires a significant property that generates revenues from operations other than leasing rental property, such as a hotel, motel, nursing home or medical office facility, the company should follow the Item 20.D updating regime discussed in Section 2325, except that the significance tests and required financial statements should be those specified in S-X 3-05. If a real estate company subject to the Item 20.D undertakings acquires a triple net leased property, the company should follow the Item 20.D updating regime discussed in this Section 2325, except that the significance threshold applied and financial information provided should be those as described in Section 2340. (Last updated: 3/31/2013)

2325.3“Blind Pool” Offerings – During the Distribution Period – Significance

(Last updated: 3/31/2013)

An individual property is significant if it:

  1. exceeds the 10% significance level, or
  2. is one of a group of properties that together aggregate more than 10% and are either:
    • acquired from a single seller, or
    • are related.

See Note 2 to Section 2310.1 regarding related properties.

Significance for purposes of the Guide 5 distribution period is computed by comparing the registrant's investment in the property to the registrant's total assets as of the date of the acquisition plus the proceeds (net of commissions) in good faith expected to be raised in the registered offering over the next 12 months. The investment includes any debt secured by the property that is assumed by the purchaser. In estimating the offering proceeds, the registrant should consider the pace of fundraising as of the measurement date, the sponsor or dealer-manager’s prior public fundraising experience and offerings by similar companies. This alternative measurement is only available during the distribution period.

2325.4“Blind Pool” Offerings – During the Distribution Period – Form 8-K Reporting Requirement

Registrants are required to file a current report on Form 8-K that includes S-X 3-14 financial statements and the related pro forma information for each property acquired during the distribution period that exceeds the 10% significance level as measured in Section 2325.3.

2325.5“Blind Pool” Offerings – After the Distribution Period
(Last updated: 3/31/2013)

While companies do not undertake to file sticker supplements after the distribution period is completed, they undertake to file on Form 8-K audited financial statements of properties, in the format described in S-X 3-14, after this period is completed. Until a company files its first annual report after the distribution period ends, the company should file a Form 8-K with the required S-X 3-14 financial statements for every significant property it purchases that represents 10% or more of the company’s total assets as of the acquisition date.  The staff has not objected to the view that the undertaking to provide audited financial statements is not applicable to individually insignificant properties. S-X 3-14 financial statements may be omitted for individually insignificant properties.

A registrant may continue to use this modified method of measuring significance until it files its first annual report after the distribution period ends. After that, it would measure significance in the normal manner described in Section 2315.

2330Real Estate Operations - Required Financial Statements

2330.1Abbreviated Financial Statements

(Last updated: 3/31/2013)

S-X 3-14 financial statements may exclude items (such as historical mortgage interest and depreciation) which are not comparable to the proposed future operations of the property. (Where items are excluded, auditors ordinarily will issue a report such as that at AU 623.15 and 623.18). Registrants may request relief from the audit requirement for financial statements of properties with a rental history of less than one year.

2330.2Periods to be Presented – Properties Acquired from Related Parties

Audited three years (two years for acquisitions by certain issuers, such as smaller reporting companies), plus the latest unaudited interim period based on the property’s fiscal periods are required for properties acquired from a related party. For properties held by the related party for less than three years, financial statements are required for the greater of the period held by the related party or one year. See Section 2330.4 “Periods to be Presented Implementation – Pre-Acquisition Using Fiscal Year-End.” (Last updated: 6/30/2013)

2330.3Periods to be Presented – Properties Acquired from Third Parties

Only the most recent year and most recent interim period are required if the property was acquired from a third party. See Section 2330.4 “Periods to be Presented Implementation – Pre-Acquisition Using Fiscal Year-End.”

2330.4Periods to be Presented - Implementation - Pre-Acquisition Using Fiscal Year-End

It is not appropriate to provide audited financial statements for a rolling 12-month period prior to the acquisition in lieu of audited financial statements for the latest fiscal year end of the property. Also, pre- and post-acquisition periods should not be combined to produce a year’s financial statements. Only pre-acquisition financial statements satisfy S-X 3-14.

2330.5Periods to Be Presented - Implementation - Application of S-X 3-06(b)

S-X 3-06(b) does not apply to financial statements of real estate properties. (Last updated: 10/20/2014)

2330.6Updating Requirements

The same rules for updating S-X 3-05 financial statements apply to S-X 3-14 financial statements. See Section 2045.

2330.7Other Required Disclosure

The registrant should describe any material factors which would cause the reported financial information not to be indicative of future operating results, such as a change in how the property will be used, an expected material modification to the property or a material change in property tax assessment.

2330.8Rental History of Less Than Nine Months

(Last updated: 3/31/2013)

If a registrant acquires an operating property with a rental history of more than three months but less than nine months, the financial statements may be presented on an unaudited basis.

2330.9Exception for Demolition

(Last updated: 3/31/2013)

If a registrant acquires an operating property which it will demolish and build a new rental property, the staff would not object to the omission of the S-X 3-14 financial statements of the acquired property if the prior rental revenues and operating costs of the property are not representative of the new property to be built. The registrant should explain the basis for omission of the financial statements in the filing. In other cases where the registrant believes the leasing history is not representative, it may request relief from CF-OCA in writing.

2330.10Exception for Properties with No or Nominal Leasing History

(Last updated: 3/31/2013)

Where a registrant acquires a property that does not have a leasing history, such as a previously owner-occupied or newly constructed property, financial statements of the property are not required. Where the leasing history is less than three months, financial statements of the property are not required.  See Section 2340 with respect to triple net leased properties.

2335REIT Formation Transactions

(Last updated: 3/31/2013)

2335.1Test of Significance in an IPO

A newly-formed REIT having no significant operations may acquire operating properties immediately prior to filing an IPO, or may identify properties to be acquired upon closing the IPO. In addition, the REIT may identify properties that it will probably acquire soon after the IPO. The staff recognizes in these circumstances that the literal application of S-X 3-14 could result in the registrant providing financial statements of properties that are clearly insignificant to investors. In identifying the financial statements required to be included in the initial registration statement, the staff has allowed registrants to compute significance using a denominator equal to the total cost of the properties acquired immediately prior to filing an initial registration statement, properties to be acquired upon closing the IPO, and properties identified as probable future acquisitions.

2335.2Tests of Significance After an IPO

In computing significance of any future property acquisition until the time the registrant files its Form 10-K covering the year the IPO is consummated, the registrant can use the same base as was used in the initial registration statement. However, that base should be reduced for any property not acquired or no longer probable. That base should not be reduced for probable acquisitions for which audited financial statements were included in the registration statement and the acquisition remains probable.

2340Properties Subject to Triple Net Lease

(Last updated: 10/20/2014)

Financial Statements of Significant Lessees

A triple net lease typically requires the lessee to pay costs normally associated with ownership of the property such as property taxes, insurance, utilities and maintenance costs. Based on these attributes, the leasing arrangement is similar to a financing arrangement for the lessee. When a registrant has triple net leased one or more real estate properties to a single lessee/tenant (including in the capacity as co-lessee or guarantor), and such properties represent a “significant” portion of the registrant’s assets, an investor may need to consider the lessee’s financial statements or other financial information in order to evaluate the risk to the registrant from this asset concentration.  An asset concentration is generally considered “significant” if it exceeds 20% of the registrant’s assets as of its most recent balance sheet.

In circumstances where a registrant acquires a property resulting in a significant asset concentration, the registrant should generally provide full audited financial statements of the lessee or guarantor for the periods required by S-X 3-01 and 3-02 / S-X 8-02 and 8-03. If the lessee is a public company subject to the periodic reporting obligations of the Exchange Act, the registrant may instead include in the filing a statement referring investors to a publicly-available website with the lessee’s SEC filed financial information.  If a registrant with an asset concentration related to a lessee believes that less detailed financial information is appropriate based on the registrant’s particular facts and circumstances or the lessee financial statements are not available, the registrant should consult with CF-OCA on a pre-filing basis.

In an annual report, registrants may provide the lessee financial statements based on the due dates for financial statements of a significant equity method investee under S-X 3-09 by analogy. Refer to Section 2405.7 – 2405.11.

Registrants should consider significant asset concentrations when preparing a Securities Act registration statement, or an Exchange Act registration statement, annual report, or current report on Form 8-K filed in connection with a property acquisition.  If a registrant acquires a property subject to a triple net lease and there is a rental history, the registrant should apply S-X 3-14 in situations where there is not a significant asset concentration.

2345Properties Securing Loans, which in Economic Substance Represent an Investment in Real Estate, including Acquisition Development and Construction ("ADC") Arrangements [SAB Topic 1I]

2345.1Overview

A registrant may make a loan that is secured by a real estate operating property. SAB Topic1I provides that financial statements for such properties may be required where the economic substance of the loan represents an investment in real estate, such as in an “ADC arrangement" as defined in AICPA’s 2/10/86 Notice to Practitioners in the CPA Letter. The characteristics of these loans are found in Exhibit I to Practice Bulletin 1. In these arrangements, a lender participates in the expected residual profit and shares in the risk and rewards of the owner.

2345.2Financial Statement Requirements in 1933 Act filings

  1. Financial statements of operating properties securing such loans are required for any single property for which 10% of offering proceeds (or total assets at the latest audited year-end balance sheet date, if greater) has been or will be loaned. The information required by Items 14 & 15 of Form S‑11 also is required.
  2. Where no single loan exceeds 10%, but the aggregate of such loans exceeds 20%, a narrative description of the properties and arrangements is required in a footnote to the financial statements.

2345.3Financial Statement Requirements in 1934 Act Filings

  1. If over 20% of the registrant’s total assets are invested in a single loan, financial statements of the underlying operating property are required (except in Annual Reports to Shareholders where only summary data is required).
  2. If over 10%, but less than 20%, of the registrant’s total assets is invested in a single loan, summarized financial information of the operating property is required.
  3. Where individual loans are not significant but in the aggregate exceed 20% of the registrant’s total assets, narrative description of the properties and arrangements is required in a footnote to the financial statements.

2350Properties Securing Loans that Represent an Asset Concentration [SAB Topic 1I]

2350.1Asset Concentration and Required Financial Statements - If over 20% of offering proceeds (or total assets at the latest audited year-end balance sheet date, if greater) have been or will be invested in a single loan (or in several loans on related properties to the same or affiliated borrowers), financial statements of the property securing the loan are required in both 1933 and 1934 Act filings.

2350.2“Related” Properties - Properties are related, for example, if they are subject to cross default or collateralization agreements.

2355Gains/Losses on Sales or Disposals by Real Estate Investment Trusts [S-X 3-15]

2355.1Income Statement Classification

Gain or loss on a sale or disposal by a REIT that qualifies as a discontinued operation under SFAS 144 [ASC 205-20] is reported as part of discontinued operations.

Gain or loss on a sale or disposal by a REIT that does not qualify as a discontinued operation is reported below Income from Discontinued Operations in accordance with S-X 3-15, but should be included in the numerator for the computation of EPS for Income from Continuing Operations. Also, the results of operations should remain in their original revenue and expense line items in continuing operations.

