Chapter 1

Knowledge check solutions

1.  
   1. Correct. The Securities Act of 1933 requires an issuer offering securities to the public in interstate commerce or through the mail, unless specifically exempted, to file a registration statement with the SEC containing financial and other information about the issuer and the offering.
   2. Incorrect. The Securities Exchange Act of 1934 requires companies to file annual and other periodic reports to keep current the information contained in the original registration filing.
   3. Incorrect. The Securities Exchange Act of 1934 is primarily concerned with the trading and ongoing reporting related to registered securities.
   4. Incorrect. The purpose of the Securities Act of 1933 is not to limit the liability of entities offering securities for sale to the public, but instead requires an issuer offering securities to the public in interstate commerce or through the mail, unless specifically exempted, to file a registration statement with the SEC containing financial and other information about the issuer and the offering.
2.  
   1. Correct. The Securities Act prohibits fraudulent practices in the sale of securities and requires the dissemination of financial and other information to prospective investors.
   2. Incorrect. Registration under the 1934 Act is required for companies that become subject to the reporting requirements of the SEC other than by an initial sale of securities to the public.
   3. Incorrect. The Private Securities Litigation Reform Act governs private lawsuits filed under the federal securities laws and prevents abusive practices by class action lawsuit plaintiffs.
   4. Incorrect. The Securities Act, not the FAST Act, prohibits fraudulent practices in the sale of securities and requires the dissemination of financial and other information to prospective investors.
3.  
   1. Correct. Under Section 406 of the Public Company Accounting Reform Act of 2002, the SEC is required to issue rules requiring public companies to disclose whether or not, and if not, why not, the company has adopted a code of ethics for its senior financial officers.
   2. Incorrect. Under the Public Company Accounting Reform Act of 2002, public accounting firms that audit public companies must register with the PCAOB, not the securities exchanges.
   3. Incorrect. The Public Company Accounting Reform Act of 2002 requires that a company’s audit committee to the board of directors be responsible for appointing, compensating, and evaluating the performance of independent auditors.
   4. Incorrect. Private companies are not required to register with the PCAOB. Under Section 406 of the Public Company Accounting Reform Act of 2002, the SEC is required to issue rules requiring public companies to disclose whether or not, and if not, why not, the company has adopted a code of ethics for its senior financial officers.
4.  
   1. Correct. The JOBS Act created a new category of filers called emerging growth companies, which are entitled to certain reporting relief.
   2. Incorrect. The Dodd‐Frank Act immediately instituted credit rating agency consent requirements by repealing Securities Act Rule 436(g).
   3. Incorrect. The Dodd‐Frank Act requires the SEC to adopt pay‐for‐performance and pay ratio disclosures.
   4. Incorrect. The JOBS Act does not require participation in crowdfunding. The JOBS Act created a new category of filers called emerging growth companies, which are entitled to certain reporting relief.
5.  
   1. Correct. Section 13 of the Exchange Act requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file periodic reports with the SEC.
   2. Incorrect. The Accounting Reform Act of 2002 requires public accounting firms that audit public companies to register with the PCAOB.
   3. Incorrect. The AICPA is an organization of the public accounting profession, and issuers are not required to register with the AICPA.
   4. Incorrect. IFAC is an international accounting organization.
6.  
   1. Incorrect. The Office of Administrative Law Judges hears cases presented by the Division of Enforcement and other divisions.
   2. Correct. The Office of the Chief Accountant has the final authority, subject to appeal to the SEC, on accounting issues in registrant filings and may be consulted directly on significant or controversial accounting issues.
   3. Incorrect. Such an office does not exist at the SEC. Instead, there is an Office of Investor Education and Assistance, which serves individual investors, not auditors, and management teams of registrants.
   4. Incorrect. The Division of Trading and Markets regulates securities exchanges, national securities associations, and broker‐dealers. It administers the statistical functions.
7.  
   1. Incorrect. The Division of Enforcement supervises enforcement activities under the statutes administered by the SEC.
   2. Correct. The Division of Corporation Finance’s principal responsibility is to ensure that financial information included in SEC filings is in compliance with the rules and regulations of the SEC.
   3. Incorrect. The Division of Risk, Strategy and Financial Innovation assists the SEC with long‐term strategic analysis and identifying trends and innovations in financial markets.
   4. Incorrect. The Division of Investment Management administered the Investment Company Act of 1940, and the Investment Advisers Act of 1940. It investigates and inspects broker‐dealers and deals with problems of the distribution methods, services, and reporting standards of investment firms.
8.  
   1. Incorrect. Regulation S‐X governs financial statement presentation and disclosure requirements.
   2. Incorrect. Regulation S‐K governs the nonfinancial information in filings with the SEC.
   3. Correct. Regulation S‐T governs the preparation and submission of electronic filings using the SEC’s Electronic Data Gathering and Retrieval (EDGAR) system.
   4. Incorrect. Regulation S‐Z does not exist.
9.  
   1. Correct. The PCAOB adopted existing AICPA auditing, attestation, quality control, ethics, and independence standards as interim professional auditing standards, which apply until the PCAOB revises the interim standards or issues new standards on the related topic.
   2. Incorrect. The SEC continues to recognize FASB pronouncements as being generally accepted for purposes of filings with the SEC.
   3. Incorrect. The SEC accepts financial statements in accordance with IFRS as issued by the IASB if an entity qualifies as a foreign private issuer. However, the SEC does not have oversight of the IASB.
   4. Incorrect. The PCAOB did not adopt nonattest standards from the AICPA. It adopted the existing AICPA auditing, attestation, quality control, ethics, and independence standards as interim professional auditing standards, which will apply until the PCAOB revises the interim standards or issues new standards on the related topic.
10.  
    1. Incorrect. Section 8 of the Exchange Act provides for audit requirements with respect to the financial statements of an issuer.
    2. Correct. Under Section 18 of the Exchange Act, a person who makes false and misleading statements in documents filed under the act is liable to any person who, relying on such statements, purchased or sold a security to his detriment.
    3. Incorrect. Section 903 is a section of SOX that extends potential jail sentences for mail and wire fraud to 20 years.
    4. Incorrect. Section 104 relates to the Accounting Reform Act requiring the PCAOB to conduct annual inspections of registered public accounting firms that regularly provide audit reports for more than 100 issuers, and to conduct triennial inspections for all other registered firms.
11.  
    1. Incorrect. The AICPA and peer review process covers audits under GAAS (those audits not covered by PCAOB standards).
    2. Correct. The PCAOB conducts annual inspections of registered public accounting firms that provide audit reports for more than 100 issuers and conducts triennial inspections for all other registered firms.
    3. Incorrect. The CAQ guides and supports the public company auditing profession.
    4. Incorrect. The IASB is the designated accounting standard‐setter for IFRS.
12.  
    1. Incorrect. Section 402 of the Accounting Reform Act of 2002 makes it illegal for companies to extend credit to its directors and executive officers.
    2. Correct. The Foreign Corrupt Practices Act deals with (1) payments to foreign officials and (2) internal accounting control.
    3. Incorrect. The Foreign Corrupt Practices Act makes it illegal to offer anything of value to any major foreign official, foreign political party, and so on, in order to influence the enactment of a law or public policy decision or to obtain a government contract. Payments to minor employees of foreign governments whose duties are ministerial or clerical in nature are allowed as long as they are not falsely concealed on the corporate books and records.
    4. Incorrect. The Foreign Corrupts Practices Act does not require that an entity adopt a system of internal control in accordance with COSO. It deals with (1) payments to foreign officials, and (2) internal accounting control.
13.  
    1. Incorrect. Although the 2013 framework broadens the application of internal control by organizations in addressing reporting as well as operational and compliance objectives, it does not provide a robust disclosure framework for issuers’ periodic reports filed with the SEC.
    2. Incorrect. The 2013 framework was not issued by the PCAOB, nor does it communicate the PCAOB’s desire for all issuers to obtain an audit of internal controls over financial reporting.
    3. Correct. The 2013 framework clarifies the requirements for determining what constitutes effective internal control over financial reporting.
    4. Incorrect. The 2013 framework did not supersede Enterprise Risk Management– Integrated Framework.

