SEC requires more disclosure of acquisitions and dispositions of businesses

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The Securities and Exchange Commission voted to add amendments to its rules and forms to improve financial information about acquired or disposed businesses for investors, and decrease the complexity and costs of preparing such disclosures.

The amendments aim to help companies make more meaningful decisions about whether a subsidiary or an acquired or disposed business is truly significant. They also enhance the financial disclosure requirements about acquisitions and dispositions, including real estate operations and investment companies.

The amendments update SEC rules that haven’t been addressed since they were first adopted over 30 years ago. "This action, which is designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens, will benefit investors, registrants and the market more generally," said SEC Chairman Jay Clayton (pictured) in a statement Thursday. "I want to thank the staff for their outstanding efforts to bring their years of experience to modernizing these rules."

Among other changes, the amendments will update the significance tests in the SEC’s old rules by revising the investment test to compare the registrant’s investments in, and advances to, the acquired or disposed business against the company’s aggregate worldwide market value, if it’s available. They revise the income test by adding a revenue component. They also expand the use of pro forma financial information in measuring significance; and conforming, to the extent needed, the significance threshold and tests for disposed businesses to those used for acquired businesses.

The amendments also modify disclosures of the aggregate effect of acquisitions for which financial statements are not required, or are not yet required, by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects.

They also require the financial statements of the acquired business to cover no more than the two most recent fiscal years.

They allow disclosure of financial statements that leave out certain expenses for certain acquisitions of a component of an entity. In addition, they permit the use of, or reconciliation with, International Financial Reporting Standards as issued by the International Accounting Standards Board under certain circumstances.

They no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on their significance.

The amendments will take effect on Jan. 1, 2021, but the SEC is allowing voluntary compliance before the effective date.

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