2360Proxy Statements for Acquisitions of Real Estate Operating Properties

2360.1Proxy Statements - Applicability

The staff applies the requirements of Item 14 of Schedule 14A to the Proxy Rules to the acquisition of real estate operating properties. S-X 3-14 financial statements of the properties should be provided in lieu of S-X 3-05 financial statements. In addition, registrants should comply with all of the disclosure requirements of Item 14 of Schedule 14A in a proxy statement related to the acquisition of real estate operating properties.

2360.2Proxy Statements - Management’s Discussion and Analysis is required under Item 14(c)(2). The staff expects registrants to:

  1. discuss operating trends depicted by the properties’ historical financial statements and selected financial data presented; and
  2. provide applicable property information that is described under Items 14 and 15 of Form S-11, to the extent that information is not provided elsewhere in the proxy statements.

2360.3Proxy Statements - Roll-up Transactions - Proxy statements related to roll-up transactions should also comply with the applicable roll-up provisions of Regulation S-K, Items 901-915.

2360.4Proxy Statements – Selected Financial Data

Item 14(c)(2) requires five years of selected financial data with respect to the properties that are the subject of the shareholder vote. The staff will consider granting relief to registrants on a case-by-case basis in circumstances where that information is unavailable or not obtainable without unreasonable cost or expense. Registrants may consult with CF-OCA to request this relief.

In addition, EGCs may present fewer than five years of selected financial data in certain circumstances. See Section 10220.2. (Last updated: 6/30/2013)

2400EQUITY METHOD INVESTMENTS, INCLUDING FAIR VALUE OPTION

[S-X 3-09, S-X 4-08(g), S-X 8-03, S-X 10-01(b)(1), and SAB Topic 6K.4.b.]

(Last updated: 9/30/2008)

Summary

(Last updated: 3/31/2009)

2400.1S-X 3-09 and S-X 4-08(g) use the terms “subsidiaries not consolidated” and “50% or less-owned persons.” As discussed in Section 2405.1, since the issuance of S-X 3-09 and S-X4-08(g), U.S. GAAP has been revised to require consolidation by a parent of all of its subsidiaries. Therefore, the remaining discussion in Section 2400 relates to “50% or less-owned persons,” which the staff interprets to refer to an investment accounted for using the equity method (even if voting ownership exceeds 50%).

2400.2S-X 3-09 requires separate annual financial statements of equity method investees if certain significance thresholds are met for any of the registrant’s fiscal years required to be presented in the filing using the investment and income significance tests, which are two of the three tests described in S-X 1-02(w). As described in Section 2410, the significance thresholds in S-X 3-09 differ from those stated in S-X 1-02(w). S-X 3-09 does not require separate interim financial statements. Instead, S-X 10-01(b)(1) requires certain summarized interim income statement information of the investee if it is significant.  S-X 3-09 does not apply to smaller reporting companies.

(Last updated: 6/30/2010)

2400.3S-X 4-08(g) applies to annual financial statements and requires summarized annual balance sheet and income statement information of equity method investees if certain significance thresholds are met using all three tests (the asset, investment, and income significance tests) described in S-X 1-02(w). As described in Section 2420, the significance thresholds in S-X 4-08(g) are the same as those stated in S-X 1-02(w) (i.e., 10%). We look to S-X 8-03 by analogy (see Note 1 to Section 2420.9) for the requirements for smaller reporting companies to provide summarized financial data of equity method investees in annual financial statements. The S-X 8-03 significance threshold is 20%. The summarized financial data requirements for interim financial statements differ in some respects from those for annual financial statements. See the overview at Section 2420.1.

2400.4A registrant that accounts for an equity method investment using fair value in accordance with SFAS 159, “Fair Value Option for Financial Assets and Liabilities” [ASC 825] must disclose the information required by APB Opinion 18, paragraph 20d [ASC 323-10-50-3c] (i.e., summarized financial information or separate financial statements).  As described more fully in Section 2435, the staff believes that the significance tests in S-X 3-09 and S-X 4-08(g), with the modifications described in Section 2435, should be used by analogy as presumptive thresholds for when the disclosures in APB Opinion 18, paragraph 20d [ASC 323-10-50-3c] should be provided for an equity method investment accounted for using fair value in accordance with SFAS 159 [ASC 825].

2400.5Financial statements required for the equity method investee are generally the same as those that would be required if the equity method investee were a registrant as described in Topic 1, except as noted in Section 2405.4, which relates to the effect of commencing or ceasing use of the equity method, and Section 10220.5, which relates to registrants that are EGCs. Refer to Section 2405.11 regarding age of financial statements and Section 2405.3 for audit requirements.

Exceptions: An equity method investee that is a nonpublic entity, as that term is defined in GAAP, need not include certain disclosures if specifically excluded from the scope of the related FASB standard. Examples include:

  1. Segment information under SFAS 131 [SFAS 131, par. 9 / ASC 280-10-15-3]
  2. Certain disclosures about employers’ pensions and other postretirement benefits [SFAS 132(R), par. 8 / ASC 715-20-50-5]
  3. Earnings per share under SFAS 128 [SFAS 128, par. 1 / ASC 260-10-05-1] (Last updated: 6/30/2013)
Section Description
2405 Required Financial Statements of Equity Method Investees [S-X 3-09]
2410 Measuring Significance of Equity Method Investees Under S-X 3-09
2415 Combined/Consolidated Financial Statements of Equity Method Investees [S-X 3-09]
2420 Summarized Financial Data of Equity Method Investees [S-X 4-08(g), 8-03, 10-01(b)(1)]
2425 “Foreign Business” Investees [S-X 3-09]
2430 Relief
2435 SFAS 159 [ASC 825] Fair Value Option for an Equity Method Investment and S-X 3-09/4-08(g)

2405Required Separate Financial Statements of Equity Method Investees [S-X 3-09]

2405.1Applicability of S-X 3-09 to Smaller Reporting Company Registrants - S-X 3-09 does not apply to smaller reporting company registrants [as defined in S-K 10(f)]. However, S-X 8-03 contains requirements for smaller reporting company registrants to provide summarized financial data of equity method investees. See Section 2420.

2405.2“Subsidiaries not consolidated” - Separate Financial Statements

S-X 3-09 requires that if any of the conditions set forth in S-X 1-02(w) exceed 20 percent, separate annual financial statements for each subsidiary not consolidated should be provided. Since the issuance of S-X 3-09 and S-X 4-08(g), U.S. GAAP has been revised to require consolidation by a parent of a “subsidiary.” Therefore, the requirement in S-X 3-09 related to “subsidiaries not consolidated” no longer has practical application. The remaining discussion in this Section 2400 “Equity Method Investments, including Fair Value Option” relates to “50% or less-owned persons,” which are discussed in Section 2405.3.

NOTES to SECTION 2405.2

  1. Background - Prior to the issuance of SFAS 94, ARB 51 permitted the exclusion from consolidation of certain non-homogenous subsidiaries (e.g., a finance company of a manufacturer) even though the parent controlled such subsidiaries. In these circumstances, ARB 51, paragraph 21 indicated that summarized information or separate statements of the controlled, but unconsolidated subsidiary may be necessary. S-X 4-08(g) and S-X 3-09 provided presumptive disclosure thresholds for these circumstances. SFAS 94 amended ARB 51 to remove the provision permitting non-consolidation on the basis of non-homogeneity.
  2. “Subsidiary”- is defined in S-X 1-02(x) as follows: a “subsidiary of a specified person is an affiliate controlled by such person directly, or indirectly through one or more intermediaries.”

2405.3“50% or less-owned persons” - Separate Financial Statements of Equity Investments Accounted for using the Equity Method

(Last updated: 6/30/2013)

  • The staff interprets “50% or less-owned persons” to refer to an investment accounted for using the equity method (even if voting ownership exceeds 50%).
  • S-X 3-09 requires the registrant to file separate annual financial statements for each significant equity method investee for which either the income or the investment test set forth in S-X 1-02(w) exceeds 20 percent for any of the registrant’s fiscal years required to be presented in the filing. See Section 2410 for implementation points on measuring significance.
  • If significance is met for any fiscal year presented, the registrant should file the investee’s separate annual financial statements for the same periods that would be required under S-X 3-01 and 3-02 if the investee were a registrant, except as noted in Section 2405.4, which relates to the effect of commencing or ceasing use of the equity method, and Section 10220.5, which relates to registrants that are EGCs. The investee’s separate annual financial statements must be audited for those periods where either the income or the investment test in S-X 1-02(w) exceeds 20 percent. Other periods presented may be unaudited. For example, if the highest significance of an equity method investment was 15% in 2004, 30% in 2005, and 19% in 2006, the investee’s financial statements must be audited for 2005, but may be unaudited for 2004 and 2006 (assuming that the two exceptions noted above do not apply such that three years of the investee’s financial statements are required).
  • S-X 3-09 does not require separate interim financial statements. Instead, S-X 10-01(b)(1) requires certain summarized interim income statement information of the investee if it is significant. See Section 2420.

NOTES to SECTION 2405.3

  1. Definition - The term “50 percent-owned person” is defined in S-X 1-02(j) in relation to ownership of outstanding voting shares and therefore suggests that the literal meaning of “50% or less-owned person” used in S-X 3-09 and S-X 4-08(g) is also premised on ownership of outstanding voting shares. Since the issuance of S-X 3-09 and S-X 4-08(g), the U.S. GAAP consolidation model has changed such that it is possible to own more than 50% of the outstanding voting shares of a person, as defined in S-X 1-02(q), and still account for that investment using the equity method. The staff believes interpreting the phrase “50% or less-owned persons” as an investment accounted for using the equity method is consistent with the type of investment to which S-X 3-09 and S-X 4-08(g) were originally intended to apply.
  2. Measuring Significance – Significance should be measured for each fiscal year presented. The staff believes that the purpose of the S-X 3-09 reference to S-X 1-02(w) is to describe the mechanics of the significance tests, not to limit application of the tests to the most recently completed fiscal year. The asset test in S-X 1-02(w) does not apply. See Section 2410 for implementation points on measuring significance. (Last updated: 6/30/2010)
  3. Interim Financial Statements - The basis for our conclusion that S-X 3-09 does not require interim financial statements is contained in S-X 3-09(b), which indicates that S-X 3-09 financial statements “shall be as of the same dates and for the same periods as the audited [emphasis added] consolidated financial statements required by S-X 3-01 and S-X 3-02.” S-X 3-01 and S-X 3-02 do not require interim financial statements to be audited.
  4. Effect of Different Fiscal Years and One Quarter (or Less) Lag – See Section 2410.7.

2405.4Effect of Commencing or Ceasing Use of Equity Method on S-X 3-09 Financial Statements

(Last updated: 6/30/2010)

For purposes of S-X 3-09, the investee’s separate annual financial statements should only depict the period of the fiscal year in which it was accounted for by the equity method. However, CF-OCA will, upon a written request, consider accepting the investee’s financial statements for the whole year, if the registrant demonstrates that it is an undue hardship to obtain investee’s financial statements through the date it ceases to be accounted for under the equity method.

