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Perspectives

A roadmap to SEC reporting considerations for business combinations

This Roadmap is intended to help registrants navigate their SEC reporting requirements related to the acquisition or probable acquisition of a business. It combines the SEC’s guidance on reporting for business acquisitions—including acquisitions of real estate operations and pro forma financial information—with Deloitte’s interpretations (Q&As) and examples in a comprehensive, reader-friendly format.

We are pleased to present the 2020 edition of A Roadmap to SEC Reporting Considerations for Business Combinations. This Roadmap is intended to help registrants navigate their SEC reporting requirements related to the acquisition or probable acquisition of a business. It combines the SEC’s1 guidance on reporting for business acquisitions—including acquisitions of real estate operations and pro forma financial information—with Deloitte’s interpretations (Q&As) and examples in a comprehensive, reader- friendly format. Most of the updates in the 2020 edition of the Roadmap expand on or clarify existing text.

Registrants may be required under SEC rules to file the acquiree’s separate annual and interim preacquisition financial statements along with the related pro forma financial information. Disclosure of this information can be important to investors because an acquisition will generally affect a registrant’s financial condition, results of operations, liquidity, and future prospects. While registrants are also required to disclose the nature and financial impact of a business combination under the FASB’s accounting standards, the SEC’s requirements are significantly more detailed and can result in considerable financial reporting responsibilities regardless of whether a company acquires businesses frequently or only occasionally.

In May 2020, the SEC issued a final rule2 to improve the information investors receive regarding acquired or disposed businesses, reduce the complexity and costs of preparing the required disclosures, and facilitate timely access to capital. For example, the final rule modifies certain significance tests to reduce the potential for anomalous results that may have required a registrant to provide acquiree financial statements that may not be material to investors. Further, it allows registrants to (1) present fewer acquiree financial statement periods, (2) present acquiree financial statements in fewer circumstances, and (3) when certain criteria are met, use abbreviated financial statements without requesting permission from the SEC staff.

The final rule also modifies the criteria for pro forma adjustments by replacing current requirements with two categories of required adjustments that depict (1) only the accounting for the transaction (referred to as transaction accounting adjustments) and (2) the registrant as a stand-alone entity (referred to as autonomous entity adjustments). In addition, the final rule gives management the option to disclose, in the form of a reconciliation in the notes to the pro forma financial information, synergies and “dis-synergies” (referred to as management’s adjustments) if certain conditions are met. The final rule must be adopted for fiscal years beginning after December 31, 2020; however, early application is permitted. For more information about the final rule, see the Changing Lanes discussion in the Roadmap’s introduction; Appendix C, which summarizes a registrant’s disclosure requirements before and after adoption of the final rule; and Deloitte’s June 2, 2020, Heads Up. Note that the final rule’s amendments are not yet reflected in this Roadmap—stay tuned for future updates.

This Roadmap is not a substitute for the exercise of professional judgment, which is often essential to applying the financial reporting guidance for various business acquisitions and pro forma financial information. It is also not a substitute for consulting with Deloitte professionals on complex transactions and SEC reporting matters.

1 For a list of abbreviations used in this publication, see Appendix E.

2 SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses.

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The Roadmap series contains comprehensive, easy-to-understand accounting guides on selected topics of broad interest to the financial reporting community.

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