Concept release comment s x
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The document discusses proposed changes to Regulation S-X disclosure requirements for business acquisitions and investments. It suggests replacing the current significance tests with a revenue test and fair value investment test to improve reliability. It recommends limiting the scope of Rule 3-09 disclosures to equity method investments not carried at fair value, and allowing abbreviated interim disclosures without audited financial statements for immaterial investees. Overall, the proposed changes aim to increase the quality, usefulness and reliability of disclosures while reducing compliance costs.
![CONCEPT RELEASE-BUSINESSAND FINANCIALDISCLOSUREREQUIRED BY REGULATION S-X
Request
comment
number
Personal Comments
Rule 3-05, Financial Statementsof BusinessAcquiredor to be Acquired
1 The accountingstandardsrequire disclosure toenableinvestorstounderstandthe nature andfinancial
effectof a businesscombination. Some of disclosuresrequirementsbythe accountingstandardsare the
same as those requiredbyRule 3-05 and the relatedrequirements. Others,suchaspro formafinancial
informationare similaralthoughthe proformainformationREQUIREDBY Article 11 of RegS-X ismore
detailedandrequiresthe filingof Form8-Kregistrationstatement. Reg3-05 requireshistorical financial
statementsof acquiredentityandthe accountingstandardsdonot
2 There are changesto these requirementsthe SECshouldconsiderinordertoaddqualityandutilityof this
disclosure byaverage investors. Forinstance,there are suggestionsof changingthe requirementsof Article
11 in orderfor proforma information tohelpreadersinvestorsunderstandthe targetperformance of the
combinedcompany post-merger. Inmyview,synergyisthe mostimportantinformationinvestorneedsto
evaluate the mergerbutthe challenge istominimize the gapbetweenthe targetsynergyandthe actual
synergy. The problemisthatregistranttendstooverestimate thisinformationjusttowinavote from
shareholders. The secondproblemisthe issue of asymmetricof informationputtingthe registrantina
difficultpositiontoestimate the rightvalue of the acquiree andthe difficultroadtowardthe merger. The
thirdproblem isthe difficultyof predictinganyregulatoryoutcome andexternal factors(customers,
community,union,…)
3 The lack of reliabledata(private companyandforeigncompanies)affectthe significance testitiswhyI
recommendthe SECto revise thisrule andaddthe quality,attractivenessandreliabilitytothe S-XRule 1-02
(w). Aswe knowtestswe now use can be affectedbyjusta little manipulationof impairmentvaluation
change. It is whyitmakessense toaccept revenue testandfairvalue investmenttest asnewtoolstotest
companyfor significance. Ibelieve the incomingrevenuerecognition rule will notimpactthisposition. It
doesnotmatter that companiesleadersmustworkveryhardto winon the marketshare price competition
(maximizationof shareholdervalue)forthistest. Investors mustunderstandwhythese companies did
choose or are notchoosingto ‘marry’[merge] eachotherbasedonhow othersare valuingthem.(external
valuators,customersbythe revenuesandmarketplace bymarketshare price) Investorsvotingonthis
mergerwill evaluatethisinformationbased onexternal assessments(bothare notunderpressure orhave
not incentive tolie orinflateanyvalue)
4 Pretax income testcanbe manipulatedandwillresultintoquestionable positive /negative tests. Fairvalue
investmenttestcanincrease utilityof thisinformationbecause itissimpletounderstandbyaverage
investor. Inshort,thistestisnot ‘ora-quick’testtokeep,SECmusteliminate these testswithchainsof
questionable andaggressive resultsandreplace itwiththe reliable tests.
