SEC Adopts Changes to Required Financial Disclosures for Acquisitions and Dispositions

Capital Markets Client Alerts

The Securities and Exchange Commission (“SEC”) has approved amendments to its rules and forms related to the disclosure of financial information regarding acquisitions and dispositions of businesses by SEC registrants. These amendments relate to (1) the definition of “significant” subsidiaries, (2) the requirements to provide financial statements for “significant” acquisitions, and (3) the formulation and usage of pro forma financial information.

The amendments will become effective on January 1, 2021, however, companies may use the new rules on a voluntary basis effective immediately as long as they adopt the amended rules in their entirety. Selective use of the new rules is not permitted.

Under SEC rules, companies that make “significant” acquisitions are required to provide separate audited annual and unaudited interim pre-acquisition financial statements of acquired businesses. The number of years of financial information required varies based on the significance of the acquisition. Companies may also be required to file unaudited pro forma financial information.

An acquisition is considered “significant” if it exceeds certain thresholds under any of three tests: the investment test, the asset test, and the income test. The amendments update this testing process by (1) modifying the investment test to compare the investment in the target against the registrant’s public aggregate worldwide market value of voting and non-voting common equity instead of its total assets as of the prior year-end; and (2) modifying the income test to add a revenue component instead of simply comparing the registrant’s net income against the target’s net income. There were no substantive changes to the asset test. The amendments also raise the applicable thresholds for a disposed business to 20% from 10% so that they are now consistent with the thresholds applicable to an acquired business.

The amendments also change the requirements for presenting pro forma financial information by replacing the existing adjustment criteria with three new adjustment categories:

  • Transaction Accounting Adjustments – reflect only the application of required accounting to the acquisition or disposition.
  • Autonomous Entity Adjustments – reflect the operations and financial position of the registrant as an autonomous entity when it was previously part of another entity.
  • Management’s Adjustments – provide companies with the flexibility to include forward-looking information that show the “synergies and dis-synergies” identified by management in determining the complete the transaction for which disclosure is required.

Overall, these amendments represent a substantial change to the SEC’s reporting and disclosure requirements with respect to business combinations and dispositions.

The full text of the SEC’s final rule can be found at

Jonathan A. Greene is a member of the Capital Markets, Banking & Financial Institutions, and Mergers & Acquisitions practice groups of Wyrick Robbins.  He regularly represents public and private companies in strategic combinations and financing transactions, with a particular emphasis on the financial services industry.  Wyrick Robbins publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.