Securities Act Release No. 6413

Exchange Act Release No. 18842

Public Utility Holding Company Act Release No. 22547

Investment Company Act Release No. 12504

June 24, 1982

RELEASE NO. 2 Instructions for the Presentation and Preparation of Pro Forma Financial Information and Requirements for Financial Statements of Businesses Acquired or to be Acquired

ACTION: Final rules.

SUMMARY: The Commission announces the adoption of uniform instructions for the presentation and preparation of pro forma financial information in Commission filings. The rules codify existing administrative practices and do not significantly modify the various situations for which pro forma financial presentations are now required or alter the specific disclosures required by existing accounting literature. However, the rules do provide for an optional presentation of a financial forecast in place of certain of the required pro forma information. In addition, the Commission announces adoption of revised requirements for filing financial statements of businesses acquired or to be acquired which provide for variable disclosure depending on the significance of the acquisition to the registrant. Finally, Form 8-K and various other Commission reporting requirements have been amended to reflect adoption of these rules.

DATE: The rules adopted herein are effective for filings with the Commission after September 30, 1982; early application of these rules in their entirety is permitted.

FOR FURTHER INFORMATION CONTACT: David F. Martin, Edmund Coulson or Eugene W. Green, Jr. (202-272-2130), Office of the Chief Accountant, or Howard P. Hodges (202-272-2553) or James N. O'Brien (202-272-2549), Division of Corporation Finance, Securities and Exchange Commission, 450 North Fifth Street, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission has adopted rules which incorporate in Regulation S-X ("S-X") [17 CFR Part 210] its administrative policies and practices applicable to the presentation and preparation of proforma financial information included in certain filings with the Commission. The rules are intended to simplify and improve the registration and reporting process by codifying current policies developed by the Commission's Division of Corporation Finance through the comment process as well as those practices generally followed by registrants when presenting proforma financial information in Commission filings. The rules do not significantly change or expand the various reporting situations for which pro forma financial information has been presented in the past, but they will generate pro forma financial information which distinguishes between the one-time impact and on-going impact of the transaction more clearly than such information has done historically. Further, as part of the Commission's effort to encourage presentation of projected financial information, the rules permit registrants to present a financial forecast in lieu of certain of the pro forma information.

In addition, the Commission has adopted rules which in certain situations significantly reduce the reporting requirements for financial statements of businesses acquired or to be acquired. The revised requirements are based on the significant subsidiary tests using a sliding scale so that the requirements for filing such financial statements as well as the periods covered by such financial statements will vary with the impact of the acquisition on the registrant.

Finally, Form 8-K has been amended to require the filing of pro forma financial information consistent with the concepts underlying the Commission's integrated disclosure system and to revise the provision relating to extension of time to file required financial statements. Several minor modifications of various Commission reporting requirements have been made to reflect adoption of these rules and to effect certain technical amendments.

BACKGROUND

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PROPOSAL AND COMMENT

In Securities Act Release No. 6350 (September 24, 1981) [46 FR 48943], the Commission invited comment on uniform instructions for the presentation and preparation of pro forma financial information in Commission filings. In addition, that release proposed to consolidate existing provisions relating to financial statements of companies acquired or to be acquired.

The Commission received 31 letters of comment on these proposals. Although substantially all of the commentators endorsed the objective of the rule proposals, various improvements were suggested and changes in the rules reflect some of these suggestions. The major comments are listed below and the Commission's responses to those suggestions are discussed in the following section.

Pro forma financial information.

1. Commentators objected to the proposal to require disclosure of nonrecurring charges and credits in a table immediately following the pro forma condensed income statement because of concern that that disclosure would infer an inappropriate degree of exactness and create an ambiguity as to whether all nonrecurring items or only those attributable to the transaction had been included in the table. Footnote disclosure of these items was suggested by some as sufficient to highlight the one-time cost or benefit of the transaction to the registrant.