5 SEC can improve the utilityof the proformainformationbyincreasingitsfrequency(quarterlyand
annually). SECshouldnotchange itsmethodologies,addanycomparative proformincome statementsor
modifythe requirementsthe restrictions forproformaincome adjustments. Aggregate small acquisitions
requirementsmustprovide proformainformationif theytestpositiveforsignificance inannual basis after
updatingitregularly. Whenregistrantcannotprovide aproforma disclosure becauseof lackof data or
reliable data(private and/orforeignacquire),itshouldbe requiredtoprovide abbreviatednarrative
disclosure if the auditordeterminesthisfact
6 Yes,SEC shouldmodifythe requirementtoprovide Rule 3-05financial statements byfilingproforma
informationforimpendingacquisitionsthatare individuallysignificantorinsignificantbutsignificantas
aggregate;all underSA 1933 and SEA 1934. SEC shouldallow companiestocure noncompliance withS-X3-
05 witha reductionof the ‘blackout’ periodtoa yearand provide relieffromcomplyingwithUSGAAPand](https://image.slidesharecdn.com/conceptreleasecomments-x-160722163524/85/Concept-release-comment-s-x-1-320.jpg)
Concept release comment s x
- 1. CONCEPT RELEASE-BUSINESSAND FINANCIALDISCLOSUREREQUIRED BY REGULATION S-X Request comment number Personal Comments Rule 3-05, Financial Statementsof BusinessAcquiredor to be Acquired 1 The accountingstandardsrequire disclosure toenableinvestorstounderstandthe nature andfinancial effectof a businesscombination. Some of disclosuresrequirementsbythe accountingstandardsare the same as those requiredbyRule 3-05 and the relatedrequirements. Others,suchaspro formafinancial informationare similaralthoughthe proformainformationREQUIREDBY Article 11 of RegS-X ismore detailedandrequiresthe filingof Form8-Kregistrationstatement. Reg3-05 requireshistorical financial statementsof acquiredentityandthe accountingstandardsdonot 2 There are changesto these requirementsthe SECshouldconsiderinordertoaddqualityandutilityof this disclosure byaverage investors. Forinstance,there are suggestionsof changingthe requirementsof Article 11 in orderfor proforma information tohelpreadersinvestorsunderstandthe targetperformance of the combinedcompany post-merger. Inmyview,synergyisthe mostimportantinformationinvestorneedsto evaluate the mergerbutthe challenge istominimize the gapbetweenthe targetsynergyandthe actual synergy. The problemisthatregistranttendstooverestimate thisinformationjusttowinavote from shareholders. The secondproblemisthe issue of asymmetricof informationputtingthe registrantina difficultpositiontoestimate the rightvalue of the acquiree andthe difficultroadtowardthe merger. The thirdproblem isthe difficultyof predictinganyregulatoryoutcome andexternal factors(customers, community,union,…) 3 The lack of reliabledata(private companyandforeigncompanies)affectthe significance testitiswhyI recommendthe SECto revise thisrule andaddthe quality,attractivenessandreliabilitytothe S-XRule 1-02 (w). Aswe knowtestswe now use can be affectedbyjusta little manipulationof impairmentvaluation change. It is whyitmakessense toaccept revenue testandfairvalue investmenttest asnewtoolstotest companyfor significance. Ibelieve the incomingrevenuerecognition rule will notimpactthisposition. It doesnotmatter that companiesleadersmustworkveryhardto winon the marketshare price competition (maximizationof shareholdervalue)forthistest. Investors mustunderstandwhythese companies did choose or are notchoosingto ‘marry’[merge] eachotherbasedonhow othersare valuingthem.(external valuators,customersbythe revenuesandmarketplace bymarketshare price) Investorsvotingonthis mergerwill evaluatethisinformationbased onexternal assessments(bothare notunderpressure orhave not incentive tolie orinflateanyvalue) 4 Pretax income testcanbe manipulatedandwillresultintoquestionable positive /negative tests. Fairvalue investmenttestcanincrease utilityof thisinformationbecause itissimpletounderstandbyaverage investor. Inshort,thistestisnot ‘ora-quick’testtokeep,SECmusteliminate these testswithchainsof questionable andaggressive resultsandreplace itwiththe reliable tests. 