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SEC Insights - August 2011

Recent Updates to the SEC’s Financial Reporting Manual
By Jennifer Puronen, Senior Manager - Assurance Services

Recent Updates to the SEC's Financial Reporting ManualOn July 1, 2011, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued its updated Financial Reporting Manual incorporating changes through March 31, 2011.  The updates include a clarification of the Form 8-K reporting requirements for reverse recapitalizations with shell companies and a summary of the transition reports required when there are changes in fiscal year ends due to reverse acquisitions.  The updated manual also provides pro forma guidelines when combining foreign and domestic registrants and highlights Public Company Accounting Oversight Board (PCAOB) reporting requirements for newly public companies and subsidiary guarantors.

Form 8-K financial statement requirements applicable to reverse recapitalizations with shell companies

In the event of a reverse recapitalization with a shell company where the Form 8-K filing date is prior to the private operating company’s most recent annual or quarterly financial statements being filed in Form 10, the private operating company’s financial statements may not be included for that period in the Form 8-K.  The registrant would be required to file an amended Form 8-K, including the private company’s most recently completed annual or quarterly financial statements, within the required 90 or 45 days, as applicable, after the private company’s period end.  This would be subsequent to, or concurrent with, the registrant's filing of its quarterly or annual financial statements in a Form 10. 

The example given in the manual is as follows “For example, assume the shell and private operating company both have a calendar year end and the reverse recapitalization takes place on February 1, 20X2. Within four business days of the transaction, the audited financial statements of the private operating company for the year ended December 20X0 and the unaudited financial statements for the interim period ended September 30, 20X1 and comparable prior period would be filed on Form 8-K, in addition to the other information required by Items 2.01, 5.01, 5.06, and 9.01.  The registrant would file its annual report on Form 10-K for the year ended December 31, 20X1 within 90 days after December 31, 20X1. In addition, the registrant would file the same information that would be required in a Form 10-K of the private operating company in an amended Form 8-K by the same Form 10-K due date – 90 days after December 31, 20X1”.  Refer to Section 12220.1 c. of the manual.

Change in fiscal year as a result of a reverse acquisition – transition report chart updated

The chart which summarizes the transition reports which are required based on the final determination of the registrants fiscal year has been updated.  If the accounting acquirer is a public company it should continue to file all reports due for periods ending prior to the acquisition date to avoid any lapses in reporting, despite its ability to file a Form 15 to cease its reporting requirements.  In the event of a change in fiscal year end related to a reverse acquisition, the transition report chart should be carefully reviewed to ensure there is no lapse in compliance with periodic reporting requirements during the period of change.  Refer to section 12240.4 of the manual.

Pro-forma information guidelines when combining a domestic registrant and foreign private issuer with different fiscal year ends 

The age of the pro forma information in a Form 8-K or registration statement when the target company is a foreign private issuer must be determined by reference to Rule S-X 3-12 which may result in information more current than that in the separate historical financial statements of the target being included in pro forma information.  Rule S-X 3-12 notes that if the financial statements in the filing are as of a date 130 days or more (for large accelerated and accelerated filers (135 days for other registrants)) before the date the filing is expected to become effective, the financial statements shall be updated with a balance sheet as of an interim date within that timeframe (i.e. 130/135 days) with corresponding comparative statements of income for the period between the most recent fiscal year end and the date of the interim balance sheet.   The interim financial statements should be at least as recent as the most recently filed statements with the Commission on Form 10-Q. The pro forma information is not required to be audited.  [Note, however, that when the anticipated effective date of a filing is within 60 days of the end of the fiscal year for a large accelerated filer (75 days for accelerated filers and 90 days for all other registrants) the filing would have to include financial statements more current than as of the end of the third fiscal quarter if: a) audited financial statements for such fiscal year are available, or b) the effective date of the filing is 45 days subsequent to the end of the fiscal year and the registrant does not meet the conditions of Rule 3-01 (c).]

For example, assume a domestic registrant with a December 31, 20X0 year-end intends to file a registration statement on June 1, 20X1 for a business combination transaction with a foreign private issuer with a year end of November 30, 20X0.  The balance sheet for the pro forma information would be as of March 31, 20X1 for the domestic registrant and may be permitted to combine the balance sheet of February 28, 20X1 for the foreign private issuer.  The comparative pro forma statements of income would combine information for the year ended December 31 20X0 and the three months ended March 31, 20X1 of the domestic registrant with information for the year ended November 30, 20X0 and the three months ended February 28, 20X1 of the foreign private issuer. 

Although S-X Article 11 permits the ending date of the periods included for the target company to differ from those of the registrant by up to 93 days, depending on the fiscal year ends of the domestic registrant and the foreign target company, the foreign target company may be required to include a period in the pro forma information that would be more current than its separate historical financial statements.  The staff may consider combinations of periods that involve overlaps or gaps in the information of the target company of up to 93 days, provided that the resulting annual and interim periods are of the same length as required for the registrant, and there are no overlaps or gaps in the registrant’s information.  Refer to section 3330.3 of the manual.

Clarification of reporting requirement for management’s report on Internal Control Over Financial Reporting for newly public companies

A newly public company is not required to provide management’s report on internal control over financial reporting unless it was required to file an annual report for the prior fiscal year or it had filed a Form 10-K for the prior fiscal year.  However, a company that has historically reported under the Exchange Act as a voluntary filer or because of registered debt (and therefore filed annual reports prior to its IPO including management’s report on internal control over financial reporting) is required to continue to provide management’s report on internal control over financial reporting in its first annual report following the IPO.  In either case, an auditor’s attestation report on internal control over financial reporting is not required in the first annual report following an IPO.  The following statement should be included in the initially filed annual report “This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies”. Refer to section 4310.6 of the manual.

Clarification of PCAOB requirements for SEC filings including requirements for subsidiary guarantors

A chart has been included in the manual which outlines when an auditor’s report must be issued by a public accounting firm registered with the PCAOB and when the auditor’s report must refer to PCAOB standards. Financial statements of subsidiary guarantors filed under S-X 3-10 must be audited by a PCAOB registered firm using PCAOB standards.   Although relief may be granted for recently acquired subsidiary guarantors, registrants should consult with the Division of Corporation Finance, Office of the Chief Accountant before filing any such financial statements that are not audited by a PCAOB registered firm.  Refer to Sections 4110.5 and 4110.7 of the manual.

A copy of the updated Financial Reporting Manual can be obtained by visiting the Corporation Finance section of the SEC’s website at www.sec.gov

Michael Naparstek contributed to this article.

 

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