2. Approximately one-third of the commentators opposed the option to present a financial forecast in lieu of a pro forma income statement because of concern that the greater number of assumptions necessary to the preparation of a forecast as compared with a pro forma income statement adversely affects the accuracy of the former and its relevance to the transaction. In addition, in the opinion of most commentators, an independent accountant's review of a financial forecast would subject registrants to increased costs without significantly enhancing the reliability of the forecast.

3. Commentator response to the invitation to comment on whether pro forma financial information should be required in reports on Form 8-K was mixed with most commentators suggesting that inclusion of pro forma financial information in Form 8-K be optional. Those that objected to a requirement primarily cited the time constraint in the filing requirement.

Financial statements of businesses acquired or to be acquired.

1. Commentators questioned the need for financial statements of acquired businesses for periods prior to their acquisition.

2. In addition, commentators urged the Commission to revise the rules for financial statements of businesses acquired or to be acquired to call for summarized or condensed financial data or no information at all under certain circumstances.

Comments applicable to both pro forma financial information and financial statements of businesses acquired or to be acquired.

1. Commentators' responses to the Commission's question relating to the need for a definition of or guidelines on the meaning of the term "business" were mixed. Some argued that a definition might restrict necessary flexibility while others requested that the Commission clarify when it believes a business is involved to facilitate registrants' understanding of when pro forma financial information and financial statements of a business acquired or to be acquired are required.

2. Various commentators objected to the proposal to require pro forma data or financial statements for planned transactions when consummation of the transaction is "probable" even though the transaction may be subject to shareholder approval.¹

DISCUSSION OF RULES

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FORM 8-K

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OTHER CHANGES

Regulation S-X

Several housekeeping changes have been made to Regulation S-X. For example, the substance of former Article 11, "Contents of Statements of Other Stockholders' Equity", which specifies reporting requirements for changes in other stockholders equity, has been moved to Rule 3-04. In addition, the Commission has deleted Article 11A, "Statement of Source and Application of Funds" because that article required disclosure substantially similar to the information required by Accounting Principles Board Opinion No. 19, "Reporting Changes in Financial Position."

Forms S-1, S-2, S-3 and S-18

Forms S-1, S-2, S-3 and S-18 have been amended to reflect the adoption of Rule 3-05 and Article 11. Additionally, several technical amendments to cross-references in Form S-18 have been made.

Form 10-K and Annual Reports to Security Holders

Form 10-K has been amended to specify that the information required by Rule 3-05 and Article 11 need not be disclosed. (This exemption was previously in Rules 3-07 and 3-08.) Annual reports to security holders continue to be exempt from these disclosures.

Technical Amendments

The Commission is also adopting technical amendments which, among other things, (1) revise Rule 3-09 of Regulation S-X to clarify that the conditions under which separate financial statements of unconsolidated subsidiaries and 50 percent or less owned persons need not be audited for prior years are to be based on 20 percent measurements and (2) conform Schedule III under Rule 7-05 of Regulation S-X with the revised requirements for condensed parent company financial information.

CODIFICATION UPDATE

The "Codification of Financial Reporting Policies" announced in Financial Reporting Release 1 (April 15, 1982) [47 FR 21028] is updated to:

1. Add a new section. Section 506, entitled as follows:

506 Pro Forma Financial Information and Financial Statements of Businesses Acquired or to be Acquired

2. Include in Section 506 the sections of this release entitled "Background, " "Discussion of Rules" and "Form 8-K" numbered as specified below:

.01 Background

.02 Discussion of Rules

a. Pro Forma Financial Information

i. Presentation Requirements

ii. Preparation Requirements

iii. Financial Forecasts

b. Financial Statements of Businesses Acquired or to be Acquired

c. Requirements Applicable to Both Pro Forma Financial Statements of Businesses Acquired or to be Acquired

i. Guidance About What is a "Business"

ii. Businesses to be Acquired and Other Transactions not yet Consummated

.03 Form 8-K

REGULATORY FLEXIBILITY ACT CERTIFICATION

Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), the Chairman of the Commission has certified that the adopted amendments will not have a significant economic impact on a substantial number of small entities. This certification, including the reasons therefore, is attached to this release.