5 SEC can improve the utilityof the proformainformationbyincreasingitsfrequency(quarterlyand annually). SECshouldnotchange itsmethodologies,addanycomparative proformincome statementsor modifythe requirementsthe restrictions forproformaincome adjustments. Aggregate small acquisitions requirementsmustprovide proformainformationif theytestpositiveforsignificance inannual basis after updatingitregularly. Whenregistrantcannotprovide aproforma disclosure becauseof lackof data or reliable data(private and/orforeignacquire),itshouldbe requiredtoprovide abbreviatednarrative disclosure if the auditordeterminesthisfact 6 Yes,SEC shouldmodifythe requirementtoprovide Rule 3-05financial statements byfilingproforma informationforimpendingacquisitionsthatare individuallysignificantorinsignificantbutsignificantas aggregate;all underSA 1933 and SEA 1934. SEC shouldallow companiestocure noncompliance withS-X3- 05 witha reductionof the ‘blackout’ periodtoa yearand provide relieffromcomplyingwithUSGAAPand
- 2. US GAAS incertaincross bordertransactionswhere financialstatementsof the targetmusteitherbe preparedinaccordance withUS GAAPor reconcile underitem18of Form20-F. 7 No,I didread no complaintrelatedtothisamountof time,71 daysto file form8-K/A toinclude proforma disclosure orcomplywithRule S-X3-05 issufficienttime tocollect,assess,disclose. 8 Certainregistrationstatementsshouldcontinue torequire acceleratedandadditional disclosuresas comparedto the Form 8-K requirements 9 The proposedsignificance testswill determine the nature andextentof disclosure underRule 3-05 10 These proposedchangesinsignificance testswilladdqualityandreliabilitytothisinformation. Atthe same token,Ibelieve itwill addthe utilityof thisinformationbyaverage reasonableinvestors. These revenue testand fairvalue investmenttestare easytoassess,collectandprovide tothe investingpublic 11 The proposedchangesIdid describe ontopwill improve the readabilityof thisdisclosure andits understandingbyshareholderswhowill make aninformed decisionduringthe mergervote andapproval. 12 I recommendafull replacementof the actual testsof significance withjust2tests –revenue testandfair value investmenttestbutIdo notfavor risingany percentage threshold atthistime 13 Merger istiedto the top executive compensationpackage. Itistiedtotheirreputationandmegalomaniac goal and vision. Thatsaidexecutiveshave incentivestolie forfinancial andnon-financial incentives. Itis whyI will notrecommendthe SECto shiftcontrol fromthe prescriptive disclosurestothe principle disclosure orientedgivingtopexecutivesopportunitiestomerge justtoincrease theircompensation package or/andgoal of leadingabig company. In sum, letregistrantscomplytoprescriptiverulesaleastto empowerconsistencyamongregistrants. 14 Foreignprivate issuersmustprovide similardisclosureonForm6-K because itwill alignthe disclosure philosophy. Itwill be issue aboutdataanddata sharingbut if the acquiree isa US registrantitwill be easy. It will be some kindof reconciliationoruse of IFRSand negotiationwithlocal regulators 15 Scaleddisclosure mustapplytoEGC withabbreviateddisclosure requiringlessdata(mostlyhistorical data) 16 InvestmentcompaniesdeservedifferentRule 3-5appliedtothe size of investmentfiledonFormN2. That said,itwill make sense forthe SECto revisitinvestmentcompaniesrulesandaddrequirementof proforma schedule of investmentsafterfairvalue investment test. 17 At thistime, FASBisworkingonwhatit callsclarifyingthe definitionof business. There isanexposure draft whichisstill underre-deliberation. Thatsaid,we can not say at thistime whatwill be the final rule of the definitionof business. Inthe meantime,Ibelievewe