Chapter 2

Review question solutions

1.  
   1. d.
   2. c.
   3. b.
   4. a.
2. In a final prospectus filed with the SEC under Rule 424(b), generally within two business days of the determination of that price.
3. For established companies, usually one day. For relatively unknown or for early‐stage companies, sometimes as long as nine months.
4. Examples include the following:

   Amazon.com, Inc.

   Apple Inc.

   eBay, Inc.

   Google

   Intel Corporation

   Microsoft Corporation

Knowledge check solutions

1.  
   1. Correct. A privately held company may first offer its securities to the public through an IPO.
   2. Incorrect. A primary offering refers to offerings of additional securities by publicly held companies.
   3. Incorrect. A secondary offering refers to the sale of additional securities by selling stockholders of previously issued but unregistered securities by publicly held companies.
   4. Incorrect. A reverse merger refers to the issuance of stock by an existing public company (generally a public shell company) to acquire a private operating company. The former stockholders of the private operating company own a controlling interest in the public company after the transaction.
2.  
   1. Incorrect. The filing of annual reports, quarterly reports, and other reports with the SEC represents a considerable burden in terms of time and effort and also makes available to the public information that company management might prefer to be kept private.
   2. Correct. Going public increases an owner’s liquidity (subject to the SEC’s limitations on insider sales).
   3. Incorrect. The filing requirements of a public company make information available to the public, including competitors, which company management may prefer to be kept private.
   4. Incorrect. The Sarbanes‐Oxley Act established increased corporate governance and disclosure requirements and severe penalties for companies and their directors and officers for noncompliance with the securities laws. An owner of a company that goes public usually continues as an officer or member of the board of directors of the company after it goes public and is exposed to increased responsibility and scrutiny (and corresponding liability).
3.  
   1. Correct. The underwriting agreement includes all matters relevant to the issue of the securities and sets forth the responsibilities of each party.
   2. Incorrect. The comfort letter, prepared by the company’s auditors, gives the underwriters assurance with respect to the financial data contained in the registration statement that are not covered by the accountant’s report.
   3. Incorrect. The registration statement includes up to three years of audited financial statements of the company. The financial statements reflect the historical operations and financial position of the company.
   4. Incorrect. The registration statement is a disclosure document filed with the SEC, which contains required information about the securities being offered and the issuing company’s business and management.
4.  
   1. Incorrect. In an all‐or‐none arrangement, if the underwriters do not completely sell all shares, the shares are canceled and the funds returned to subscribers.
   2. Incorrect. In a best efforts offering, the underwriters agree to use their “best efforts” to sell the securities of the company. As a result, part of the issue may not be sold.
   3. Incorrect. In a minimum or maximum offering, if a minimum number of shares is not sold before the offering period expires, the offering is canceled and funds are returned to the potential investors.
   4. Correct. In a firm commitment, the underwriter agrees to buy the entire block of securities and resells it to the public at the underwriters’ own risk. If the underwriters cannot sell part of the securities, they must hold the remaining shares for their own account.
5.  
   1. Incorrect. Form S‐4 is the form to be used for securities to be issued in certain business combinations.
   2. Incorrect. Form S‐11 is the form to be used by a real estate company to register securities.
   3. Correct. Form S‐1 is used to register securities when no other form is specifically prescribed.
   4. Incorrect. Form F‐1 may be used by a foreign private issuer.
6.  
   1. Incorrect. Rule 134 allows the publication of a statement to generate interest for the offering after the filing of the registration statement. This statement may include strictly defined limited information.
   2. Incorrect. A “tombstone” ad is an ad to sell securities. Rule 134 strictly regulates its display and contents.
   3. Correct. A “red herring” is a preliminary prospectus. The term arises because the legend identifying the prospectus as preliminary was originally required to be printed in red ink on the cover.
   4. Incorrect. A summary prospectus is a shortened version of a prospectus usually published in a newspaper, magazine, or other publication.