LIST OF SUBJECTS IN 17 CFR 210. 229, 230, 231, 239, 240 AND 249: Accounting, Reporting Requirements, Securities.

TEXT OF RULES

In accordance with the foregoing, 17 CFR Chapter II is amended as follows:

PART 210 FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. By revising paragraph (v)(1) of §210.1-02 to read as follows: * * *[Text omitted]

2. By revising paragraph (a) of §210.3-02 to read as follows: * * *[Text omitted]

3. By redesignating §210.3-06 as §210.3-03.* * *[Text omitted]

4. By removing §§210.11-01 and 210.11-02 (Article 11) and combining their substance in a new §210.3-04 to read as follows: * * *[Text omitted]

5. By adding §210.3-05 to read as follows: * * *[Text omitted]

6. By deleting §§210.3-07 and 210.3-08.

7. By revising paragraph (b) of §210.3-09 to read as follows: * * *[Text omitted]

8. By revising paragraph (d) of §210.3-18 to read as follows: * * *[Text omitted]

9. By deleting paragraph 31(c) of §210.5-02.

10. By revising paragraph 26(c) of §210.6-22 to read as follows: * * *[Text omitted]

11. By revising paragraph (a) of §210.7-05 and revising Schedules III, IV and V to read as follows: * * *[Text omitted]

12. By adding new Article 11 and §§210.11-01, 210.11-02 and 210.11-03 to read as follows: * * *[Text omitted]

13. By deleting §§210.11A-01 and 210.11A-02 (Article 11A).

PART 229 STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934 REGULATION S-K

14. By revising paragraph (b)(2) of §229.303 to read as follows: * * *[Text omitted]

PART 230 GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

15. By revising paragraph (1) of the definition of significant subsidiary in §230.405 to read as follows: * * *[Text omitted]

PART 231 INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

16. By rescinding Release No. 4950 (February 20, 1969) (34 FR 4886).

PART 239 FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

17. By revising Item 11(e) of Form S-1 in §239.11 to read as follows: * * *[Text omitted]

18. By revising Items 11(a)(3) and 11(b)(2) of Form S-2 in §239.12 to read as follows: * * *[Text omitted]

19. By revising Item 11(b) of Form S-3 in §239.13 to read as follows: * * *[Text omitted]

20. By revising Form S-18 in §239.28 to read as follows: * * *[Text omitted]

PART 240 GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

21. By revising paragraph (1) of the definition of significant subsidiary in §240.12b-2 to read as follows: * * *[Text omitted]

22. By revising paragraph (b)(1) of §240.14a-3 to read as follows: * * *[Text omitted]

23. By revising Items 14(b)(5), (b)(6) and (b)(7); the instructions to Item 14(b); and Item 15(f) of §240.14a-101 to read as follows: * * *[Text omitted]

24. By revising paragraph (a)(1) of §240.14c-3 to read as follows: * * *[Text omitted]

PART 249 FORMS, SECURITIES EXCHANGE ACT OF 1934

25. By revising instructions 4 and 6 of Item 2 and paragraph (a) of Item 7 of §249.308 to read as follows: * * *[Text omitted]

26. By revising the first paragraph of Item 8 of §249.310 to read as follows: * * *[Text omitted]

The amendments are adopted pursuant to authority in Sections 7 and 19a of the Securities Act, 15 U.S.C. 77g, 77s(a), 77aa(25)(26); Sections 12, 13, 14, 15(d), and 23(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78l, 78m, 78n, 78o(d), 78w(a), Sections 5(b), 10(a), 14, 20(a), of the Public Utility Holding Company Act, 15 U.S.C. 79e(a), 79n, 79t(a); Sections 8, 20, 30, 31(c), 38(a) of the Investment Company Act of 1940, 15 U.S.C. 80a-8, 80a-20, 80-30(c), 80a-37(a).

By the Commission.

¹ The proposing release stated that such point in time is generally reached when an agreement in principal has been reached or when the board of directors has reached agreement on the transaction.