SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses

On May 3, the Securities and Exchange Commission (SEC) voted to propose amendments (the proposed amendments ) to improve the information that investors receive regarding the acquisition and disposition of businesses. The proposed amendments are intended to facilitate more timely access to capital and reduce the cost and complexity of preparing the financial disclosures.

The proposed amendments affect Rules 3-05, 3-14 and Article 11 of Reg. S-X, as well as related rules and forms. The proposed amendments to Rule 3-14, which governs the acquisitions of real estate, will be of particular interest to Nareit members operating as equity REITs. The proposed amendments would align Rule 3-14 with Rule 3-05 and clarify the application of Rule 3-14 regarding the determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule's requirements.

If you are interested in participating in a Nareit Task Force that will review the proposed amendments and evaluate whether Nareit should respond, please contact Christopher Drula ( by May 15. The proposed amendments have a 60-day comment period following its publication in the Federal Register.

In addition to the proposed changes to Rule 3-14 described above, the proposed amendments would, among other things:

  • Update the significance tests under these rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business;
  • Require the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years;
  • Permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
  • Clarify when financial statements and pro forma financial information are required;
  • Permit the use in certain circumstances of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board;
  • No longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year;
  • Amend the pro forma financial information requirements to improve the content and relevance of such information; more specifically, these improvements would include disclosure of "Transaction Accounting Adjustments," reflecting the accounting for the transaction; and "Management's Adjustments," reflecting reasonably estimable synergies and transaction effects.

The proposed amendments are the result of the SEC's ongoing initiative to update disclosure requirements, an effort that included the SEC's 2015 Request for Comment on the Effectiveness of Financial Disclosures About Entities Other Than the Registrant. In late 2015, Nareit formed a task force and submitted a responsive comment letter to the SEC on Nov. 15, 2015. In its comment, Nareit recommended that the SEC:

  • Increase and align the significance percentage thresholds utilized in S-X Rules 3-05, 3-09 and 3-14;
  • Define another measure as a performance metric for the income test (i.e., Earnings Before Income Taxes, Depreciation and Amortization (EBITDA) or Funds from Operations (FFO)) that more faithfully represents the underlying economics of acquired interests in other entities in transactions involving investment property (e.g., shopping malls, office buildings and apartments); and,
  • Establish a single-year requirement for stand-alone financial statements for acquired interests in other entities.


Christopher Drula (, Victoria Rostow ( or George Yungmann (