Chapter 3

Review question solutions

Discussion topics

1. Smaller reporting companies can elect to comply with all, some, or none of the scaled financial and nonfinancial disclosures in Regulations S‐K and S‐X on a quarterly basis in their periodic reports and registration statements. The nonfinancial disclosure rules for smaller reporting companies are contained within Regulation S‐K; a chart in Regulation S‐K Item 10(f) outlines the S‐K Items that have scaled disclosure options for smaller reporting companies. The scaled financial statement disclosures available to smaller reporting companies are found in Regulation S‐X Article 8.

   To the extent that the smaller reporting company scaled item requirement is more rigorous than the same larger company item requirement, smaller reporting companies must comply with the smaller reporting company item requirement. Currently, Item 404 of Regulation S‐K (transactions with related persons) presents the only instance where the scaled requirements could be more rigorous than the larger company standard.

   In determining how much disclosure to provide, companies should consider the following:

   • The benefit to investors of providing full S‐K and S‐X disclosure may outweigh the cost savings of providing scaled disclosure.
   • If, in subsequent years, a company no longer qualifies as a smaller reporting company, it will have to provide the full disclosures, including prior year comparisons. For this reason, the data needed to comply with the full disclosure rules should continue to be collected and kept on file.
   • Because the rules do not permit “cherry‐picking” (that is, providing more disclosure only in periods when expanded disclosure is favorable), companies need to consider whether foregoing a particular disclosure in one year will raise questions if the disclosure is then provided in a subsequent year.
2. As reflected in SEC comment letters, registrant restatements, and enforcement actions, revenue recognition has consistently been a focus of the SEC staff. The staff’s rules and views on revenue recognition are included in Regulations S‐X and S‐K, the codification of Financial Reporting Releases, and Staff Accounting Bulletins. The SEC has consistently encouraged registrants to provide clear and robust disclosures that provide investors with an understanding of the type, nature, and terms of significant revenue transactions and how the accounting literature is applied to those transactions. The following is an overview of some of the more significant SEC rules, regulations, and staff guidance related to revenue recognition:

   Rule 5‐03 of Regulation S‐X requires registrants to state separately on the face of its income statement (a) net sales of tangible products, (b) operating revenues of public utilities, (c) income from rentals, (d) revenues from services, and (e) other revenues. Revenues of any class that are less than 10% of total revenue may be combined with other classes. Cost of sales should be separated in a similar manner.

   SAB No. 13, Revenue Recognition, does not amend any of the existing issued accounting guidance but instead provides the staff’s interpretations on the application of those revenue recognition rules, including the general premise that revenue should not be recognized until realized or realizable and earned. The SAB requires that registrants disclose its revenue recognition policy, noting that if a registrant has different policies for different types of revenue transactions, the policy for each material type of transaction should be disclosed. The staff expects registrants to discuss the significant provisions of revenue transactions such as discounts, return policies, continuing obligations, and warranties and how they affect revenue recognition. In its 2003 Fortune 500 report, in which the staff reviewed all of the annual reports filed by Fortune 500 companies, the SEC noted that revenue recognition policy disclosure was an area in which improvement was needed. The report noted trends in certain industries in which revenue recognition policies were not adequate explained, such as the following:

   • Software. Expanded disclosures for software and multiple element arrangements.
   • Capital goods. Improved disclosures for deferred revenue, return and price protection features, requirements for installation of equipment.
   • Energy. Improved disclosures for material terms of contracts.
   • Retail. Improved disclosures for product returns, discounts, and rebates.

   Item 303 of Regulation S‐K provides the requirements for management’s discussion and analysis (MD&A), which includes the discussion on the liquidity, capital resources, results of operations, and other information necessary to understand the registrant’s financial condition, change in financial condition, and results of operations. The evaluation of the companies’ operations and changes in revenues is critical to this analysis. Financial Reporting Release 36 (FRR 36) provides further insight into the staff’s expectations of MD&A, noting that the content should “give investors an opportunity to look at the registrant through the eyes of management by providing a historical and prospective analysis of the registrant’s financial condition and results of operations with a particular emphasis on the registrant’s prospects for the future.” Management should not simply recite the information provided on the financial statements, but should provide meaningful analysis of why the results of operations changed and expected future trends.

   Examples of revenue recognition disclosures based on the principles of FRR 36 include the following:

   • Shipments of product at the end of a reporting period that significantly decrease customer backlog and that reasonably might be expected to result in lower shipments and revenue in the next period
   • Granting of extended payment terms that will result in a longer collection period for accounts receivable and slower cash flows from operations
   • Changing trends in shipments into, and sales from, a sales channel or separate class of customer that could be expected to have a significant effect on future sales
   • An increasing trend toward sales to a different class of customer that might lower gross profit margin
   • Seasonal trends or variations in sales
3. Accounting and Auditing Enforcement Releases (AAER) provide background on enforcement actions brought by the SEC and illustrate the variety of activities that constitute financial fraud. Very often, revenue recognition manipulation is at the center of fraud. Regulation S‐X is a uniform set of financial statement disclosure requirements that govern the form and content of the financial statements included in SEC filings, including what financial statements must be presented and for what periods. Regulation S‐X, in general, is consistent with GAAP but does contain certain incremental disclosures items that are not required by GAAP. Examples of disclosures that are incremental to GAAP include disclosures related to income taxes, restriction of dividend payments, inventories, and conditionally redeemable preferred stock. The provisions of Regulation S‐X, although prescriptive, are intended to be applied based on the facts and circumstances of the registrant, including consideration of materiality. Regulation S‐X is organized in 12 articles and rules, including Article 8 for smaller reporting companies.