NOTE to SECTION 2405.4

As noted in Section 2010.3, the acquisition of an investment accounted for using the equity method represents the acquisition of a business for reporting purposes. Consequently, the acquisition is subject to S-X 3-05. Under S-X 3-05, the investee’s financial statements would be required for periods prior to the acquisition if S-X 3-05 significance is met. (Last updated: 6/30/2010)

2405.5Change from Cost Method to Equity Method - If a registrant’s financial statements are retroactively adjusted in accordance with APB 18, paragraph 19m [ASC 323-10-35-33] to reflect equity method accounting for an investment previously accounted for under the cost method, S-X 3-09 financial statements, or summarized financial information required by S-X 4-08(g), S-X 8-03, or S-X 10-01(b)(1), may be required for periods in which the cost method was previously used if the significance tests are met.

2405.6Lower Tier Investees - S-X 3-09 applies to an investee accounted for by the equity method by an investee of the registrant. To determine whether separate financial statements of an investee accounted for by the equity method by an investee of the registrant are required, the significance test should be computed based on the materiality of the lower tier investee to the registrant consolidated. [SAB Topic 6K.4.a.]

2405.7S-X 3-09 Financial Statement Due Date - Annual Reports - General

The filing date for S-X 3-09 financial statements differs depending primarily on four factors:

  1. whether the registrant is a domestic issuer or a foreign private issuer;
  2. the investee’s fiscal year end;
  3. both the investee’s and the registrant’s filing status (e.g., non-accelerated filer, accelerated filer or large accelerated filer), and
  4. whether or not the investee is a foreign business. See definition in S-X 1-02(l).

2405.8S-X 3-09 Financial Statement Due Date - Annual Reports – Domestic Issuer AND Domestic Investee

The financial statements required by S-X 3-09 must be filed within the following number of days after the investee’s fiscal year-end:

  • 60 days if the investee is a large accelerated filer
  • 75 days if the investee is an accelerated filer; or
  • 90 days for all other investees.

However, if the number of days after the investee’s fiscal year-end is before the due date of the registrant’s Form 10-K, then the S-X 3-09 financial statements need not be filed prior to the due date of the registrant’s Form 10-K. Also, if the investee’s financial statements are due after the registrant’s Form 10-K is required to be filed (e.g., registrant is an accelerated filer, but investee is non-accelerated and both have the same year end), the financial statements required by S-X 3-09 should be filed in an amendment to the registrant’s Form 10-K.

NOTE to SECTION 2405.8

Exchange Act Rule 12b-25(f) indicates that the 15 calendar day extension provided for the registrant to file its Form 10-K is not applicable to S-X 3-09 financial statements to be filed by amendment to a Form 10-K. See the Division of Corporation Finance’s C&DIs for Exchange Act Rules, Question 135.01.

2405.9S-X 3-09 Financial Statement Due Date - Annual Reports – Foreign Private Issuer AND Domestic Investee

Financial statements required by S-X 3-09 may be filed in an amendment to the Form 20-F within the following number of days after the investee’s fiscal year end: [S-X 3-09(b)(2)]

  • 60 days if the investee is a large accelerated filer
  • 75 days if the investee is an accelerated filer; or
  • 90 days for all other investees.

However, if the number of days after the investee’s year-end noted above is before the due date of the Form 20-F, then the S-X 3-09 financial statements need not be filed prior to the due date of the Form 20-F.

NOTE to SECTION 2405.9

The 15 calendar day extension provided for the registrant to file its Form 20-F is not applicable to S-X 3-09 financial statements to be filed by amendment to a Form 20-F. See the analogous guidance in Exchange Act Rule 12b-25(f).

2405.10S-X 3-09 Financial Statement Due Date - Annual Reports –Investee is a Foreign Business

(Last updated: 3/31/2009)

S-X 3-09 financial statements of a foreign business must be filed within six months after the investee’s year-end, but in no event earlier than the due date of the registrant’s annual report (i.e., Form 10-K or 20-F). [S-X 3-09(b)(1) and (b)(2)] If the investee’s financial statements are due after the registrant’s annual report is required to be filed, the financial statements required by S-X 3-09 should be filed in an amendment to the registrant’s annual report.

NOTES to SECTION 2405.10

  1. The 15 calendar day extension provided for the registrant to file its Form 10-K/20-F is not applicable to S-X 3-09 financial statements to be filed by amendment to a Form 10-K/20-F. [Exchange Act Rule 12b-25(f) for Form 10-K and by analogy for Form 20-F]
  2. In 2008, the SEC adopted revisions to Form 20-F. See Section 6000. As part of those revisions, effective for fiscal years ending on or after December 15, 2011, annual reports on Form 20-F will be required to be filed within four months after a foreign private issuer’s fiscal year end rather than six months after fiscal year end. [General Instruction A to Form 20-F] This revision to the annual report deadline does not change the requirement to file S-X 3-09 financial statements of a foreign business within six months after the investee’s fiscal year end in annual reports of domestic issuers and foreign private issuers. If the investee’s financial statements are due after the registrant’s annual report is required to be filed, the S-X 3-09 financial statements may continue to be filed by amendment to the registrant’s annual report on Form 20-F.

2405.11Updating S-X 3-09 Financial Statements - Registration or Proxy Statement

If the investee is a foreign business, S-X 3-09 financial statements may not be older than 15 months. [S-X 3-12(f) references Item 8.A.4. Form 20-F] If the investee is not a foreign business, S-X 3-09 financial statements must be updated within the following number of days after the investee’s fiscal year end: [S-X 3-09(b) references S-X 3-01 and S-X 3-02]

  • 60 days if the investee is a large accelerated filer 
  • 75 days if the investee is an accelerated filer; or
  • 90 days for all other investees.

NOTES to SECTION 2405.11

  1. As noted in Section 2405.3, interim financial statements are not required under S-X 3-09 (although S-X4-08(g) information may be required). Therefore the updating requirements relate to annual financial statements.
  2. The discussion in S-X 3-09(b) cited above relates to registration and proxy statements. The discussion in S-X 3-09(b)(1) and (b)(2) only relate to annual reports.
  3. “Foreign business” is defined in S-X 1-02(l).

2410Measuring Significance of Equity Method Investees Under S-X 3-09

NOTE to SECTION 2410

With the exception of Section 2410.1, the guidance in Section 2410 also applies to calculating S-X 4-08(g) significance. Section 2410.1 does not apply to S-X 4-08(g) significance because the number of significance tests and the significance thresholds used under S-X 4-08(g) can differ from the number of significance tests and the significance thresholds used under S-X 3-09. See Section 2420.1. (Last updated: 6/30/2010)

2410.1General - As noted in Section 2405.3, S-X 3-09 requires the registrant to file separate annual financial statements for each significant equity method investee for which either the income or the investment test set forth in S-X 1-02(w) exceeds 20% for any of the registrant’s fiscal years required to be presented in the filing (see Note 2 to Section 2405.3). The asset test in S-X 1-02(w) does not apply. (Last updated: 6/30/2010)

2410.2Amounts Used to Measure Significance Under S-X 3-09

(Last updated: 9/30/2010)

The S-X 1-02(w) income test is based on the registrant's “equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle of the subsidiary exclusive of amounts attributable to any noncontrolling interests” (i.e., the numerator) compared to "such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year" (i.e., the denominator). Such equity in an investee's pretax earnings or loss is not required to be shown or disclosed in the registrant's financial statements, so the amount to be used as the numerator and denominator in the income test must be calculated.

NOTE to SECTION 2410.2

Significance should be measured for each fiscal year presented. The staff believes that the purpose of the S-X 3-09 reference to S-X 1-02(w) is to describe the mechanics of the significance tests, not to limit application of the tests to the most recently completed fiscal year. (Last updated: 9/30/2010)

2410.3Income Test – Implementation Point 1 – Calculating the Numerator

(Last updated: 9/30/2010)

The numerator is calculated based on the registrant’s proportionate share of the pre-tax income from continuing operations reflected in the separate financial statements of the investee prepared in accordance with U.S. GAAP for the period in which the registrant recognizes income or loss from the investee under the equity method adjusted for any basis differences. In determining the basis differences that should be included for this test, the registrant should consider ASC 323-10-35-34 and ASC 323-10-35-32A. While not an exclusive list, items impacting net income of the registrant that should be excluded from the test are: impairment charges at the investor level, gains/losses from stock sales by the registrant; dilution gains/losses from stock sales by the investee, preferred dividends.

See the related discussion about the effect of different fiscal year ends and one quarter (or less) lags at Section 2410.7. Foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB should use IFRS as issued by the IASB in performing this analysis. The aforementioned guidance does not apply if the registrant elected to use the fair value option. See Section 2435.

NOTES to SECTION 2410.3

  1. Numerator - ASC 323-10-45-2 states that the investor’s share of extraordinary items and its share of accounting changes reported in the financial statements of the investee shall be classified separately. Such amounts are not included in the numerator of the income test.
  2. Numerator - In the year significant influence is either attained or lost, the registrant’s equity in the income or loss of the investee presented in the registrant’s income statement will only include results of the investee for the portion of the year during which the investment was accounted for using the equity method. Do not annualize these amounts when calculating S-X 3-09 significance. (Last updated: 9/30/2010)

2410.4Income Test – Implementation Point 2 – Calculating the Denominator

(Last updated: 9/30/2010)

Using the income statement presentation depicted in S-X Article 5 as an example, the calculation of the denominator of the income test should begin with the amount identified at S-X 5-03(b)10 (i.e., the registrant’s income or loss before income tax expenses and other items) adjusted to:

  1. Include the registrant’s equity in the earnings (or loss) of the investee from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle exclusive of amounts attributable to any noncontrolling interests of the investee.
  2. Exclude the portion of the registrant’s income or loss before income tax expenses and other items identified at S-X 5-03(b)10 attributable to any non-controlling interests in the registrant’s subsidiaries.

2410.5Income Test – Implementation Point 3 – Income Averaging

The registrant should not exclude its equity in the income or loss of the investee when determining whether the registrant qualifies for income averaging under computational note 2 to S-X 1-02(w). If a registrant qualifies to use income averaging and the tested equity method investee incurred a loss, then, pursuant to computational note 1 to S-X 1-02(w), the registrant’s equity in the income or loss of the investee should be excluded from the income of the registrant when computing the registrant’s average income.

2410.6Income Test – Implementation Point 4 - Intercompany Transactions

(Last updated: 3/31/2009)

Because an equity method investee is not consolidated, intercompany transactions should not be eliminated when measuring significance of an equity method investee.

