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Financial Reporting Manual

Dec. 11, 2017

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TOPIC 7 - Related Party Matters



(Last updated: 9/30/2008)

7210Reflect All Costs of Doing Business

All costs of doing business, including costs incurred by parent and others, should be reflected in historical financial statements. Allocation of common expenses may be required. A registrant is not required to impute costs, if they were not incurred by its parent or others. Footnote disclosure should include management’s assertion that the allocation method is reasonable and management’s estimate of what the expenses would have been on a stand‑alone basis, if materially different. See also Section 7400 “Components of Larger Entities” below.

7210.1Organizational and offering costs paid for by a related party should be reflected in the financial statements of the registrant where those costs will be directly or indirectly reimbursed. [SAB Topic 5D] In the absence of an obligation or intent to reimburse directly or indirectly, the staff will not insist on inclusion of these amounts in the issuer’s financial statements.

7210.2Obligations paid by parent or principal shareholder on behalf of the registrant must be reflected in the registrant’s financial statements. [SAB Topic 5T]

7220Compensation Arrangements

7220.1Contributed services

(Last updated: 3/31/2009)

  1. Financial statements might not include compensation at fair market levels where charges were not made or were relatively low, or if amounts owed for services were forgiven and accounted for as a contribution to capital. If so, the notes to the historical financial state­ments should provide quantified disclosure of the significant compensation arrangements with related parties that resulted in below-market compensation expense.
  2. If historical statements reflect compensation that will be materially different from the compensation expense expected after the offering or in the future, disclosure of the salary commitment should be made and pro forma data for the latest year and interim period may be necessary. In addition, consider whether additional disclosure is warranted in the MD&A discussion of liquidity.

7220.2Other forms of compensation provided by a related party or other holder of an economic interest in the entity to an employee for services should also be reflected in the registrant’s financial statements.


(Last updated: 9/30/2008)

7310Transfer of Nonmonetary Assets

7310.1In most circumstances, transfers of nonmonetary assets for stock or other consideration of the registrant prior to an initial public offering are recorded at predecessor cost as determined in accordance with GAAP. Where the registrant gives monetary consideration for property conveyed by promoters, the excess over predecessor cost is treated as a reduction of equity (i.e., a special distribution).

7310.2Promoters: persons founding or organizing the entity; persons who receive 10% or more of the stock of the entity in connection with its founding or organization. [S-X 1‑02(s)]

NOTE: The guidance in SAB Topic 5G is not intended to modify the requirements of SFAS 141. The combination of two or more businesses should be accounted for in accordance with SFAS 141 and its interpretations and SAB Topic 2A.8.


7320.1Receivables from affiliates which are the equivalent of unpaid subscriptions receivable or capital distributions should be reflected as a deduction from equity. [SAB Topic 4G]

7320.2Receivables from an officer or director need not be deducted from equity if the receivable was paid in cash prior to the publication of the financial statements and the payment date is stated in a note to the financial statements. [SAB Topic 4E]

7330Distributions to or from Major Shareholders Prior to Offering [SAB Topic 1B.3]

(Last updated: 3/31/2009)

7330.1Refer to Topic 3 for detailed discussion of pro forma requirements.

7330.2Distributions should be given retroactive effect in latest balance sheet or reflected in pro forma balance sheet alongside of historical balance sheet.

7330.3If the distribution is compensation for prior services or consideration for prior conveyances, only retroactive presentation would be acceptable.

7340Offering Proceeds

7340.1In addition to historical EPS, if a material portion of the proceeds of an offering will be distributed to shareholders, present pro forma EPS for the latest year and interim period reflecting dilution equivalent to the number of shares whose proceeds will be used to pay dividends.

7340.2Even if the distribution is not clearly to be paid from offering proceeds, pro forma EPS is required if the distribution exceeds current year’s earnings.


(Last updated: 9/30/2008)

7410Financial Statement Requirements

Registrants that are components of larger entities should consider SAB Topic 1B when preparing financial statements. Also, retained earnings should not be separately reported by a non‑corporate entity. The residual interest should be presented as a single component, such as “parent’s equity in division.” (Last updated: 1/12/2015)

7420Statements of Revenues and Direct Expenses

Refer to Section 2065 for a discussion of when less than full financial statements are appropriate as well as form and content requirements.

7430Pro Forma Financial Statement Requirements

Refer to Section 3290 for guidance on pro forma financial information related to acquisitions of components of larger entities.


(Last updated: 6/30/2009)

7510Stock Compensation

7510.1In evaluating whether a stock issuance is in fact a compensation arrangement or only a restructuring of non-employee ownership rights prior to an offering, the staff will evaluate the circumstances of the issuance and the extent of employee participation.

7520Valuation of Privately-Held-Company Equity Securities Issued as Compensation

7520.1In the evaluation of the assumptions used in and the results of applying an appropriate valuation methodology to estimate the fair value of the stock, the registrant should consider the proximity of the issuance to the offering, intervening events, transfer restrictions and exercise dates, and profitability and financial condition of the company at the date of the valuation. If the estimated fair value of the stock is substantially below the IPO price, the registrant should be able to reconcile the difference between them (for example, explain the events or factors that support the difference in values). The reliability of a valuation specialist’s fair value determination may be affected by the timing of the valuation (contemporaneous versus retrospective) and the objectivity of the specialist (unrelated versus related-party).

7520.2Nominal Issuances [SAB Topic 4D]

  1. Nominal issuances of shares are considered in-substance recapitalization transactions. Issuances of shares for which compensation or other expense has been appropriately recorded under ASC 718 ordinarily would not be considered nominal issuances since consideration received for issuance of shares may include goods or services. However, even if goods or services are received, it may still be necessary to compare the consideration received, as accounted for in the financial statements, to the fair value of the shares issued to determine whether the consideration is nominal. Also, issuances of shares in exchange for assets (for example, SAB 48 transactions) would not be considered nominal issuances, unless the fair value of the assets is nominal.
  2. In an IPO, and in subsequent filings, nominal issuances of common stock and potential common stock (for example, options and warrants) should be reflected in the calculation of earnings per share for periods prior to their issuance in a manner similar to a stock split or stock dividend for which retroactive treatment is required. [ASC 260-10-55-12]
  3. Nominal issuances should be limited to certain issuances to investors or promoters.

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