   Regulation S‐K contains the disclosure requirements for the textual or nonfinancial statement information included in SEC filings. Items such as the description of business, management’s discussion and analysis of financial condition, and results of operations and market risk disclosures are governed by Regulation S‐K. Regulation S‐K also includes the SEC’s policy on projections, rules on incorporation by reference, and use of non‐GAAP financial measures in SEC filings. Regulation S‐K is organized with subparts and items. In cases where smaller reporting companies are not required to provide disclosures required of larger companies (for example, the disclosure required under Item 305 on quantitative and qualitative disclosures on market risk) a paragraph in the relevant item of Regulation S‐K has been included indicating that smaller reporting companies are not required to respond to the Item.

4. Under GAAP, instruments that have redemption features must be considered under the guidance of FASB ASC 480‐10. FASB ASC 480‐10 requires that freestanding instruments be accounted for as liabilities if they meet any of the following conditions: (a) mandatorily redeemable, (b) obligate the issuer to buy back some of its shares in exchange for cash or other assets, or (c) obligations that must or may be settled with a variable number of shares the monetary value of which is based solely or predominantly on a fixed monetary amount or a variable such as a market index or a variable inversely related to the value of the issuer’s shares. The SEC’s rules for redeemable securities were written before FASB ASC 480‐10, but if FASB ASC 480‐10 requires the redeemable security to be classified as a liability, that guidance takes precedence over the SEC’s guidance for presentation and disclosure.

   For SEC registrants, instruments that fall outside the scope of FASB ASC 480‐10 must be assessed to determine whether they should be classified as permanent or temporary equity. Rule 5‐02.28 of Regulation S‐X defines redeemable preferred stock as any class of stock that the issuer undertakes to redeem at a fixed or determinable price on a fixed or determinable date or dates, (b) is redeemable at the option of the holder, or (c) has conditions for redemption that are not solely within the control of the issuer, such as provisions for redemption out of future earnings (the SEC staff believes that all of the events that could trigger redemption should be evaluated separately and that the possibility that any triggering event that is not solely within the control of the issuer could occur — without regard to probability — would fall into the category of redeemable preferred). Redeemable preferred stock or another type of stock with the same characteristics may be not included under the general heading of “stockholders’ equity” or combined with other stockholders’ equity captions, such as additional paid‐in capital and retained earnings.

   The rule also requires registrants to provide a general description of each issue of redeemable preferred stock, including its redemption terms, the combined aggregate amounts of expected redemption requirements each year for the next five years, changes in each issue for each period for which an income statement is required, and other significant features similar to those for long‐term debt.

   The following flowchart illustrates the decision process:

   

   Financial statement requirements

5. No. Because the registration statement is to be filed before 90 days after its year‐end, the company must look to the criteria in Regulation S‐X Rule 3‐01(c) to determine whether it can include its third quarter 20XC interim financials instead of its 20XD audited financial statements in the filing. Although Company A meets the first and third tests of Rule 3‐01(c), it does not meet the second (“For the most recent fiscal year for which audited financial statements are not yet available the registrant reasonably and in good faith expects to report income after taxes but before extraordinary items and the cumulative effect of accounting changes.”). Had Company A met all of the criteria in S‐X Rule 3‐10(c), it could have filed its registration statement until March 31, 20XE, using audited financial statements for 20XA, 20XB, and 20XC, and unaudited financial statements for the nine months ended September 30, 20XC and 20XD.
6. No, the answer would not be the same. If Company A was a large accelerated filer and reasonably and in good faith expected to report income before extraordinary items and the cumulative effect of accounting changes in 20XD, it may file its registration statement within 60 days after its December 31, 20XD, year‐end (that is, until March 1, 20XE), using audited financial statements for 20XA, 20XB, and 20XC, and unaudited financial statements for the nine months ended September 30, 20XC and 20XD.
7. Regulation S‐X Rule 3‐12 covers the age of financial statements presented at the effective date of a registration statement.
8. Regulation S‐X Article 12 governs the form and content of financial statement schedules.
9. For annual filings, Regulation S‐X Rule 3‐01 requires audited balance sheets to be provided as of the end of each of the two most recent fiscal years. Rule 3‐02 requires audited statements of income (and comprehensive income) and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet to be provided. Under Rule 3‐04, an analysis of the changes in stockholders’ equity must be presented for each period for which an income statement is required to be filed.

   If the issuer is a smaller reporting company, the smaller reporting company rules apply and the number of years required is reduced for audited statements of income (and comprehensive income) and cash flows to two years. Under Rule 3‐04, an analysis of the changes in stockholders’ equity must be presented for each period for which an income statement is required to be filed, and therefore this requirement is also for two years.

   For quarterly periodic reports, Regulation S‐X Rule 10‐01 requires an interim balance sheet as of the end of the most recent fiscal quarter and a balance sheet as of the end of the preceding fiscal year to be provided. In addition, interim statements of income for the most recent fiscal quarter for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding periods of the preceding fiscal year must be provided. Interim statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding period of the preceding fiscal year must also be included. All such financial statements may be unaudited.

   Financial statement disclosures

10. Presentation of separate audited financial statements for the investee is required under Rule 3‐09 of Regulation S‐X. Summarized financial statement information that would normally be required under Rule 4‐08(g) is not required if separate financial statements are provided and they cover the same periods as those for which summarized financial information would be provided. If other equity investees exist (for which separate financial statements were not provided), summarized financial information for all equity investees in the aggregate generally would be required.

Case study solutions—Rule 3‐05, Financial Statement Requirements

Case 3‐1

It would be unusual for a company to sign a letter of intent to make a significant acquisition without first getting approval from the board of directors to proceed with the transaction and without the expectation that the acquisition would be completed. Although the specific facts and circumstances would need to be considered, the acquisition would usually be considered probable.

Case 3‐2

Registrant must provide three years of audited Company T financial statements at the time the registration statement is filed (that is, registrant cannot wait until 75 days after the acquisition was completed, as is permitted when filing acquiree financial statements with the Form 8‐K to report the acquisition) because the significance of Company T exceeds 50% (Rule 3‐05(b)(4)(i)).