2410.7Income Test – Implementation Point 5 -Effect of Different Fiscal Years and One Quarter (or Less) Lag

(Last updated: 6/30/2010)

The investee’s financial statements a registrant is required to file under S-X 3-09 may differ from the investee’s financial results used by the registrant to calculate the registrant’s equity in the income or loss of the investee presented in the registrant’s financial statements. This may occur when a registrant and an investee have different fiscal years or when they have the same fiscal year, but the registrant computes its equity in the income or loss of the investee on a consistent one quarter (or less) lag basis. In these circumstances, the S-X 3-09 significance tests should be determined using the investee’s financial results used by the registrant to calculate the registrant’s equity in the income or loss of the investee presented in the registrant’s financial statements, not amounts derived from the investee’s financial statements required to be filed under S-X 3-09. For example, consider a registrant with a December 31 year end and an investee with a June 30 year end. Assume the registrant consistently recognizes its equity in the income of the investee using the investee’s twelve months ended September 30. In this case, the registrant calculates the S-X 3-09 significance tests consistent with FRM 2410.2 using the investee’s results for the twelve months ended September 30. If the investee is significant, the investee’s financial statements for the twelve months ended June 30 would satisfy the requirements of S-X 3-09 because those are the annual financial statements the investee would be required to present pursuant to S-X 3-01 and 3-02 if the investee were a registrant.

2410.8Income Test – Implementation Point 6 - Effect of Discontinued Operations or Retrospectively Applied Change in Accounting Principle

(Last updated: 3/17/2016)

If a registrant has a discontinued operation or a retrospectively applied change in accounting principle subsequent to the registrant’s filing of its Form 10-K, the staff will not object if a registrant uses its historical financial statements in its most recent Form 10-K to determine whether S-X 3-09 financial statements and S-X 4-08(g) financial information is required. In other words, the registrant need not recompute significance using the financial statements that give retrospective effect to the discontinued operation or change in accounting principle and are included or incorporated into the registration or proxy statement. In addition, the staff will not object if a registrant, when filing a subsequent Form 10-K, does not recompute S-X 3-09 and S-X 4-08(g) significance for periods earlier than the one during which a retrospectively applied change in accounting principle occurred. However, for a discontinued operation, a registrant must recompute S-X 3-09 and S-X 4-08(g) significance for all periods presented. As a result, a previously insignificant investee may become significant as a result of a discontinued operation.

Discontinued Operation and Change in Accounting Principle Exception for Form 10-K for the Year of Disposal

S-X 3-09 financial statements and S-X 4-08(g) financial information for a disposed equity method investment will not be required in the Form 10-K for the year of disposal if (A) in the year an equity method investment is disposed, either a different event occurs after the disposal requiring a component of the registrant to be reported as a discontinued operation or a change in accounting principle is adopted by the registrant in the year of the disposal; and (B) the equity method investment is not significant for any of the registrant’s fiscal years required to be presented in the Form 10-K, including the year of disposal, based on the historical financial statements of the registrant that have not been retrospectively adjusted to give effect to the discontinued operation or change in accounting principle.

2410.9Multiple Series Registrants - S-X 3-09 Significance Calculations

(Last updated: 9/30/2009)

  1. Multiple series registrants are formed as trusts or partnerships under state law, which establishes the registrant as a legal entity and as an issuer. As an issuer, the registrant may conduct offerings of interests in different series where such series are not considered registrants or even legal entities. However, each series is considered a security. Typically, investors will invest in one or more individual series being offered by a registrant, and the capital raised by a particular series is invested separately from the capital of any other series of the registrant. For purposes of SEC reporting, the trust (or partnership) is the sole registrant, not the individual series. However, separate financial statements of each individual series must be provided because an investor invests in an individual series.
  2. Significance must be assessed at the individual series level for purposes of S-X 3-09 and 4-08(g) to determine if separate financial statements or summarized financial data of any investments made by an individual series must be provided. Even though the trust or partnership is the issuer, that issuer status does not negate the requirement for series level disclosure and the provision of series level financial statements under S-X 3-09 and 4-08(g).

    For example: Series A is one of 5 series within a registrant and the registrant’s Form 10-K includes the financial statements of all such series. Series A made an investment which has a greater than 20% significance level to Series A (but represents only 5% significance to the registrant overall). Separate financial statements for the investment must be provided in the registrant’s 10-K under the provisions of S-X 3-09.

For further discussion about multiple series registrants, see the Division of Corporation Finance’s C&DIs for Securities Act Sections, Question 104.01.

2415Combined/Consolidated Financial Statements of Equity Method Investees

S-X 3-09 allows for the presentation of combined or consolidated financial statements (where appropriate) if financial statements are required for two or more investees. Combined financial statements generally are appropriate only for entities under common control or common management, and then only for periods in which that condition existed. [ARB 51 paragraphs 22 and 23 / ASC 810-10-55-1B and ASC 810-10-45-10]

2420Summarized Financial Data of Equity Method Investees
[S-X 4-08(g), S-X 8-03, S-X 10-01(b)(1), and SAB Topic 6K.4.b.]

2420.1Overview

(Last updated: 3/31/2009)

NOTE to SECTION 2420.1

With the exception of Section 2410.1, the guidance in Section 2410 also applies to calculating S-X 4-08(g) significance. Section 2410 includes important clarifying points, which may not be reproduced below, related to measuring S-X 4-08(g) significance. Therefore, you should refer to Section 2410 (except Section 2410.1) as well as Section 2420 when seeking guidance on calculating S-X 4-08(g) significance. Section 2410.1 does not apply to S-X 4-08(g) significance because the number of significance tests and the significance thresholds used under S-X 4-08(g) can differ from the number of significance tests and the significance thresholds used under S-X 3-09. See further discussion in the chart below and Note 3 to Section 2420.3.
(Last updated: 6/30/2010)

The requirements to present summarized financial data of the registrant’s equity method investees in a footnote to the registrant’s financial statements apply to all registrants. The significance tests and thresholds used to determine whether such disclosure is required as well as the level of disclosure may differ depending on whether:

  1. The registrant is a smaller reporting company and
  2. The registrant’s financial statements are for an annual or interim period.

The following table includes an overview of the sources of these requirements as well as the number of significance tests that must be computed and the significance thresholds. See the Sections noted in the chart for further detail.

Registrant Annual Financial Statements Interim Financial Statements
Other Reporting Companies Source: S-X 4-08(g)
Number of Significance Tests: 3
Significance Threshold: Exceeds 10%
See Sections 2420.3 to 2420.5
Source: S-X 10-01(b)(1)
Number of Significance Tests: 2
Significance Threshold: Exceeds 20%
See Sections 2420.6 to 2420.8
Smaller Reporting Companies Source: S-X 8-03
Number of Significance Tests: 3
Significance Threshold: Exceeds 20%
See Section 2420.9
Source: S-X 8-03
Number of Significance Tests: 3
Significance Threshold: Exceeds 20%
See Section 2420.9

2420.2Definitions – The summarized financial data requirements apply to “Subsidiaries Not Consolidated” and “50% or Less-owned Persons.” See Sections 2405.2 and 2405.3 for definitions of these terms.

2420.3Other Reporting Companies - Annual Financial Statements - Overview [S-X 4-08(g)]

(Last updated: 3/31/2013)

Determine significance of each investee for each of the registrant’s fiscal years required to be presented in the filing using all 3 tests in S-X 1-02(w) (investment, asset and income tests). Present summarized financial data described in Section 2420.4 in the registrant’s financial statement footnotes for all investees (not just the investee that is significant) if significance of any individual or any combination of investee(s) exceeds 10%. See exception below at Section 2420.5 Interaction of S-X 4-08(g) with S-X 3-09.

NOTES to SECTION 2420.3

  1. De Minimis Exception - Annual Financial Statements - SAB Topic 6K.4.b. notes that the staff recognizes that exclusion of summarized information for certain, but not all, investees may be appropriate in some circumstances where it is impracticable to accumulate and the summarized information to be excluded is de minimis.
  2. Significance – Number of Tests - The requirement to determine significance for purposes of S-X 4-08(g) using all 3 tests in S-X 1-02(w) differs from S-X 3-09, which only requires significance to be determined based on 2 tests (investment and income tests). In 1994, S-X 3-09 was revised to delete the asset test; however the asset test was retained for S-X 4-08(g) to ensure a minimum level of financial information about an investee when the investment test significance was small, but the registrant’s proportionate interest in the investee’s assets was material, as might be the case for a highly leveraged investee.
  3. Significance – Number of Periods - Significance should be measured for each fiscal year presented. The staff believes that the purpose of the S-X 4-08(g) reference to S-X 1-02(w) is to describe the mechanics of the significance tests, not to limit application of the tests to the most recently completed fiscal year. (Last updated: 6/30/2010)

2420.4Other Reporting Companies - Annual Financial Statements – Minimum Disclosure [S-X 4-08(g) references S-X 1-02(bb)]

(Last updated: 6/30/2010)

If S-X 4-08(g) significance is met in any fiscal year presented, the registrant’s financial statement footnotes for each of the registrant’s fiscal years presented should include, at a minimum, the following summarized financial data for all investees (not just the investees that are significant):  current and noncurrent assets and liabilities; redeemable stock and noncontrolling interests; revenues; gross profit; income from continuing operations; and net income). The summarized annual financial data for each investee may be aggregated, but it should not be labeled “unaudited.”

2420.5Other Reporting Companies - Annual Financial Statements – Interaction of S-X 4-08(g) with S-X 3-09 [S-X 4-08(g) and SAB Topic 6K.4.b.]

SAB Topic 6K.4.b. notes that if a registrant includes separate financial statements (i.e., S-X 3-09 financial statements) for an investee in its annual report, then it need not include the summarized financial information required by S-X 4-08(g) for that investee. The reason for this conclusion is that separate financial statements of an investee would include the minimum information required by S-X 4-08(g) and therefore such information need not be repeated in the registrant’s financial statement footnotes. As noted in Section 2405, in certain circumstances S-X 3-09 financial statements may be filed after the original due date of the registrant’s Form 10-K. If S-X 3-09 financial statements are not filed at the same time as the Form 10-K, the registrant must include S-X 4-08(g) summarized financial information in its audited financial statements included in the Form 10-K.

NOTE to SECTION 2420.5

SAB Topic 6K.4.b. discusses the Annual Report to Shareholders. The Annual Report to Shareholders differs from the Annual Report on Form 10-K in certain significant respects. See Proxy Rules 14a-3 for a discussion of the Annual Report to Shareholders. However, CF-OCA applies the rationale in SAB Topic 6K.4.b. to the Annual Report on Form 10-K.

2420.6Other Reporting Companies - Interim Financial Statements – Overview  [S-X 10-01(b)(1)]

(Last updated: 3/31/2009)

Present summarized income statement information for each investee for which both:

  1. Investee is significant, measured using either the income or investment tests described in S-X 1-02(w) substituting 20% for 10%; and
  2. Form 10-Q financial information (i.e., Part 1 of Form 10-Q) would be required if investee was a registrant. Examples of registrants that do not need to file Form 10-Q Part 1 include foreign private issuers, asset-backed issuers, mutual life insurance companies and certain mining companies. See Exchange Act Rule 13a-13 and Exchange Act Rule 15d-13 for a complete list and explanation.

NOTE to SECTION 2420.6

Measuring Significance – See Implementation points in Section 2420.7.

