2015 Measuring Significance — Basics [S-X 3-05(b)(2)] (2024)


Registrants may request CF-OCA interpretation in unusual situations or relief where strict application of the rules and guidelines results in a requirement that is unreasonable under the circ*mstances.

2015.1 Registrants must measure the significance of an acquired business under S-X 3-05 and S-X 8-04 using three tests, the:

  • Asset test,
  • Investment test, and
  • Income test.

These tests are described in further detail below.

NOTE to SECTION 2015.1

In certain circ*mstances, registrants preparing an initial registration statement may consider applying SAB 80 instead of S-X 3-05 or S-X 8-04. See further discussion at Section 2070, "SAB 80: Application of S-X 3-05 in Initial Registration Statements (SAB Topic 1J)."

2015.2 Financial Statements Used to Measure Significance — Generally, compare the most recent pre-acquisition annual financial statements of the acquired business to the registrant's pre-acquisition consolidated financial statements as of the end of the most recently completed audited fiscal year required to be filed with the SEC. Financial statements of both the acquired business and the registrant used to measure significance must be prepared in accordance with the comprehensive basis of accounting described in Section 2015.3, "Comprehensive Basis of Accounting Used to Measure Significance."

If a change in the reporting entity or a reorganization will occur at or after effectiveness of an initial registration statement but no later than closing of the IPO, the staff will consider requests for relief to use the combined financial statement amounts as the denominator for purposes of significance calculations in determining other financial statement requirements for the filing (e.g., S-X 3-05 and 3-09). (Last updated: 3/31/2010)

2015.3 Comprehensive Basis of Accounting Used to Measure Significance -A registrant that files its financial statements in accordance with or is required to provide reconciliation to U.S. GAAP should determine significance using amounts for both the acquired business and the registrant determined in accordance with U.S. GAAP; that is, both the numerator and denominator of the significance test would be determined in accordance with U.S. GAAP. A foreign private issuer that files its financial statements in accordance with IFRS as issued by the IASB should determine significance using amounts for both the acquired business and the registrant determined in accordance with IFRS as issued by the IASB; that is both the numerator and denominator of the significance test would be determined in accordance with IFRS as issued by the IASB. To illustrate these requirements, if a registrant that files its financial statements in accordance with U.S. GAAP acquires, both legally and for accounting purposes, a foreign private issuer or a foreign business that files its financial statements in accordance with IFRS as issued by the IASB, significance (both the numerator and denominator) must be determined in accordance with U.S. GAAP. This is true even though the acquired business did not reconcile its financial statements to U.S. GAAP.

2015.4 Asset Test -Compare registrant's share of acquired business's total assets to the registrant's consolidated total assets. Ordinary receivables and other working capital amounts not acquired should nevertheless be included as part of the assets of the acquired enterprise in tests of significance relative to the registrant's assets because that working capital is expected to be required and funded after the acquisition.

2015.5 Investment Test - Acquisition Accounting under ASC 805 and IFRS 3 as issued by the IASB -

Compare the total GAAP purchase price of the acquired business, as adjusted below, to the registrant's consolidated total assets.

GAAP purchase price in this context means the "consideration transferred", as that term is used in the applicable accounting standard.It includes the acquisition-date fair value of all contingent consideration and excludes acquisition-related costs.

The adjustment - For purposes of the "investment" test, "consideration transferred" should be adjusted to


carrying value of assets transferred by the acquirer to the acquired business that will remain with the combined entity after the business combination.

NOTE to SECTION 2015.5

The numerator of the investment test for the purchase of an equity method investment should include transaction costs, consistent with the accounting under ASC 323-10. The numerator should also include contingent consideration (on a gross basis) if the likelihood of payment is more than remote. (Last updated: 3/31/2010)

2015.6 [Reserved]

(Last updated: 10/30/2020)

2015.7 Investment Test - Reorganization of Entities Under Common Control — Compare the net book value of the acquired business to the registrant's consolidated assets


compare the number of shares exchanged to registrant's outstanding shares at the date the combination is initiated.

2015.8 Income Test -Compare registrant's equity in the acquired business's income from continuing operations before taxes to that of the registrant.

There are three computational notes to the income test included at S-X 1-02(w). The second computational note indicates that if the registrant's income for the most recent fiscal year is 10% or more lower than the average of the registrant's income for the last five fiscal years, then the average income of the registrant should be used for this computation. This computational note also applies if the registrant reported a loss, rather than income. If the registrant reported a loss, the registrant should compare the absolute value of its reported loss to its average income for the last five fiscal years to determine if the registrant is required to use average income. In computing the registrant's average income for the last five fiscal years, loss years should be assigned a value of zero in computing the numerator for this average, but the denominator should be "5". Also, the acquiree's income may not be averaged. (Last updated: 12/31/2010)

2015.9 Significance — Absolute Values -In the case of a single acquisition, if either the registrant or the acquired business reported a pretax loss and the other entity reported pretax income, use the absolute values.