In contrast to a Form 8‐K filing, a registration statement involves a transactional filing. In a transactional filing, the age of a target’s financial statements must comply with Rule 3‐01 of Regulation S‐X. The determination of whether a target’s financial statements must be updated on the 46th or the 90th day (75th day if accelerated or 60th day if large accelerated filer) after year‐ end is based on whether the registrant (not the target) meets the conditions in Rule 3‐01(c). If the registrant meets the conditions in Rule 3‐01(c), then financial statements of the same age as what would be required in the Form 8‐K to report the acquisition (December 31, 2016, 2015, and 2014 audited and September 30, 2017, and 2016 unaudited) would be required. If the registrant does not meet the conditions in Rule 3‐01(c) (or it meets those conditions but it amends the registration statement or the registration statement is to be declared effective on or after the 90th day [or 75th or 60th day for accelerated and large accelerated filer, respectively] after December 31, 2017), then the registrant would have to include audited December 31, 2017, Company T financial statements in the registration statement.

Case 3‐3

In general, target financial statements must be updated in a transactional filing if they are over 134 days old at the filing or effective date. The SEC staff permits gaps in reporting, as long as they are less than a complete quarter. If the registrant filed a Form 8‐K at the time of the acquisition that included Company T financial statements for the year ended December 31, 2016 (audited), and the 9 months ended September 30, 2017, and 2016 (unaudited), then the gap in reporting (from September 30, 2017, to the February 22, 2018, acquisition date) would exceed one quarter. Therefore, updating of the Company T financial statements would be required. Further, because the registration statement is being filed more than 45/90 (45/75 for accelerated or 45/60 for large accelerated filer) days after Company T’s year‐end, audited December 31, 2017, Company T financial statements are required.

This example illustrates that financial statements that are sufficient for a current Form 8‐K filing may not be sufficient for a subsequent transactional filing. Therefore, when a company acquires a business shortly after the acquired business’ year‐end and the company plans to file a registration statement in the future, it is often desirable to audit the most recent year for purposes of the Form 8‐K filing (even though not required) to avoid the need to do another audit later.

Case 3‐4

Rule 3‐06 permits a registrant to substitute audited financial statements for 9 months for financial statements for one 12‐month period. Because the significance exceeds 50%, 33 months of audited Company T financial statements must be provided (assuming a 9‐month period is substituted for one of the 3 required 12‐month periods). Although not specified in the rules, in practice the SEC staff accepts that a registrant is in substantial compliance with Rule 3‐05 if (1) the combined pre‐ and post‐acquisition audited periods presented equal the number of months of audited operating results required by Rule 3‐05, and (2) the period audited is continuous (that is, there must be no break in the audit coverage). Therefore, in this fact pattern, Company R could either (1) provide Company T audited financial statements for the years ended December 31, 2014, December 31, 2013, and December 31, 2012, and unaudited financial statements for the three months ended March 31, 2015 and 2014, or (2) provide Company T audited financial statements for the period from January 1, 2015 (or April 1, 2015), to May 15, 2015, and use this period plus the 31½ months of post‐acquisition audit coverage to meet the 33‐month audit requirement.