2420.7Other Reporting Companies - Interim Financial Statements – Significance Tests Implementation Points [S-X 10-01(b)(1)]

  1. Income Test: Use the year-to-date interim period income statement for the current year in lieu of either the quarterly financial statements or the financial statements for the most recently completed fiscal year (except the first quarter where the quarterly and year-to-date period are the same); and
  2. Income Test: Omit income averaging [i.e., computational note 2 of S-X 1-02(w)].
  3. Investment Test: Use both the most recent balance sheet, which should correspond to the end of the year-to-date (cumulative) interim period used to measure significance under the income test, and the balance sheet as of the end of the most recently completed fiscal year that is included in the quarterly report.

NOTE to SECTION 2420.7

Investment Test – It is important to use the balance sheet as of the end of the most recently completed fiscal year that is included in the quarterly report as it may differ from the corresponding balance sheet included in the most recently filed Form 10-K if a transaction or event has occurred since filing the Form 10-K that requires retrospective application in the subsequently filed Form 10-Q, such as a change in accounting principle.

2420.8Other Reporting Companies - Interim Financial Statements – Minimum Disclosure [S-X 10-01(b)(1)]

(Last updated: 6/30/2010)

When interim summarized income statement information is required, it need only be provided for investees that are significant. Minimum disclosure for each significant investee, which may be aggregated with such minimum disclosure for other significant investees, must include: revenues; gross profit; income from continuing operations; and net income. If S-X 10-01(b)(1) significance is met for any year-to-date (cumulative) interim period included in a quarterly report (See Sections 2420.6 and 2420.7), then the registrant should present the minimum disclosure for both the current and prior year comparative year-to-date periods included in that quarterly report.

2420.9Smaller Reporting Companies – Annual and Interim Financial Statements [S-X 8-03]

(Last updated: 6/30/2010)

Determine significance of each investee for any of the registrant’s fiscal years required to be presented in the filing using all 3 tests in S-X 1-02(w) (investment, asset and income tests), substituting 20% for 10%. If significance of any individual or any combination of investee(s) exceeds 20%, include in the registrant’s financial statement footnotes summarized financial data for all investees for each period presented. Summarized annual financial data should not be labeled "unaudited." Interim financial statements need only include summarized financial data for each investee that is significant. Summarized financial data should quantify at a minimum the investee’s: revenues; gross profit; income from continuing operations; and net income.

NOTES to SECTION 2420.9

  1. Source of Requirement - The smaller reporting company requirement for summarized financial information is located within the S-X 8-03 requirements for interim financial statements. Notwithstanding the location of this requirement, the staff applies the S-X 8-03 requirement for summarized financial information to both annual and interim financial statements.
  2. Significance - S-X 8-03(b)(3) states that significance should be determined based on “a registrant’s consolidated assets, equity or income from continuing operations.” Comparing a registrant’s investment to its equity, rather than its total assets as required in S-X 4-08(g) and S-X 10-01(b)(1), would likely have the unintended consequence of requiring a smaller reporting company registrant [as defined in S-K 10(f)] to disclose summarized financial information more often than a registrant that is not a smaller reporting company. The staff did not intend for the disclosure requirements for a smaller reporting company to be more onerous than those for a registrant that is not a smaller reporting company. Therefore, the staff determines significance for purposes of reporting summarized financial information by smaller reporting companies in a manner consistent with S-X 1-02(w), substituting 20% for 10%.
  3. De Minimis Exception - Annual Financial Statements - SAB Topic 6K.4.b. notes that the staff recognizes that exclusion of summarized information for certain, but not all, investees may be appropriate in some circumstances where it is impracticable to accumulate and the summarized information to be excluded is de minimis.

2420.10Change from Cost Method to Equity Method - If a registrant’s financial statements are retroactively adjusted in accordance with APB 18, paragraph 19m [ASC 323-10-35-33] to reflect equity method accounting for an investment previously accounted for under the cost method, S-X 3-09 financial statements, or summarized financial information required by S-X 4-08(g), S-X 8-03, or S-X 10-01(b)(1), may be required for periods in which the cost method was previously used if the significance tests are met.

2420.11Multiple Series Registrants - Information required by S-X 4-08(g) must be provided on an individual series level. See Section 2410.9 for more information. (Last updated: 9/30/2009)

2425“Foreign Business” Investees

Financial statements required by S-X 3-09 for an investee that meets the definition of a foreign business [see S-X 1-02(l)] need only comply with the reporting requirements of Item 17 of Form 20-F and are subject to the updating requirements of Item 8.A.4 of Form 20-F. Reconciliation requirements are described at Topic 6.

2430Relief

Registrants may request that CF-OCA grant relief in unusual situations where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances. Favorable requests for relief from S-X 3-09 often do not provide a sufficient basis for also granting relief from the disclosure required by S-X 4-08(g).

2435SFAS 159 [ASC 825] Fair Value Option for an Equity Method Investment and S-X 3-09 and S-X 4-08(g)

2435.1SFAS 159 [ASC 825] Fair Value Option - Background - S-X 3-09 and S-X 4-08(g) did not contemplate the fair value option. Those rules were put in place to provide presumptive disclosure thresholds for separate financial statements and/or summarized financial information of entities accounted for using the equity method, consistent with the requirements of APB Opinion 18, paragraph 20d [ASC 323-10-50-3c]. SFAS 159 [ASC 825] requires, in part, that companies electing the fair value option for an investee comply with the disclosure requirements in APB Opinion 18, paragraph 20d [ASC 323-10-50-3c].

2435.2SFAS 159 [ASC 825] Fair Value Option – Presumptive Disclosure Thresholds for Summarized Financial Information and Separate Financial Statements of Investees - The staff believes that the significance tests in S-X 3-09 and S-X 4-08(g), as modified below, provide analogous guidance for the SFAS 159 [ASC 825] requirement to comply with the disclosure requirements in APB Opinion 18, paragraph 20d [ASC 323-10-50-3c]. In applying the S-X 3-09 and S-X 4-08(g) disclosure thresholds to investments that would have been accounted for under the equity method had the fair value option not been elected by the registrant, the staff believes that the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s income statement rather than the registrant’s equity in the earnings of the investee computed as if the equity method had been applied. If a registrant believes that applying the guidance in S-X 3-09 and S-X 4-08(g) by analogy as described above results in a requirement to provide more information than is reasonably necessary to inform investors, the registrant is encouraged to consult with CF-OCA.

2435.3SFAS 159 [ASC 825] Fair Value Option – MD&A Disclosure of Methods and Assumptions Used to Determine Fair Value - The staff also cautions registrants that investees accounted for using the fair value option may be material at levels below the disclosure thresholds in S-X 3-09 and S-X 4-08(g). When investees accounted for using the fair value option are material to an understanding of results of operations, financial position, or cash flows, registrants should consider whether qualitative and quantitative analysis in MD&A is required by S-K 303, whether or not the investee’s separate financial statements are provided and/or the registrant’s financial statement footnotes include the investee’s summarized financial information. Specifically, registrants should consider describing in MD&A the methods and underlying assumptions used in determining fair value, and analyzing the effects of any changes therein from the previous period(s). Registrants should be mindful that such an analysis may be necessary even when material changes in significant assumptions have offsetting effects.

2500GUARANTORS OF SECURITIES

[S-X 3-10 and S-X 8-01 Note 3]

(Last updated: 6/30/2011)

Section Description
2500 Guarantors of Securities
2510 Exceptions to the General Rule
2515 Condensed Consolidating Financial Information
2520 Implementation Issues
2530 Recently Acquired Guarantor Subsidiaries
2540 Periodic Reporting by Subsidiary Issuers and Guarantors

2500.1Requirement for Full and Complete Disclosure - Debt or preferred stock registered under the Securities Act may be guaranteed by one or more affiliates of the issuer. As described in Section 2500.2, S-X 3-10 and S-X 8-01 Note 3 require financial statements of guarantors of registered securities to be included in registration statements and Exchange Act reports. In certain circumstances described in Section 2510.1, S-X 3-10 and S-X 8-01 Note 3 provide relief from the requirement to provide full financial statements for each guarantor. Qualification for such relief does not relieve the issuer of its responsibility to provide full and complete disclosure of:

  1. the legal aspects of the guarantee arrangement that would be material for an investor to evaluate the sufficiency of the guarantee,
  2. financial information in sufficient detail to allow investors to determine the nature of the assets held by, and the operations and cash flows of, each of the guarantors, including the investors' priority position in the event of a default by the issuer, and
  3. any significant restrictions on the issuer's ability to obtain funds from its guarantors by dividend, loan, or other means.

2500.2General Rule

Unless an exception applies (see Section 2510.1), each issuer of a guaranteed security and each guarantor of that security must file the financial statements specified by Regulation S-X for a registrant. [S-X 3-10(a)]

NOTES to SECTION 2500.2

  1. The exceptions involve, in lieu of a subsidiary issuer’s or subsidiary guarantor’s full financial statements, financial and/or narrative disclosures about the subsidiary issuer or guarantor in the financial statements of the parent company that issued or guaranteed the registered security.
    (Last updated: 6/30/2010)
  2. The financial statements of an entity that is not an issuer or guarantor may not be substituted for the financial statements of the parent company even if the financial statements would be virtually identical to those of the parent company. [Note to S-X 3-10(a)(2)]

2510Exceptions to the General Rule

(Last updated: 6/30/2010)

2510.1The exceptions in the table below relate to the structure of the guaranteed transaction. The exceptions apply only when:

  • each subsidiary issuer/guarantor is 100% owned and
  • each guarantee of the security being registered is full, unconditional, and joint and several with all other subsidiary guarantees.

These terms are defined in S-X 3-10(h) and are included below in Sections 2510.3 and 2510.4.

Also, the exceptions are available only for guaranteed securities that are “debt or debt-like.” The characteristics that identify a security as debt or debt-like are

  • the issuer has a contractual obligation to pay a fixed sum at a fixed time; and
  • where the obligation to make such payments is cumulative, a set amount of interest must be paid.

NOTE TO SECTION 2510.1

Further discussion of the meaning of debt or debt-like is provided in Release No. 33-7878.

If an exception applies, the parent company may provide the disclosure specified in the following table instead of full financial statements of the subsidiary issuer or guarantor. Relief from providing full financial statements of the subsidiary issuer or guarantor does not relieve the parent company of its obligation to provide the disclosure described in Section 2500.1. In certain exceptions described in the table below, the disclosure required for relief includes condensed consolidating financial information. See Section 2515 for a description of condensed consolidating financial information.