mustkeeprelyingonthe definitionof businessunder S-XArticle 11-01 (d) Rule 3-09, Separate Financial Statementsof SubsidiariesNot Consolidatedand50 Percent or Less OwnedPersons 18 Rule S-X3-09 dictated the financial informationneededtodiscloseequitymethodinvestees. Thisrule requiressummarizedfinancial informationforannual disclosure onForm10-K or N6 and interimdisclosure on Form10-Q for the aggregate of all equitymethodinvesteesif significance tests,ruledby1-02 (w), exceeds 10%. There are costs andoperational challengestoobtainstubfinancialstatementsforonlya portionor quarterof the year. 19 SEC shouldrevise the rule andapplythe proposedS-Xrule 1-03(w) fortests. Registrantsneedreliabledata inorder to prepare a gooddisclosure tohelpinvestorsmake aninformedinvestmentandvotingdecisions. 20 Beside reliable data,the costof the disclosure anditslow utility,SECshouldlimitthe scope of s-x rule 3-09 to equitymethodinvesteesthatare notcarriedat fair value. Noauditedfinancialdisclosure shouldbe requiredfordisposedequityinvestment. Changestothe requirementsinthe yearof acquisitioncan facilitate compliance andreduce pre-filingrequestsforexemptionandwaiverstothe SECstaff. This will give more opportunitiesforregistranttoaddquality,transparencyandreliabilitytotheirdisclosure butit may notdirectlyincrease the utilityof the information byaverage reasonable investorsandsophisticated investorsmayfinditmore useful 21 Investorsmaynotneedinterimfinancial informationaboutequitymethodinvesteesunderArticle10and S-
- 3. X Rule 8-03, withoutanyadverse change since precedentyearendorquarterend 22 Summarizedfinancial informationwillbe more usefultoinvestors(mostlysophisticatedinvestors) if itis disclosedseparately forindividuallymaterial investees. SECshouldconsideraddingdisclosure of the respective ownershipinteresttothisrequirement. If thisdisclosurecancause any competitive harmtothe registrant,itwill be omittedandthe reasonof thisomission mustbe disclosed. 23 Yes,it will be appropriate forthe SECto revisitRule 3-09 andcorrect it because itisone of itssubsets 24 It islessuseful thatmeanswithalittle trustfrominvestorsbutitdoesnotmake any financial sense to spendthatmuch for an insignificantinformation. 25 Yes,significance testsif performedwell,canappropriatelydetermine the nature,timingand extentof disclosure underRule 3-09and the relatedrequirements 26 I didalreadyindicate proposedchangestoRule 1-02 (w) withjust2 tests,revenue testsandfairvalue investmenttestsforsignificance tests. The onlychallengetothisproposedtestisthe reliabilityof the data of the company 27 Withthe proposedchangestothe test,itwill addreliance andreadabilitytothe disclosure helpinginvestors to make an informedinvestmentandvotingdecisions. 28 No,SEC shouldnotshiftcontrol of the significance testtothe managementof the registrant. The first concernis a lack of consistencyandthe second isthe lack of incentive formanagementtoprovide areliable test. 29 Othersare recommendedthe use of greaterthan10% forindividual significance test,greaterthan20%for the aggregate of individuallyinsignificantequityinvesteesandgreaterthan80% for auditedfinancial statements,Iamnot sure theywill testbetter 30 I do notbelieve thatinterimdisclosure shouldbecomeoptional. The interimfinancial informationshould be basedon material adverse changessince previousyearendandquarterend. SEC mustdetermine what to omit,whenandhow 31 SRC and EGC must provide ascaleddisclosure because of lackof reliable dataandthe size of their investment 32 Investmentcompaniesshould follow adifferentstandardof S-XRule 3-09. For instance,theirtestof significance shouldbe basedonfairvalue investmenttest. Inaddition,we cancreate 2 groupsof investmentcompanies,investmentinanoperatingportfoliobusiness(withsummarizedfinancial information) andinvestmentinanentityaccountedforasan investmentcompany(withschedule of investments)