Knowledge check solutions

1.  
   1. Correct. After reviewing the general instructions of the form, the specific Regulation S‐K disclosure requirements applicable to the form should be reviewed.
   2. Incorrect. The instructions refer to the specific Regulations S‐K and S‐X items that are required for the form and will indicate which items can be incorporated by reference from the annual report to shareholders.
   3. Incorrect. A “no action” request is usually made by a registrant with respect to a proposal made by an eligible shareholder under Regulation 14a‐8, Shareholder Proposals. A “no action” letter granted by the SEC allows the SEC registrant to exclude the shareholder’s proposal from its proxy statement.
   4. Incorrect. Although SEC filing fees are required for some SEC filings, the fees are generally based on the aggregate offering amount and would not be the most logical next step after reviewing the form instructions.
2.  
   1. Incorrect. Regulation S‐T governs the electronic filing or submission of documents with the SEC.
   2. Incorrect. Regulation S‐K contains the disclosure requirements for the “textual” (nonfinancial statements) information in filings with the SEC.
   3. Correct. Regulation S‐X sets forth the form and content of and requirements for financial statements for SEC filings.
   4. Incorrect. Regulation FD requires that when an issuer discloses material nonpublic information to certain individuals or entities, the issuer must make public disclosure of that information.
3.  
   1. Incorrect. Article 7 contains financial statement and schedule instructions for insurance companies.
   2. Incorrect. Article 6 contains financial statement and schedule instructions for registered investment companies.
   3. Incorrect. Article 4 of Regulation S‐X outlines the rules regarding general notes to the financial statements.
   4. Correct. Article 5 contains instructions for commercial and industrial companies on the content and disclosure for the balance sheet and income statement as well as the requirements for financial statement schedules.
4.  
   1. Incorrect. Rule 2‐01 of Regulation S‐X contains rules related to the qualifications of accountants.
   2. Incorrect. Rule 2‐03 of Regulation S‐X provides the requirements on examination of financial statements by foreign government auditors.
   3. Correct. Rule 2‐02 of Regulation S‐X contains rules on the form and content of accountants’ reports that are to be included in SEC filings.
   4. Incorrect. Rule 2‐04 of Regulation S‐X provides the requirements on examination of financial statements of persons other than the registrant.
5.  
   1. Incorrect. When the other accountant plays a significant role in the audit, the other accountant should be registered with the PCAOB and conduct the audit in accordance with the PCAOB’s auditing standards; however, if the principal auditor does not refer to the other accountant in its report on the consolidated financial statements, a separate report of the other accountant is not required to be included in a filing with the SEC in accordance with Regulation S‐X Rule 2‐05.
   2. Correct. Regulation S‐X Rule 2‐05 requires that the other accountant’s report be included in the SEC filing when it is referred to in the principal accountant’s report.
   3. Incorrect. If the other accountant’s report is not referred to in the principal accountant’s report, it does not have to be included in the filing.
   4. Incorrect. If part of the examination of the financial statements is made by an independent accountant other than the principal accountant and the principal accountant elects to place reliance on the work of the other accountant and makes reference to that effect in his or her report, the separate report of the other accountant shall be filed (Regulation S‐X Rule 2‐05).
6.  
   1. Incorrect. The SEC generally will not accept audit opinions that are qualified for audit scope.
   2. Incorrect. Because GAAP requires assets to be stated not in excess of their net recoverable amount, such an explanatory paragraph would indicate a scope limitation. The SEC generally will not accept opinions that are qualified for scope or fairness of presentation, and would consider the filing incomplete.
   3. Incorrect. The SEC generally will not accept opinions that are qualified for fairness of presentation and would consider the filing incomplete.
   4. Correct. The SEC will accept a standard “going concern” explanatory paragraph if prepared in conformity with AS 2415, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.
7.  
   1. Incorrect. Regulation S‐X Rule 4‐01 sets forth the rules for the general form and content of the financial statements.
   2. Correct. The additional requirements are set forth in Regulation S‐X Rules 4‐08(a) through (n). If the amounts involved are not material, disclosures may be omitted.
   3. Incorrect. Regulation S‐X Rule 3‐09 requires that registrants present separate financial statements for 50%‐or‐less owned equity method investees that are significant.
   4. Incorrect. Regulation S‐X Rule 3‐11 contains the financial statement requirements of inactive registrants.
8.  
   1. Incorrect. Regulation S‐X Rule 4‐08(g) requires summarized financial statement footnote information for equity method investees when any one of the significant subsidiary tests of Rule 1‐02(w) is met on an individual or aggregate basis for any fiscal year presented by the registrant.
   2. Correct. Summarized financial statement footnote information as to assets, liabilities, and results of operations for all of the registrant’s equity method investees (except those for that separate financial statements are provided pursuant to Rule 3‐09 of Regulation S‐X) is required when any one of the significant subsidiary tests of Rule 1‐02(w) is met on an individual or aggregate basis for all fiscal years presented by the registrant.
   3. Incorrect. Summarized financial statement footnote information is required when any one of the significant subsidiary tests of Rule 1‐02(w) is met on an individual or aggregate basis for any fiscal year presented by the registrant for all fiscal years presented by the registrant.
   4. Incorrect. Summarized financial statement footnote information for all of the registrant’s equity method investees (except those for which separate financial statements are provided pursuant to Rule 3‐09 of Regulation S‐X) is required when any one of the significant subsidiary tests of Rule 1‐02(w) is met on an individual or aggregate basis for all fiscal years presented by the registrant, and not for the investee that meets the significance threshold only.
9.  
   1. Incorrect. Rule 3‐10 of Regulation S‐X generally requires a guarantor of a registered security to file full financial statements or modified financial information, depending on the circumstances. Summarized financial information is not an alternative.
   2. Correct. If the conditions described in the question are met, Rule 3‐10 permits the parent company to include in its periodic reports a footnote to its financial statements that provides condensed consolidating financial information for the parent company, guarantor subsidiary, and all other subsidiaries combined.
   3. Incorrect. If the guarantor is 100% owned by the parent and the guarantee is full and unconditional, the parent company (registrant) is allowed to file in a footnote disclosure condensed consolidating financial information for the parent, subsidiary guarantor, and all other subsidiaries in accordance with Rule 3‐10. Separate financial statements of the guarantor subsidiary would be required only if they were not wholly owned and did not meet the “full and unconditional” criteria.
   4. Incorrect. Rule 3‐10 of Regulation S‐X generally requires a guarantor of a registered security to file full financial statements or modified financial information, depending on the circumstances. Summarized financial information is not an alternative.
10.  
    1. Correct. Schedule II must be filed in support of valuation and qualifying accounts included in each balance sheet, but not included in Schedule VI.
    2. Incorrect. Certain real estate companies file schedule IV in support of investments in mortgage loans on real estate.
    3. Incorrect. Condensed financial information of the registrant is filed on Schedule I.
    4. Incorrect. The Summary Compensation table is required by Item 402(c) of Regulation S‐ K and may be included under Item 11 of Part III of Form 10‐K or incorporated by reference from the definitive proxy or information statement (if filed no later than 120 days after the end of the fiscal year covered by Form 10‐K).
11.  
    1. Correct. Item 303 of Regulation S‐K sets forth the requirements for MD&A.
    2. Incorrect. Regulation S‐X sets forth the form and content of and requirements for financial statements for SEC filings.
    3. Incorrect. Regulation S‐B, which contained the financial and nonfinancial rules for small business issuers, was phased out and eliminated effective March 15, 2009. The rules for the new category of smaller reporting companies are now included within Regulations S‐K and S‐X.
    4. Incorrect. Regulation M‐A contains the disclosure requirements for merger and acquisition transactions and other extraordinary transactions.
12.  
    1. Incorrect. Regulation S‐X schedules are required in Form 10‐K.
    2. Correct. Although schedules are not required to be presented in Form S‐3, they are part of filings on that form because that form requires the Form 10‐K to be incorporated by reference.
    3. Incorrect. Regulation S‐X schedules are required in Form S‐4.
    4. Incorrect. Regulation S‐X schedules are required in Form S‐1.
13.  
    1. Correct. FRRs, or Financial Reporting Releases, are published to communicate significant amendments to Regulations S‐X and S‐K. They frequently provide guidelines and interpretations on the rules and related amendments.
    2. Incorrect. AAERs, or Accounting and Auditing Enforcement Releases, are issued to communicate enforcement actions brought by the SEC against companies and people who have violated the securities laws.
    3. Incorrect. SLBs, or Staff Legal Bulletins, reflect the views of the staff on SEC legal issues.
    4. Incorrect. SABs, or Staff Accounting Bulletins, reflect the SEC staff’s views on matters related to accounting and disclosure practices.
14.  
    1. Incorrect. The SEC staff’s views related to accounting and disclosure regarding discontinued operations are expressed in SAB Topic 5‐Z.
    2. Incorrect. The SEC staff’s views regarding disclosure of potential impact of accounting standards that have been issued but not yet adopted are expressed in SAB Topic 11M.
    3. Incorrect. The SEC staff’s views regarding accounting for revenue recognition are expressed in SAB Topic 13.
    4. Correct. SAB Topic 5DD expresses the SEC staff’s view that expected cash flows related to servicing a loan commitment should be included in the measurement of all written loan commitments that are accounted for at fair value.
15.  
    1. Correct. The staff believes that registrants should use a combination of two approaches, the “rollover” approach and the “iron curtain” approach for quantifying misstatements to evaluate materiality. The SEC refers to this combined approach as the “dual approach.”
    2. Incorrect. The rollover approach focuses only on the income statement and quantifies an error as the amount by which the current year income statement is misstated. The staff believes that in addition to this approach, registrants also need to apply the “iron curtain” method in evaluating misstatements for materiality, which focuses on the magnitude of the misstatement to the current balance sheet.
    3. Incorrect. The iron curtain approach focuses on the magnitude of the misstatement in the current balance sheet. The staff believes that in addition to this approach, registrants also need to apply the “rollover” approach in evaluating misstatements for materiality, which focuses on the magnitude of misstatement to the income statement.
    4. Incorrect. The staff believes that registrants should use a combination of two approaches, the “rollover” approach and the “iron curtain” approach for quantifying misstatements to evaluate materiality. The SEC refers to this combined approach as the “dual approach.”

