SEC proposes to overhaul disclosures on business acquisitions and dispositions

The Securities and Exchange Commission has voted to propose a set of amendments to its rules governing the kind of information provided to investors about the acquisition and disposition of businesses, saying the changes will facilitate more timely access to capital and to reduce complexity and compliance costs.

SEC building with official seal
The Securities and Exchange Commission stands in Washington, D.C., U.S., on Monday, May 10, 2010. The chief executive officers of the biggest U.S. stock markets were called to a meeting at the U.S.Securities and Exchange to discuss last week’s selloff in equities, according to four people familiar with the situation. Photographer: Joshua Roberts/Bloomberg

Among the changes, the proposal would update significance tests under the existing rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business. It would require the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years. The proposal would allow disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity; and clarify when financial statements and pro forma financial information are required.

“The proposed rules are, first and foremost, intended to ensure that investors receive the financial information necessary to understand the potential effects of significant acquisitions or dispositions,” said SEC Chairman Jay Clayton in a statement.

The proposal would also allow the use in certain circumstances of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board. It would no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year;

It would amend the pro forma financial information requirements to improve the content and relevance of the information. It would include disclosure of “Transaction Accounting Adjustments,” reflecting the accounting for the transaction; and “Management’s Adjustments,” reflecting reasonably estimable synergies and transaction effects. The proposal would also

make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X. It would also add a definition of significant subsidiary that is tailored for investment companies; and add a new Rule 6-11 and amend Form N-14 to cover financial reporting for fund acquisitions by investment companies and business development companies.

There will be a 60-day public comment period following publication of the proposal in the Federal Register.

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