Exceptions Disclosure Required for Relief
Finance subsidiary issues securities guaranteed by its parent company; no other subsidiary guarantees Narrative disclosure about the guarantee in a note to the parent company’s financial statements [S-X 3-10(b)]
Operating subsidiary issues securities guaranteed by its parent company; no other subsidiary guarantees Condensed consolidating financial information in a note to the parent company’s financial statements [S-X 3-10(c)]
Finance or operating subsidiary issues securities guaranteed by its parent company; one or more other subsidiary guarantees Condensed consolidating financial information in a note to the parent company’s financial statements [S-X 3-10(d)]
One finance or operating subsidiary guarantees securities issued by its parent company Condensed consolidating financial information in a note to the parent company’s financial statements [S-X 3-10(e)]
More than one finance or operating subsidiary guarantees securities issued by its parent company Condensed consolidating financial information in a note to the parent company’s financial statements [S-X 3-10(f)]
All subsidiaries guarantee securities issued by their parent company and the parent company has no independent assets or operations. This condition is also met when any non-guarantor subsidiaries are minor (their total assets, stockholders’ equity, revenues, income from continuing operations, and cash flows from operating activities, individually and in the aggregate, are less than 3% of the parent company’s consolidated totals). Narrative disclosure about the guarantee in a note to the parent company’s financial statements [S-X 3-10(c),(e),(f)]

NOTE to SECTION 2510.1

If one or more of the guarantor subsidiaries is not 100% owned, or if one or more of the guarantees is not full and unconditional, the issuer must file full audited financial statements of those guarantor subsidiaries pursuant to S-X 3-10(a). Unaudited interim financial statements of those guarantor subsidiaries would also be required in a registration statement or Form 10-Q. MD&A and selected financial data for any guarantor subsidiary that is not 100% owned should also be provided if required for the parent. If full audited financial statements are required for a 100% owned guarantor (e.g., because one or more of the guarantees is not full and unconditional), provide management’s narrative analysis of the material changes between the most recent fiscal year presented and the fiscal year immediately preceding it. See General Instruction I of Form 10-K. (Last updated: 3/31/2009)

2510.2Applicability to Co-Issuers - The exceptions in Section 2510.1 also apply to subsidiaries that co-issue, rather than guarantee, securities issued by their parent company.

2510.3Definition – 100%-owned - A subsidiary is 100% owned if all of its outstanding voting shares are owned, either directly or indirectly, by the parent company [S-X 3-10(h)]. For a non-corporate subsidiary, all interests must be owned by the parent company. Registrants with questions about these definitions should contact CF-OCC.

2510.4Definition – Full and Unconditional - A guarantee is full and unconditional if, when an issuer of a guaranteed security has failed to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it doesn’t, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of all amounts due and payable [S-X 3-10(h)]. Registrants with questions about this definition should contact CF-OCC.

An arrangement that permits a guarantor to opt out of its obligation prior to or during the term of the debt is not a full and unconditional guarantee. (Last updated: 12/31/2010)

See discussion at Section 2510.5 regarding the availability of S-X 3-10 notwithstanding the existence of arrangements that provide for the release of subsidiary guarantees. (Last updated: 6/30/2011)

2510.5Subsidiary Guarantee Release Provisions – A subsidiary that guarantees its parent’s debt securities pursuant to an indenture that provides for the subsidiary’s guarantee to be released automatically under customary circumstances may rely on S-X 3-10, provided the other requirements of S-X 3-10 are met.  These customary circumstances include, for example, when:

  • the subsidiary is sold or sells all of its assets;
  • the subsidiary is declared “unrestricted” for covenant purposes;
  • the subsidiary’s guarantee of other indebtedness is terminated or released;
  • the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied;
  • the rating on the parent’s debt securities is changed to investment grade; or
  • the parent’s debt securities are converted or exchanged into equity securities.

Registrants with questions about these and other types of customary circumstances in which S-X 3-10 may be available notwithstanding the existence of arrangements that provide for the release of subsidiary guarantees should contact CF-OCC. Registrants should not characterize subsidiary guarantees as full and unconditional without disclosure describing any qualifications to the subsidiary guarantees (e.g., the circumstances in which they could be released). (Last updated: 9/30/2011)

2515Condensed Consolidating Financial Information [S-X 3-10(i)]

(Last updated: 6/30/2011)

2515.1Which Filings

Inclusion of the disclosure outlined below is a condition to relief from the full financial statement requirement. The disclosure must be provided in the registration statement that registers the guaranteed securities and in the parent company’s subsequent annual reports on Form 10-K and quarterly reports on Form 10-Q.

2515.2Form and Content - General

Condensed consolidating financial information should follow the general guidance in S-X 10-01 concerning form and content. However, the condensed consolidating financial information should be in sufficient detail to allow investors to determine the nature of the assets held by, and the operations and cash flows of, each of the consolidating groups and include a discussion of any significant restrictions on the parent's and the guarantors’ ability to obtain funds from their subsidiaries by dividend or loan. Additional financial and narrative information about individual guarantors should be disclosed if the information would be material for an investor to evaluate the sufficiency of the guarantee. In addition, condensed consolidating information presented in accordance with the general guidance on form and content in S-X 10-01 should include a total for comprehensive income presented in either a single continuous statement or in two separate but consecutive statements. See footnote 2 to Section 1110.1.

(Last updated: 12/31/2011)

NOTE to SECTION 2515.2

For public entities, the amendments in ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, and ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. The guidance must be applied retrospectively for all periods presented in the financial statements. (Last updated: 12/31/2011)

2515.3Form and Content - Columnar Presentation

Condensed consolidating financial information must be provided in a note to the parent company’s consolidated financial statements. Where the parent company’s financial statements are audited, the condensed consolidating financial information must be audited. Separate columns should depict:

  1. the parent company,
  2. the subsidiary issuer(s),
  3. the subsidiary guarantor(s), on a combined basis,
  4. the non-guarantor subsidiar(ies), on a combined basis,
  5. consolidating adjustments, and
  6. total consolidated amounts.

Additional columns may be necessary for:

  • each subsidiary issuer or guarantor not 100% owned, whose guarantee is not full and unconditional, or whose guarantee is not joint and several with the guarantees of other subsidiaries (inclusion of a separate column does not relieve that subsidiary of its separate requirement to file full financial statements)
  • each subsidiary issuer or guarantor by legal jurisdiction if differences in domestic or foreign laws affect the enforceability of the guarantees.

NOTE to SECTION 2515.3

The non-guarantor column may be eliminated if the non-guarantor subsidiaries, individually and in the aggregate, are minor. S-X 3-10(h)(6) states that a subsidiary is minor if each of its total assets, stockholders’ equity, revenues, income from continuing operations before income taxes, and cash flows from operating activities is less than 3% of the parent company’s corresponding consolidated amount.

The “minor” definition applies to both direct and indirect subsidiaries of the parent. That is, non-guarantor subsidiaries that are more than minor prevent the use of the narrative approach, whether owned directly by the parent or indirectly through another subsidiary.

For a registration statement, “minor” subsidiary status is determined as of the end of the most recent annual period included in the financial statements. For periodic reporting, it is determined at the end of each annual and quarterly reporting period. Changes in columnar presentation as a result of changes in the “minor” status of subsidiaries should ordinarily be reflected prospectively beginning with the period of the change in status. (Last updated: 12/31/2010)

2515.4Reconciliation Requirement

Where the parent company’s consolidated financial statements are prepared on a comprehensive basis of accounting other than U.S. GAAP or IFRS as issued by the IASB, reconcile the information in each column of the condensed consolidating financial information to U.S. GAAP to the extent necessary to allow investors to evaluate the sufficiency of the guarantees. The reconciliation may be limited to the information required by Item 17 of Form 20-F. The reconciling information need not duplicate information elsewhere in the reconciliation of the consolidated financial statements.

2515.5No Relief for Summarized Financial Information - Inclusion of summarized financial information of subsidiary issuers and guarantors does not provide relief from the full financial statement requirements of S-X 3-10(a).

2520Implementation Issues

(Last updated: 6/30/2010)

Subsidiaries That File Full Financial Statements Under S-X 3-10(a) – Such subsidiaries must comply with all reporting obligations of an issuer. For example, they must provide all applicable S-K disclosures, ICFR assessments, reports and disclosures, financial statements of acquired businesses and equity method investees under S-X 3-05 and 3-09, etc.

2530Recently Acquired Guarantor Subsidiaries [S-X 3-10(g)]

2530.1General - If historical operations for a significant recently acquired subsidiary issuer or guarantor are not included in the audited consolidated financial statements of the parent company for at least nine months, separate pre-acquisition financial statements of the recently acquired subsidiary are required.

2530.2Significance Test

If the net book value or purchase price, whichever is greater, of the subsidiary is 20% or more of the principal amount of the securities being registered, financial statements are required. Acquisitions of a group of related subsidiary issuers or guarantors are aggregated for purposes of applying this test. “Related” has the same meaning as in S-X 3-05. “Purchase Price” should be determined in the same manner as the numerator of the investment test under S-X 3-05. See discussions at Section 2015.15 for “related” and Sections 2015.5 and 2015.6 for “purchase price.”

2530.3Periods to be Filed

(Last updated: 3/31/2009)

Audited financial statements for the most recent fiscal year preceding the acquisition and unaudited interim financial statements for the periods specified by S-X 3-01 and 3-02. If the subsidiary is a foreign business, the financial statements may be presented in conformity with Item 17 of Form 20-F and Item 8.A of Form 20-F.

NOTES to SECTION 2530.3

  1. Pre-acquisition financial statements of a foreign business filed pursuant to S-X 3-10(g) may continue to be presented in conformity with Item 17 even after certain revisions to Form 20-F take effect in fiscal 2011. See Section 6500.
  2. S-X 3-10(g) applies only to registration statements. S-X 3-10(g), Instruction 2 indicates that financial statements of recently acquired subsidiary issuers and guarantors are not required in periodic reports under the Exchange Act. However, the separate requirements of S-X 3-05 may apply in other filings such as a Form 8-K or a subsequent registration statement.

2540Periodic Reporting by Subsidiary Issuers and Guarantors

(Last updated: 6/30/2010)

2540.1Subsidiary issuers and guarantors that are permitted by S-X 3-10 to omit separate financial statements are exempt from the periodic reporting requirements of Sections 13(a) and 15(d) of the Exchange Act. Subsidiary issuers and guarantors that file separate financial statements solely because they were recently acquired are also exempt. [Exchange Act Rule 12h-5]

The conditions in S-X 3-10(b) through (f), as applicable, for use of the Rule 12h-5 exemption must be met at the end of each annual and quarterly reporting period.

NOTE to SECTION 2540.1

As a result of Rule 12h-5, subsidiary issuers or guarantors are no longer required to request the exemptive or no-action relief from their periodic reporting obligations under the Exchange Act previously specified in SAB 53. Further, CF-OCC does not intend to process no-action requests regarding subsidiary issuers or guarantors except those that involve novel facts or interpretive issues.

2540.2As a condition to the use of the Rule 12h-5 exemption by the subsidiary issuers and guarantors, condensed consolidating financial information is required in the parent’s financial statements for as long as the registered security is outstanding. [Release No. 33-7878] This is true even if a subsidiary issuer or guarantor properly suspends its reporting obligation with respect to the security and/or the guarantees under Section 15(d) of the Exchange Act. By contrast, subsidiary guarantors that fully report under S-X 3-10(a) may discontinue filing financial statements if their reporting obligation is properly suspended.

2540.3S-X 3-10 applies to a registrant that acquires the issuer or guarantor of a registered debt security and assumes or guarantees the obligation. Assuming the conditions in S-X 3-10(b) through (f), as applicable, are met, condensed consolidating financial information is required in order for any pre-existing subsidiary issuers and guarantors as well as any newly added subsidiary issuers and guarantors to qualify for the Rule 12h-5 exemption.

