Regulation S-X: Requirements for SEC Filings

Regulation S-X is a set of rules from the U.S. Securities and Exchange Commission (SEC) that dictates the specific form and content of financial statements included in filings with the agency. Its purpose is to ensure that the financial information public companies provide to investors is consistent and transparent, helping them compare the performance of different companies.

The regulation works with Generally Accepted Accounting Principles (GAAP), which are the broad principles of accounting. While GAAP provides the standards for how to account for transactions, Regulation S-X specifies how to present the outcomes of that accounting in SEC filings. It extends beyond the basic financial statements to include all accompanying notes and supporting schedules, ensuring a comprehensive financial picture is available.

Applicability of Regulation S-X

Regulation S-X applies to companies subject to the reporting requirements of U.S. federal securities laws. This primarily includes companies whose securities are publicly traded and those in the process of registering securities for public sale. The regulation’s reach is broad, covering filings under both the Securities Act of 1933 and the Securities Exchange Act of 1934.

Any time a company is required to provide financial statements to the SEC as part of a formal filing, Regulation S-X will govern their form and content. Common filings that must comply include:

• Registration statements for initial public offerings (IPOs), such as Form S-1
• Annual reports filed on Form 10-K
• Quarterly reports on Form 10-Q
• Proxy statements used to solicit shareholder votes
• Filings related to tender offers or going-private transactions

Required Financial Statements and General Rules

Regulation S-X mandates a specific set of audited consolidated financial statements. For most filings, this includes balance sheets for the end of the two most recent fiscal years. The balance sheet provides a snapshot of the company’s assets, liabilities, and shareholders’ equity at a specific point in time.

Companies must also provide audited statements of comprehensive income and statements of cash flows for the three most recent fiscal years. The statement of comprehensive income details the company’s revenues and expenses, while the statement of cash flows tracks the movement of cash from operating, investing, and financing activities. A statement of changes in stockholders’ equity is also required for the three most recent fiscal years.

For any interim period between the last audited year-end and the most recent quarter, companies must also provide unaudited financial statements.

Regulation S-X also establishes rules that govern their presentation. Financial statements must be audited by an independent public accountant, with Rule 2-01 outlining criteria to ensure auditor independence. The regulation also specifies the content of the accountant’s report, which must state the auditor’s opinion on whether the financial statements are presented fairly in accordance with GAAP.

Special Financial Statement Requirements

Beyond the primary financial statements, Regulation S-X has rules for when financial statements of other entities must be included. This occurs when a company acquires another significant business. Rule 3-05 requires the filing company to provide separate, audited pre-acquisition financial statements for the business being acquired to show the financial condition of the entity being integrated.

The determination of whether an acquired business is “significant” is governed by tests outlined in Rule 1-02. These significance tests compare the acquired business’s assets, investments, and income to those of the filing company. The results dictate how many years of financial statements for the acquired business are required, which can be up to three years.

These special requirements are not limited to business acquisitions. Rule 3-14 sets out similar requirements for the acquisition of significant real estate operations. The rules also extend to situations involving guarantors of securities and other affiliates. If an affiliate’s securities are pledged as collateral or a subsidiary guarantees debt, separate financial statements or condensed consolidating financial information may be necessary.

Pro Forma Financial Information

Pro forma financial information is a requirement under Article 11 of Regulation S-X, designed to show the impact of a significant transaction on a company’s historical financial statements. Pro formas present a hypothetical financial picture, illustrating what the company’s financial results might have looked like if the transaction had occurred at an earlier date, such as the beginning of the most recent fiscal year.

These statements are required when a company has completed a significant business acquisition or disposition. The requirement is linked to the significance tests for acquisitions; if an acquisition is significant enough to require historical financial statements of the target, pro forma information will also be necessary.

Pro forma financial statements consist of a pro forma balance sheet and pro forma statements of income. They start with the historical financial statements of the filing company and make specific adjustments to reflect the transaction. For an acquisition, these adjustments include adding the assets and liabilities of the acquired business and reflecting the financing used for the purchase.

The adjustments made must be directly attributable to the transaction and factually supportable. For example, adjustments might include the new interest expense from debt used to fund the acquisition or the elimination of expenses from the acquired company that will not continue.

Rules for Specific Types of Filers

Regulation S-X includes provisions that allow for scaled disclosure requirements for certain categories of smaller companies. These accommodations are intended to reduce the compliance burden on these entities. Two categories of companies that benefit are “Smaller Reporting Companies” (SRCs) and “Emerging Growth Companies” (EGCs).

A Smaller Reporting Company is a company with a public float of less than $250 million, or a company with less than $100 million in annual revenues and a public float of less than $700 million. SRCs are permitted to provide fewer years of financial statements in their filings. For example, an SRC is required to provide only two years of statements of income, comprehensive income, and cash flows, compared to the three years required for larger filers.

An Emerging Growth Company is a company with total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year that has not yet reached certain milestones, such as its fifth anniversary of going public. EGCs also benefit from scaled disclosure requirements, including the option to provide only two years of audited financial statements in their IPO registration statement.