Chapter 4

Review question solutions

1. It is to minimize duplication of effort by facilitating the incorporation by reference of certain information from the annual report to shareholders and the proxy statement for the election of directors.
2. Five years, as called for by Item 6, under Part II of Form 10‐K, concerning selected financial data. See Regulation S‐K, Item 301. (Certain schedules may require longer than five years, but they are not required for most companies.)
3. D. All of the above. The general instructions to Form 10‐K permit the information required by Part I and II of 10‐K to be incorporated from the annual report to shareholders. Information required by Part III, such as Item 11. Executive compensation usually may be incorporated by reference from the registrant’s proxy statement so long as it is filed within 120 days of the fiscal year‐end.
4. Generally, a major customer is one that represents 10% or more of revenues. The name of a major customer must be disclosed if the loss of the customer would have a material adverse effect on the registrant.
5. A company must reissue a 302 certification if the amended filing contains financial statements.
6. D. Cash dividends declared per share. Item 301 of Regulation S‐K requires registrants to include the following:
   • Net sales or revenues
   • Income (loss) from continuing operations and related earnings per share
   • Total assets
   • Long‐term obligations
   • Cash dividends declared per share

   Item 301 permits registrants to include other items that they believe would enhance an understanding of and would highlight other trends in their financial condition and results of operations.

7. No, they may not. The SEC believes accountants have an obligation to withhold their report on the financial statements if a significant amount of nonpublic information is missing, and we have already determined that the loss of more than 10% of sales is deemed significant.
8. Audited balance sheets as of the end of the most recent two fiscal years (20XC and 20XB), and audited statements of income, stockholders’ equity, and cash flows for the most recent three fiscal years (20XC, XB, and XA).
9. It means management’s search for an auditor willing to support an accounting treatment intended to accomplish a registrant’s reporting objectives, even though that treatment might conflict with reliable reporting.
10. For the principal executive officer, the principal financial officer, and the three other most highly compensated executive officers, total compensation must be disclosed in the Summary Compensation Table. The disclosures cover salary, bonus, stock options, restricted stock, pension benefits, deferred compensation, and all other compensation including perks. Grants of plan‐based awards are disclosed in the Grants of Plan‐Based Awards Table. Compensation policy and decisions are covered in the new principles‐based analysis: Compensation Disclosure and analysis. Details of the named executive officer compensation are included in the Outstanding Equity Awards at Fiscal Year‐End Table, Option Exercises and Stock Vested Table, Pension Benefits Table, Nonqualified Deferred Compensation Table, and narrative on potential payments upon termination or change in control.
11. Item 401 of Regulation S‐X requires identification of certain significant employees if such individuals make or are expected to make significant contributions to the company’s business. Such individuals could include research scientists. Therefore, the professor should probably be included in Item 10, “Directors and Executive Officers of the Registrant.”
12. The critical accounting policy disclosure should communicate uncertainties and how they might affect the financial statements. The discussion should provide insight into how the estimate was arrived at, including the assumptions that factored into the initial estimate, and how susceptible the estimate is to variability. It should include a discussion of how assumptions changed from the prior period, the reason for the change and resulting impact on the estimate, and factors that could cause the estimate to change in the future, including the potential magnitude of future changes.
13. The SEC staff advised that the registrant should disclose the following in MD&A for a reporting unit with a material amount of goodwill that is at risk of failing step 1 of the impairment test in FASB ASC 350‐20‐35:
    • The percentage by which fair value exceeded the carrying amount
    • The amount of goodwill allocated to the reporting unit
    • Key assumptions that drive fair value (for example, cost of capital)
    • Any uncertainty or potential events that could have a negative effect should also be disclosed

    Due to the interplay between assumptions, the SEC staff now believes that a sensitivity analysis focused on the impact of a change in only one assumption does not provide the most meaningful information.

    If an issuer does not have any reporting units that are at risk of future material goodwill impairment, the staff recommends that it disclose that fact in MD&A.