2540.4Condensed consolidating financial information of the new parent (acquirer) is required for all periods for which financial statements are required by Regulation S-X, based on the status of the subsidiaries as issuers, guarantors, or non-guarantors as of the end of the most recent period presented.  Amounts related to the acquiree and its subsidiaries are included in the new parent’s condensed consolidating financial information only for periods for which they are consolidated by the new parent (i.e., subsequent to the date of acquisition).

2540.5A parent company that files annual reports on Form 20-F is not required to provide quarterly condensed consolidating financial information about its subsidiary issuers and guarantors, even if those subsidiaries are incorporated in the U.S. However, in a registration statement under the Securities Act, a parent company that is a foreign private issuer is required to include condensed consolidating financial information about its subsidiary issuers and guarantors for all required annual and interim periods. The periods to be presented are determined by reference to Item 8.A of Form 20-F.

(Last updated: 9/30/2009)

2600COLLATERALIZATIONS

(Last updated: 6/30/2010)

2600.1Background - S-X 3-16 and S-X 8-01 Note 4 require registrants to file financial statements of each affiliate whose securities constitute a substantial portion of the collateral for any class of security that is registered or being registered. S-X 3-16 and S-X 8-01 view guarantees and collateralizations as two separate disclosure matters. S-X 3-10 applies only to guarantors (see Section 2500) and does not apply to collateral situations, as the concepts of full, unconditional, and joint and several obligation do not apply to collateralizations. Unlike guarantees, enforcement of collateral provisions would result in the debt holder becoming an equity security holder of the affiliate. Therefore, full audited financial statements of each affiliate whose securities constitute a substantial portion of the collateral of a security that is registered or being registered are required by S-X 3-16. (Last updated 12/31/2009)

2600.2Financial statements required for the affiliate whose securities constitute a substantial portion of collateral for any class of securities that is registered or being registered are generally the same as those that would be required if such an affiliate were a registrant as described in Topic 1.

Generally, the staff will not require SFAS 131 [ASC 280] segment information in S-X 3-16 financial statements. Such affiliates are typically subsidiaries of the registrant and the affiliates’ assets and operations are included in the registrant’s segment reporting. (Last updated: 9/30/2010)

2600.3Unusual situations regarding the financial statements that should be filed under S-X 3-16 may be discussed with CF-OCA. (Last updated: 9/30/2010)

2610Measuring “Substantial Portion of the Collateral”

(Last updated: 6/30/2010)

2610.1Securities constitute a substantial portion of collateral if the greatest of the aggregate principal amount, par value, book value, or market value of the securities equals 20% or more of the principal amount of the secured class of securities.

NOTE to SECTION 2610.1

The term “market value” should be read as “fair value.” This is true even if the securities that serve as collateral for a class of registered securities are not traded on an exchange or in an over-the-counter market. From an investor’s perspective the fact that the affiliate’s securities are not traded on an exchange or in an over-the-counter market does not change the fact that the affiliate may constitute a substantial portion of the collateral because of its significant market value.

2610.2The “substantial portion of the collateral” test described in 2610.1 above should be performed using information as of the end of the most recent fiscal year for which audited financial statements would be required in the filing.

2610.3The “substantial portion of the collateral” test described in 2610.1 above should be performed at the time of effectiveness of a registration statement, and subsequently as of the end of each fiscal year for which an annual report on Form 10-K or 20-F is required.

2610.4The denominator of the test should be based on the outstanding principal balance of the registered debt as of the date being tested, as described in 2610.2 and 2610.3 above. In circumstances where the principal balance is being reduced over time, the tested significance of affiliates will tend to increase over time. Registrants who believe that the test produces an anomalous result may request relief from CF-OCA.

2610.5A registrant may issue multiple series of debt instruments under the same indenture.  If all terms of the securities are identical, including interest rates, repayment terms, maturity dates and collateral arrangements, the series may be tested as one class of securities. If all terms are not identical, each series should be tested as a separate class.

2620When Financial Statements are Required

2620.11933 and 1934 Act Registration Statements

S-X 3-16 financial statements are only required in 1933 Act registration statements that register securities for which the affiliate’s securities represent a substantial portion of the collateral for the registered securities. S-X 3-16 financial statements are not required in registration statements that register securities that are not collateralized by an affiliate’s shares, even if another collateralized registered security of the registrant is outstanding.

2620.2Periodic Reports

Financial statements are required under S-X 3-16 in Form 10-K, but not in Form 10-Q.

NOTE to SECTION 2620.2

Interim financial statements of an affiliate that meets S-X 3-16 significance are required in both 1933 Act and 1934 Act registration statements, including Form 10, even though interim financial statements of an affiliate that meets S-X 3-16 are not required in Form 10-Q.

Rationale: S-X 3-16 states that the financial statement requirements for an affiliate that meet S-X 3-16 significance are those financial statements that would be required if the affiliate were a registrant and required to file financial statements. As a result of this requirement, both annual and interim financial statements of an affiliate that meets S-X 3-16 significance would be required in a registration statement, notwithstanding the fact that interim financial statements of that affiliate are not required in Forms 10-Q. The exclusion of S-X 3-16 financial statements from Form 10-Q is primarily a consequence of (A) Form 10-Q only requires financial information specified in S-X Article 10 and (B) S-X 10-01(a)(1), which states in part “Interim financial statements required by this rule need only be provided as to the registrant and its subsidiaries consolidated ...”, only requires interim financial statements for registrants. The staff believes the requirement to provide interim financial statements of an affiliate that meets S-X 3-16 significance also applies to a smaller reporting company notwithstanding the fact that S-X 8-01, Note 4 only references S-X 8-02 – Annual Financial Statements.

2630Implementation Issues

(Last updated: 6/30/2010)

2630.1Shelf Registration Statements – An issuer of registered debt may determine whether financial statements are required under S-X 3-16 at the time a takedown is contemplated, rather than when the original registration statement is filed. Any financial statements required by S-X 3-16 at the time of takedown may be filed via inclusion in a post-effective amendment to the registration statement, in an Exchange Act report that is incorporated by reference into the registration statement, or in a prospectus supplement.

2630.2Multiple Affiliates – The significance of a particular affiliate may change over time. In some cases, affiliates whose financial statements were not required at the time of the registration statement may be required in subsequent annual reports, and in other cases affiliates whose financial statements were required at the time of the registration statement may no longer be required in subsequent annual reports. When an affiliate subsequently becomes significant, its financial statements must be presented for all periods for which a registrant’s financial statements are required. When an affiliate subsequently ceases to be significant, its financial statements are not required for any periods.

2630.3[Reserved]

2630.4Financial Statements of Other Entities – S-X 3-16 requires the same financial statements of an affiliate that would be filed if the affiliate was a registrant. Accordingly, financial statements of other entities such as acquired businesses under S-X 3-05 (for registration statements only) and equity method investees under S-X 3-09 must be filed with respect to the affiliate. The reporting for these entities is limited to these financial statement requirements and other filing and disclosure obligations do not apply (e.g., S-K disclosures, filing of periodic reports, etc.).

2630.5Suspension of Reporting Obligation - A registrant that properly suspends its reporting obligation with respect to registered collateralized debt under Section 15(d) of the Exchange Act is no longer required to file financial statements under S-X 3-16. Unlike condensed consolidating information with respect to subsidiary issuers and guarantors that are exempt from periodic reporting under Rule 12h-5, there is no requirement to file S-X 3-16 financial statements “for as long as the debt is outstanding.”

2630.6Termination of Collateral Arrangement – If the pledged securities cease to be pledged as collateral (either by operation of the underlying indenture or by consent of the debt holders) prior to the end of the most recent period for which S-X 3-16 financial statements would be required, S-X 3-16 financial statements are not required. Ordinarily, this will also be the case if pledged securities cease to be pledged as collateral after the end of the most recent reporting period, but before the corresponding annual report is due. However, there may be situations involving adverse credit events occurring after the end of the most recent period that warrant presentation of S-X 3-16 financial statements with full disclosure of the circumstances and current status of the collateral.

2700CREDIT – THIRD PARTY FINANCIAL STATEMENTS

(Last updated: 9/30/2008)

Section Description
2705 Asset-Backed Securities - Presentation of Certain Third Party Financial Information
2710 Third Party Credit Enhancements for Securities that are NOT "Asset-backed Securities"

2705Asset-Backed Securities – Presentation of Certain Third Party Financial Information [S-K 1100]

2705.1Regulation AB - Background - Regulation AB is the source of various disclosure items and requirements for “asset-backed securities” filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. “Asset-backed security” is defined in S-K 1101(c)(1) as a security that is primarily serviced by cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of physical property underlying such leases. The definition of “asset-backed security” has a number of additional conditions listed at S-K 1101(c)(2) which must be met in order for a security to be considered an “asset-backed security.”

2705.2Regulation AB – Requirement for Certain Third Party Financial Information

Regulation AB requires certain third party financial information for:

  1. “Significant Obligors” (defined at S-K 1101(k)) of Pool of Assets [S-K 1112(b)]
  2. Credit enhancement and other support, except for certain derivative instruments [S-K 1114(b)(2)]
  3. Certain Derivative Instruments [S-K 1115(b)]

2705.3Regulation AB - Certain Third Party Financial Information for “Significant Obligors” (defined at S-K 1101(k)) of Pool of Assets [S-K 1112(b)]

  • If pool assets relating to a significant obligor represent 10% or more, but less than 20% of the asset pool, then depending on type of significant obligor, provide either selected financial data required by S-K 301 or net operating income only for the most recent fiscal year and interim period. See S-K 1112(b).
  • If pool assets relating to a significant obligor represent 20% or more of the asset pool, provide financial statements of the significant obligor meeting the requirements of Regulation S-X (S-X 1–01 through S-X 12–29), except S-X 3–05 and S-X Article 11. Financial statements of such obligor and its subsidiaries consolidated [as required by Proxy Rules 14a–3(b)] shall be filed. See details and exceptions at S-K 1112(b).

NOTE to SECTION 2705.3

Financial statements meeting all of the requirements of Regulation S-X (S-X 1-01 through S-X 12-29) are required notwithstanding the reference to Proxy Rules 14a-3(b), which might be read to suggest certain components of Regulation S-X, such as financial statement schedules, need not be provided.

2705.4Regulation AB - Certain Third Party Financial Information for Credit Enhancement and Other Support, except for certain derivative instruments [S-K 1114(b)(2)]

  • If any entity or group of affiliated entities providing enhancement or other support described in S-K 1114(a) is liable or contingently liable to provide payments representing 10% or more, but less than 20%, of the cash flow supporting any offered class of the asset-backed securities, provide financial data required by Item 301 of Regulation S-K for each such entity or group of affiliated entities.
  • If any entity or group of affiliated entities providing enhancement or other support described in S-K 1114(a) of this section is liable or contingently liable to provide payments representing 20% or more of the cash flow supporting any offered class of the asset-backed securities, provide financial statements meeting the requirements of Regulation S-X (S-X 1–01 through S-X 12–29), except S-X 3–05 and S-X Article 11, of such entity or group of affiliated entities.  Financial statements of such enhancement provider and its subsidiaries consolidated (as required by Proxy Rules 14a–3(b)) shall be filed under this item. See details and exceptions at S-K 1114(b)(2).

