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US Securities and Exchange Commission

Financial Waiver Requests Dropped Following Rule on Business Combination Disclosure, SEC Official Says

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

During a financial reporting conference, a senior SEC official said that the commission’s 2020 rule that scaled back corporate disclosure requirements related to acquisitions and dispositions of other businesses significantly reduced the number of company requests for financial reporting waivers. But on other less common waiver requests, the staff had to slightly change the process for financial reporting waivers to make it less time-consuming for everyone involved.

Rule 3-13 of Regulation S-X permits companies to omit, add, or substitute information in their financial statements. Reg S-X lays out the form and content of the financial statements that have to be included in regulatory filings.

The SEC’s Division of Corporation Finance (CorpFin) staff gets requests from companies that are seeking financial reporting waivers. And the staff will provide its views about whether it agrees with the companies or not.

“We have seen a decline in our waiver letter process over the last two years. And I would say that this is directly related to the rulemaking that the division did, specifically CorpFin OCA related to 3-05, 3-14 and pro formas, and article 11. I mean, it really addressed our common waivers we’ve received,” CorpFin Chief Accountant Lindsay McCord said at the 40th annual SEC Financial Reporting Institute Conference hosted by the University of Southern California (USC) on June 2, 2022.

She was making a reference to a rule the SEC adopted two years ago to reduce the complexity and costs of preparing financial information related to mergers and acquisitions (M&As) in Release No. 33-10786Amendments to Financial Disclosures about Acquired and Disposed Businesses.

The rule changes, the market regulator said at the time, are intended to better help operating public companies as well as investment companies determine whether a subsidiary or an acquired or disposed business is significant.

The final release streamlines Rule 3-05 and Rule 3-14, among other rules in Reg S-X. And the changes update certain rules in the regulation which have not been comprehensively addressed since they were adopted over 30 years ago. (See Divided SEC Scales Back Disclosure Requirements for Business Combination in the May 22, 2020, edition of Accounting & Compliance Alert.)

“So, I take that as a huge success for the office and the division and for preparers to not spend the time and energy to write into all those letters,” McCord said.

Slight Change in Waiver Request Process

In the meantime, John White, a partner with Cravath, Swaine, & Moore LLP, who moderated the conference panel discussions, said there seems to have been a shift in terms of how companies should present information to the SEC staff to get a waiver. He previously served as SEC’s CorpFin director.

McCord responded yes, noting that a CorpFin colleague at an AICPA conference last year discussed best practices when trying to get waivers from the division.

“It’s mostly due to the fact that we found that the process was taking longer to go through the request because we often had to go back and ask for additional information,” she said.

For example, she said that CorpFin would set up a call with the company preparer to discuss information the staff needs or questions that need to be answered. And it would take about a week or two for the company to get the information to the staff. Then the SEC staff will take about a week to discuss internally before a conclusion can be reached. Thus, this turned into a process that dragged out for almost a month.

To try to shorten the amount of time involved, she said CorpFin staff suggested that the waiver letters have a lot of pertinent details about the transaction in question.

“What led to this transaction, for example. Was there a merger or some sort of reorganization of the business before the transaction? What is the structure of the transaction? What is being acquired? Or is it mostly intangible assets? Is there a mix of tangible and intangible? What’s the allocation of the purchase price?” McCord explained. “It’s very much focusing on all the information that might even be beyond what you would normally disclose in a filing about the transaction so we can really assess the total mix of information to make a determination in the waiver because it’s not just about the actual significance tests.”

She noted that a number of years ago, CorpFin OCA streamlined the waiver process. (See Requests for Financial Reporting Waivers Get Quick Approval in the November 22, 2017, edition of ACA.)

“But a lot of that was when we were seeing waiver letters that the rulemaking addressed; it was the low hanging fruit waiver letters as I would call them,” McCord said. “Now that everything is complex since we did so much in the rulemaking, we need the additional information. And again, the sole purpose of this is try to make it a more efficient process.”

White pointed out that 3-13 waiver notes that a company should offer up additional information to make up for information that it is seeking to omit.

“So that’s certainly worth focusing on when you are putting in a waiver request,” said White who provides companies advice on filings.

McCord agreed, saying that the staff works hard to try to come up with alternative solutions.

“It’s not uncommon for us to reach out to preparers and say, ‘we can’t just waive everything. We need something; what can you provide?’ And it’s kind of crickets on the other end,” she explained. “We push the staff to say ‘well, what is the information? Let’s talk to the filing review groups that have seen the document and what is the type of information this company generally applies or provides to their investors? What can we kind of come up with to try to solve the issue?’ Because, again, sometimes it’s the fact that they can’t even get the information.”

She said that this is often the case in the real estate industry when companies cannot access their tenants’ significant financial information.

When a company acquires a significant business, other than a real estate operation, Rule 3-05 generally requires the company to provide separate audited annual and unaudited interim pre-acquisition financial statements for that business. The number of years of financial information that must be provided depends on the relative significance of the acquisition to the company.

Similarly, Rule 3-14 addresses real estate operations, and it requires a company that has acquired a significant real estate operation to file financial statements of the acquired entity. The SEC updated the significance tests under the rules by revising the investment test and the income test.

This deals with whether an acquisition is sufficiently large to affect future financials of the combined company.


This article originally appeared in the June 13, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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