2015.10 Significance — Denominator - The acquired business is not considered part of the registrant's denominator in determining significance for purposes of S-X 3-05 [S-X 1-02(w)]

2015.11 Significance — Intercompany Transactions - When measuring significance for all three S-X 1-02(w) tests, intercompany transactions between the registrant and acquiree should be eliminated in the same way that would occur if the acquiree were consolidated. See by analogy S-X 1-02(w)(2).
(Last updated: 9/30/2009)

2015.12 Significance — "Related Businesses" -Acquisitions of "related businesses" must be treated as a single business acquisition. Businesses are related under S-X 3-05 if:

  • they are under common control or management, or
  • their acquisitions are dependent on each other or a single common event or condition.

2015.13 Significance — Rounding - Do not round the results of the significance tests.

2015 Measuring Significance — Basics [S-X 3-05(b)(2)] (2024)


What is the rule 3 05 of Regulation SX? ›

Rule 3-05 requires any registered entity that wants to acquire a business to provide audited annual financial statements and other types of financial reporting.

What is the regulation SX 5 02? ›

S-X 5-02 requires SEC reporting entities to separately present individual balance sheet amounts that exceed certain quantitative thresholds.

What is the rule 3 13 of Regulation SX? ›

Regulation S-X, Rule 3-13, gives the SEC staff the authority to permit the omission or substitution of certain financial statements otherwise required under Regulation S-X “where consistent with the protection of investors.” Further, the SEC staff has historically encouraged registrants to seek modifications to their ...

What is a significant subsidiary in Regulation SX? ›

(1) The term significant subsidiary means a subsidiary, including its subsidiaries, which meets any of the conditions in paragraph (w)(1)(i), (ii), or (iii) of this section; however if the registrant is a registered investment company or a business development company, the tested subsidiary meets any of the conditions ...

Who does Regulation S-X apply to? ›

Regulation S-X profoundly affects internal and external accountants and auditors, and directors and officers and numerous officials, employees and contractors of publicly reporting companies, and because of the need for accurate reporting of monies and other data, any operation of a company may be affected to require ...

What is the 5% balance sheet rule? ›

State separately, in the balance sheet or in a note thereto, any item in excess of 5 percent of total current liabilities. Such items may include, but are not limited to, accrued payrolls, accrued interest, taxes, indicating the current portion of deferred income taxes, and the current portion of long-term debt.

What is the purpose of Rule 2 06 of Regulation S-X? ›

Rule 2-06 requires that accountants retain certain records relevant to an audit or review of an issuer's or registered investment company's financial statements for seven years.

What is the rule 5-02.27 of Regulation S-X? ›

1 Initial Measurement. Facts: Rule 5-02.27 of Regulation S-X states that redeemable preferred stocks are not to be included in amounts reported as stockholders' equity, and that their redemption amounts are to be shown on the face of the balance sheet.

What is the rule 5-02.28 of Regulation S-X? ›

Per EITF D-98 Classification: “Rule 5-02.28 of Regulation S-X requires securities with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity.”

What is the rule 3-14 of Regulation S-X? ›

Rule 3-14 requires a registrant to calculate the significance of an acquisition using the investment test defined in Rule 1-02(w) of Regulation S-X. A group of related properties must be evaluated together as if they were a single acquisition for purposes of the investment test.

What is the rule 3 16 of Regulation S-X? ›

Rule 3-16 requires separate audited and interim financial statements for an issuer's affiliate if the securities of that affiliate are pledged as collateral for a registered offering and those securities constitute a “substantial portion” of the collateral for the securities being registered.

What is Rule 3 09 of Reg SX? ›

Under SEC Regulation S-X, Rules 3-09 and 4-08(g), registrants are required to evaluate the significance of an equity method investee in accordance with the tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test), to determine whether they must provide the investee's financial statements, ...

What is the SX rule? ›

Regulation S-X is a Securities and Exchange Commission (SEC) regulation under the Securities Act that outlines how registrants should disclose financial statements on registration statements, periodic reports, and other filings.

How to determine significant subsidiary? ›

In most cases, significance is determined using amounts that appear in the registrant's most recent annual pre-acquisition audited financial statements filed with the SEC and amounts in the financial statements of the acquired business for the same fiscal year.

What does 51% subsidiary mean? ›

A 51% subsidiary has the meaning given to that phrase by ICTA1988/S838. Broadly speaking, a company is a 51% subsidiary of another company if the other company beneficially owns, directly or indirectly, more than 50% of the first company's ordinary share capital.

What is Rule 3 10 Regulation S-X? ›

Rule 3-10 requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, but also provides several exceptions to that requirement.

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