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Preparing to go public
statements for the recently completed
fiscal year are required.
Unaudited interim financial statements:
Article 10 of Regulation S-X provides
guidance on the form and content of
condensed interim financial statements.
Interim financial statements (also referred
to as stub-period financial statements)
must be included in the registration
statement if the period between the
date of effectiveness of the registration
statement and the date of the latest
audited balance sheet in the filing exceeds
a specified number of days. See section
titled “Age of financial statements,”
above. Interim financial statements
include a balance sheet as of the end of
the most recent interim fiscal quarter,
statements of income, comprehensive
income, stockholders’ equity and cash
flows for the period between the latest
audited balance sheet and interim
balance sheet and the corresponding
period of the preceding year. The interim
financial statements can be presented in a
condensed format but often are presented
in a noncondensed format. The interim
financial statements may be unaudited,
but the company’s underwriters might
request them to be reviewed by an
independent accountant prior to filing
as part of their requested comfort letter
procedures.
Selected financial information: Item 301
of Regulation S-K requires selected
income statement and balance sheet
data for each of the last five fiscal years
(or, if shorter, for the life of the company
and its predecessor entities) and the
most recent interim period to be included
in the registration statement together
with comparative information for the
corresponding interim period of the
prior year. The purpose of the selected
financial data is to highlight certain
significant trends in the company’s
financial condition and results of its
operations. It must include:
• net sales or operating revenues;
• income (loss) from continuing
operations;
• income (loss) from continuing
operations per common share;
• total assets;
• long-term obligations and redeemable
preferred stock; and
• cash dividends declared per common
share.
The selected financial data may
also include any additional items that
would enhance an understanding of the
company’s financial condition and trends
in its results of operations, such as cash
and cash equivalents balances, working
capital balances and summary comparative
income statements.
Financial statements of an acquired
business: If the company has made
or is proposing to make a significant
acquisition of a business, an investment
that will be accounted for under the
equity method or multiple acquisitions
of related or unrelated businesses, it
may need to include audited financial
statements of the acquired business plus
appropriate unaudited interim financial
statements to comply with Rule 3-05 of
Regulation S-X.
Whether a proposed acquisition
requires inclusion of financial statements
in a registered offering depends on the
significance of the acquisition and whether
the acquisition is probable. The SEC has
issued no formal guidance on the standard
of probability for business combinations. 1
Generally, the determination is based on
the preponderance of evidence supporting
the conclusion that an acquisition is
probable. However, the SEC views
public announcement of a business
combination as strong evidence of a
probable acquisition. The company must
assess the probability of an acquisition by
considering factors such as the following
in addition to the advice of its securities
counsel:
1
The SEC Codification of Financial Reporting
Policies, Section 506.02(c)(ii), provides the
following: “Guidance as to when consummation
of a transaction is probable cannot be given
because such a determination is dependent
upon the facts and circumstances. In essence,
however, consummation of a transaction
is considered to be probable whenever the
registrants’ financial statements alone would
not provide investors with adequate financial
information with which to make an investment
decision.”
• progress of the negotiations,
considering such factors as progress
of discussions among senior
executives, execution of confidentiality
agreements, execution of letters
of intent, conduct of due diligence
procedures, approvals of the board
of directors and/or shareholders and
submission to appropriate government
regulators for acquisition approval;
• economic and legal penalties associated
with failure to consummate, including
costs incurred to date in pursuing the
acquisition; and
• significance of required regulatory
approvals.
The independent accountant that
has audited the financial statements
prepared for purposes of complying
with Rule 3-05 need not be registered
with the PCAOB, unless the acquired
business is a public company in the
United States. The number of years of
audited financial statements required is
determined by the size of the acquisition
and its significance relative to the
company based on the following three
significance tests under Rule 1-02(w) of
Regulation S-X:
• the amount of the company’s
investment in the acquired business
compared to its total assets;
• the total assets of the acquired
business compared to the company’s
total assets; and
• the pre-tax income from continuing
operations of the acquired business
compared to the company’s pre-tax
income from continuing operations
(“pre-tax income from continuing
operations” is income before income
taxes, extraordinary items and
the cumulative effect of a change
in accounting principle exclusive
of amounts attributable to any
noncontrolling interests).
The rules should be consulted as
they contain specific instructions for
modifying the calculation under certain
circumstances.
The test generally is performed using
the company’s and the target’s most
recent audited financial statements prior
to the date of acquisition. The following
table summarizes the general rules for
NYSE IPO Guide
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