2705.5Regulation AB - Certain Third Party Financial Information for Certain Derivative Instruments [S-K 1115(b)]

  • If the aggregate significance percentage related to any entity or group of affiliated entities providing derivative instruments contemplated by S-K 1115 is 10% or more, but less than 20%, provide financial data required by Item 301 of Regulation S-K for such entity or group of affiliated entities.
  • If the aggregate significance percentage related to any entity or group of affiliated entities providing derivative instruments contemplated by S-K 1115 is 20% or more, provide financial statements meeting the requirements of Regulation S-X (S-X 1–01 through S-X 12–29), except S-X 3–05 and S-X Article 11, of such entity or group of affiliated entities. Financial statements of such entity and its subsidiaries consolidated (as required by Proxy Rules 14a–3(b)) shall be filed under this item. See details and exceptions at S-K 1115(b).

2710Third Party Credit Enhancements for Securities that are NOT “Asset-backed Securities”

2710.1Third party credit enhancements differ from guarantees. A guarantee running directly to the security holder is a security within Section 2(1) of the Securities Act and must be covered by a Securities Act registration statement filed by the guarantor, as issuer. A third party credit enhancement is an agreement between a third party and the issuer or a trustee that does not run directly to the security holders. A party providing credit enhancement generally is not a co-issuer. However, if an investor's return is materially dependent upon the third party credit enhancement, the staff requires additional disclosure about the credit enhancer. The disclosure must provide sufficient information about the third party to permit an investor to determine the ability of the third party to fund the credit enhancement. In most cases, the disclosure of the third party's audited financial statements presented in accordance with generally accepted accounting principles would be required. Proposed exceptions should be discussed with CF-OCA prior to filing.

2710.2The staff considers the following factors in assessing the sufficiency of the disclosure in this area:

  1. the amount of the credit enhancement in relation to the issuer's income and cash flows;
  2. the duration of the credit enhancement;
  3. conditions precedent to the application of the credit enhancement; and
  4. other factors that indicate a material relationship between the credit enhancer and the purchaser's anticipated return.

2710.3Financial information of a third party credit enhancement may also be required if an investor is reasonably likely to rely on a material credit enhancement in place for other debt (including nonpublic debt), even though the credit enhancement does not run directly to the debt being registered.

2800OTHER FINANCIAL STATEMENTS

(Last updated: 9/30/2008)

Section Description
2805 General Partner, Where Registrant is a Limited Partnership
2810 Parent-Only Financial Statements (Condensed)
2815 Financial Statements of a Significant Customer
2820 Substantial Asset Concentration

2805General Partner, Where Registrant is a Limited Partnership

(Last updated: 3/31/2010)

Historically, in certain situations the structure and relationship between the general partner and limited partnership resulted in the staff requesting under S-X 3-13 a balance sheet of the general partner to be filed. SAB Topic 12.A.3.d, which indicated that the staff required that a registration statement relating to an offering of limited partnership interests include the most recent year-end balance sheet of the general partner, was removed by SAB 113, Interpretations of Accounting Rules on Oil and Gas Producing Activities. The following is a summary of the staff’s views with respect to providing a balance sheet of the general partner.

Smaller Reporting Companies:

S-X 8-07 requires the balance sheet of the general partner under certain circumstances. SAB 113 did not change S-X 8-07. Registrants should comply with this rule or, if they believe that there is a basis, request relief in writing from CF-OCA.

Registrants other than Smaller Reporting Companies:

  1. Oil and gas companies can rely on SAB 113 and do not need to request the staff’s concurrence to exclude the balance sheet of the general partner; and
  2. Likewise, non-oil and gas companies do not need to request the staff’s concurrence to exclude the balance sheet of the general partner. However, there can be situations in which the relationship between the limited partnership and the general partner can be relevant to an investor. In these situations, the staff believes there needs to be clear disclosure about this relationship. For example, registrants should disclose the following about the general partner relationship:
    • Any material transactions with the general partner, such as a substantial receivable from or payable to a general partner, or any affiliate of the general partner. Disclose the pertinent terms of any material transactions.
    • When there is a commitment, intent or reasonable possibility that the general partner(s) will fund cash flow deficits or provide other direct or indirect financial assistance to the registrant. Describe the nature and extent of the any funding or financial support arrangement.
    • When an affiliate of the general partner has committed itself to increase or maintain the general partner’s capital, if the commitment could reasonably be expected to impact the registrant.  For example, disclose when an affiliate has committed to maintain the general partner’s capital when there is a commitment, intent or reasonable possibility that the general partner will provide financial support to the registrant. Describe the nature and extent of the affiliate’s commitment to the general partner.

2810Parent-only Financial Statements (Condensed) [S-X 5‑04] [S-X 9-06]

2810.1Parent-only Financial Statements – Requirement

GAAP requires parent-only financial statements as a supplement to the consolidated financial statements where material. [ARB 51, paragraph 24 / ASC 810-10-45-11] S-X 5-04 and 9-06 include a presumption that parent-only financial statements are material when the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets at most recent fiscal year-end, although it may be material at lower levels. When significance is met or the parent-only financial statements are otherwise material, registrants should present the information required by S-X 12-04 as an S-X schedule, except bank holding companies, which must present the S-X 12-04 information in the financial statement footnotes. Because bank holding companies must include the S-X 12-04 information in their financial statement footnotes, they do not have the additional 30 days provided by Form 10-K General Instruction A(4) to file this information.

S-X 12-04 indicates the required condensed financial information need not be presented in greater detail than is required for condensed statements by S-X 10-01(a)(2), (3), and (4). The condensed financial information presented should include a total for comprehensive income presented in either a single continuous statement or in two separate but consecutive statements. See footnote 2 to Section 1110.1. (Last updated: 12/31/2011)

NOTE to SECTION 2810.1

For public entities, the amendments in ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, and ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. The guidance must be applied retrospectively for all periods presented in the financial statements. (Last updated: 12/31/2011)

NOTE to SECTION 2810.1

S-X 4-08(e)(3) outlines additional disclosures related to restricted net assets required in financial statement footnotes of all registrants subject to S-X. See Section 2810.3.

2810.2Parent-only Financial Statements - Restricted net assets Defined

Restricted net assets is the amount of the registrant's share of subsidiaries' net assets (assets less the sum of liabilities, redeemable preferred stock, and noncontrolling interests) that may not be transferred to the parent in the form of loans, dividends, etc., without a third party's consent. [S-X 4-08(e)(3) and SAB Topic 6K.2] Also, in certain circumstances, registrants must compute “subsidiary adjusted net assets”. See SAB Topic 6K.2 for further discussion.

2810.3Interaction of Restricted Net Asset Footnote Disclosures S-X 4-08(e)(3)] and Parent-only Financial Statements [S-X 5-04/9-06]

In certain circumstances, S-X 4-08(e)(3) requires footnote disclosure in the consolidated financial statements about the nature and amount of significant restrictions on the ability of subsidiaries to transfer funds to the parent through intercompany loans, advances or cash dividends. To determine which disclosures, if any, are required, a registrant must compute its proportionate share of the net assets of its consolidated subsidiaries and its proportionate share of the net assets of its unconsolidated subsidiaries as of the end of the most recent fiscal year which are restricted as to transfer to the parent company because the consent of a third party (a lender, regulatory agency, foreign government, etc.) is required.

If the registrant's proportionate share of the restricted net assets of consolidated subsidiaries exceeds 25% of the registrant's consolidated net assets, then both the S-X 4-08(e)(3) footnote disclosure and the schedule information required by S-X 5-04 (or footnote disclosure required by S-X 9-06 if the registrant is a bank holding company) are required. If the registrant's proportionate share of the restricted net assets of consolidated subsidiaries is less than or equal to 25% the schedule information required by S-X 5-04 (or footnote disclosure required by S-X 9-06 if the registrant is a bank holding company) is not required, but an additional calculation must be made to determine if the S-X 4-08(e)(3) footnote disclosure is required.  If the sum of (A) the registrant's proportionate share of the restricted net assets of consolidated subsidiaries, (B) the amount of the registrant's proportionate share of restricted net assets of unconsolidated subsidiaries and (C) the registrant's equity in the undistributed earnings since the date of acquisition of the 50% or less owned persons accounted for by the equity method exceed 25% of consolidated net assets, the S-X 4-08(e)(3) footnote disclosure is required. See SAB Topic 6K.2. Also, note that SAB Topic 6K.3. clarifies that (C) in the calculation above - the registrant's equity in the undistributed earnings since the date of acquisition of 50% or less owned persons accounted for by the equity method - is the same amount required to be disclosed in financial statement footnotes pursuant to S-X 4-08(e)(2).

2810.4Parent Company Financial Information when the Registrant has a Consolidated Shareholders’ Deficit

(Last updated: 6/30/2010)

A registrant with a consolidated shareholders’ deficit is considered to have a net asset base of zero for the purpose of computing its proportionate share of the restricted net assets of consolidated subsidiaries. As a result, any restrictions placed on the net assets of subsidiaries with positive equity would result in the 25% threshold being met and a corresponding requirement to provide parent company financial information. This is viewed by the staff as consistent with the guidance in SAB Topic 6K2.b (Question 3), which states that a subsidiary with an excess of liabilities over assets has no restricted assets. Anomalous results can be discussed with CF-OCA.

2815Financial Statements of a Significant Customer

2815.1Financial statements of a significant customer, whether affiliated or unaffiliated, may be necessary to reasonably inform investors about the registrant’s financial position, results of operations and/or cash flows.  For example, historically registration statements have been filed by issuers controlled by a foreign parent who will also be the source of a substantial portion of the company’s revenues. In some circumstances, financial statements of the parent company were publicly available, but were not filed with the SEC and were not reconciled to U.S. GAAP.  Registrant should provide such financial statements reconciled to U.S. GAAP if they are necessary to reasonably inform an investor about the registrant’s financial position, results of operations and/or cash flows.

2815.2In addition, registrants should also consider whether financial or other information about the significant customer is necessary under other disclosure requirements. Generally, known trends, demands, commitments, events and uncertainties related to customers, whether affiliated or unaffiliated, that are reasonably likely to have a material effect on the registrant should be identified, quantified and analyzed by the registrant’s management in its MD&A in accordance with Item 303 of Regulation S-K. Also, SFAS 131, paragraph 39 [ASC 280-10-50-42] requires certain financial statement footnote disclosures about major customers and SOP 94-6, Disclosure of Risks and Uncertainties [ASC 275-10-50-18], requires certain financial statement footnote disclosures about current vulnerabilities due to concentrations in the volume of business transacted with a particular customer. For affiliated customers/related party transactions, SFAS 57 [ASC 850-10-50] and S-X 4-08(k) provide additional disclosure requirements.

2820Substantial Asset Concentration

Financial and other information may be necessary by analogy to SAB Topic 1I where the registrant has investment risk due to substantial asset concentration.

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