Knowledge check solutions

1.  
   1. Correct. A large accelerated filer must have a public float of $700 million or more as of the end of its second fiscal quarter and meet the other tests included in the definition of accelerated filer.
   2. Incorrect. The public debt test is one of the tests for determining whether or not an issuer is a well‐known seasoned issuer (WKSI).
   3. Incorrect. The float is measured at the end of its most recently completed second fiscal quarter.
   4. Incorrect. The $1 billion float is not part of the measurement to determine large accelerated filer status.
2.  
   1. Correct. Large accelerated filers must file their Form 10‐Ks within 60 days.
   2. Incorrect. The SEC eliminated the final 60‐day phase‐in date for regular accelerated filers.
   3. Incorrect. Non‐accelerated filers have 90 days.
   4. Incorrect. 60 days is the deadline for large accelerated filers.
3.  
   1. Incorrect. The public float test performed within 60 days of the determination date applies to the determination of an issuer’s status as a WKSI.
   2. Correct. The test for determining accelerated filer and large accelerated filer status is performed at year‐end using an issuer’s public float as of the end of its second fiscal quarter.
   3. Incorrect. The public float test is measured at the most recently completed second fiscal quarter.
   4. Incorrect. The determination of accelerated filer status for the annual report to be filed is done at the end of the issuer’s fiscal year with the public float test measured as of the end of the second fiscal quarter.
4.  
   1. Correct. A large accelerated filer may begin filing as accelerated filer beginning with the annual report due in the same year in which the issuer’s public float dropped below $500 million as of the end of its second fiscal quarter.
   2. Incorrect. A drop in public float to below $50 million allows an issuer to move to non‐accelerated filer status.
   3. Incorrect. The public float measurement is performed as of the issuer’s second fiscal quarter.
   4. Incorrect. The determination is made at the end of a fiscal year that the issuer’s public float was less than $500 million as of the last business day of the its most recently completed second fiscal quarter.
5.  
   1. Correct. Each nonfinancial disclosure item is located in Regulation S‐K, and the scaled disclosure, if available, is noted in the S‐K item.
   2. Incorrect. Regulation S‐M does not exist. Regulation S‐K includes the scaled disclosure requirements for smaller reporting companies.
   3. Incorrect. Regulation S‐B no longer exists. The smaller reporting company nonfinancial disclosure requirements are included in Regulation S‐K.
   4. Incorrect. Regulation S‐X covers the form and content of and requirements for financial statements.
6.  
   1. Correct. If consolidated revenue does not exceed $50 million in any of the years, the materiality factor is 15% instead of 10%.
   2. Incorrect. Liquidity and capital resource disclosures are required under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation.
   3. Incorrect. The materiality threshold increases to 15% when revenues are below $50 million.
   4. Incorrect. Market for common equity is disclosed in Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
7.  
   1. Incorrect. The Securities Offering Reform rules were adopted by the SEC and do not contain any provisions related to disclosure of tax shelter penalties.
   2. Correct. In Rev. Proc. 2005‐51, the IRS requires public companies to disclose in Form 10‐K any requirement to pay a monetary penalty for the failure to include on any tax return any information required to be disclosed with respect to certain “reportable” transactions.
   3. Incorrect. FASB ASC 740, Income Taxes, is a GAAP accounting standard. The Item 3 disclosures are required by the IRS.
   4. Incorrect. Regulation S‐X covers the form and content of and requirements for financial statements.
8.  
   1. Correct. The liquidity section of MD&A should include an analysis of material increases and decreases in working capital items to explain whether changes are due to growth or contraction, or changes in turnover.
   2. Incorrect. The results of operations section of MD&A generally includes a discussion of the reasons for material year‐to‐year changes in the amount of income statement line items or the historical relationship between income statement line items.
   3. Incorrect. Contractual obligations are typically disclosures about long‐term obligations.
   4. Incorrect. Critical accounting policies disclosures should communicate uncertainties and how they might affect the financial statements, not just repeat the accounting policies footnotes. The discussion should be about those estimates that are most critical and known uncertainties that are reasonably likely to materially affect future operating results.
9.  
   1. Correct. Item 7a of Form 10‐K (Quantitative and Qualitative Disclosures about Market Risk) requires a company to furnish the information required by Item 305 of Regulation S‐K, which includes the market risks for financial instruments entered into for trading purposes and for purposes other than trading.
   2. Incorrect. These disclosures are required by Regulation S‐K Item 503 and would generally be provided in a registration statement under “Risk Factors.”
   3. Incorrect. Registrants are encouraged, not required, to provide market risk disclosures regarding market risk sensitive instruments and transactions other than those specifically required by Item 305.
   4. Incorrect. Item 305 disclosures are not required in the financial statements. Also, the safe harbor from liability in private lawsuits for certain forward‐looking statements does not apply to financial statements, so there is a disincentive for including the Item 305 disclosures in the financial statements.
10.  
    1. Incorrect. Item 15 of Form 10‐K requires exhibits and financial statement schedules.
    2. Correct. Item 8 of Form 10‐K requires financial statements and the supplementary financial data required by Item 302 of Regulation S‐K.
    3. Incorrect. Item 10 of Form 10‐K requires information about directors, executives, and corporate governance.
    4. Incorrect. Item 9B of Form 10‐K requires information to be disclosed in a report on Form 8‐K during the fourth quarter of the year covered by the Form 10‐K, but not reported.
11.  
    1. Correct. The disclosures required by Item 9 (Changes in and Disagreements with Accountants on Accounting and Financial Disclosure) would alert the SEC to possible opinion shopping by a company.
    2. Incorrect. Item 11 of Form 10‐K requires disclosures about executive compensation.
    3. Incorrect. Item 8 of Form 10‐K concerns financial statement requirements and the supplementary quarterly data required by Item 302 of Regulation S‐K.
    4. Incorrect. Item 14 of Form 10‐K requires disclosures about principal accountant fees and services.
12.  
    1. Correct. All accelerated and large accelerated filers, regardless of whether they are domestic or foreign issuers, are required to have an auditor attestation of their ICFR.
    2. Incorrect. Accelerated filers were first subject to the internal control reporting requirements of Section 404 for fiscal years ending or after November 15, 2004. Non‐accelerated filers are permanently exempted from the auditor attestation on ICFR by the Dodd‐Frank Act and SEC rules.
    3. Incorrect. All public companies have been required to have management report on ICFR since fiscal years ending on or after December 15, 2007.
    4. Incorrect. Regardless of whether it is a domestic or foreign private issuer, a filer that qualifies for non‐accelerated filing status does not need to obtain an auditor attestation on its ICFR at the end of every fiscal year based on the permanent exemption provided by the Dodd‐Frank Act and SEC rules.
13.  
    1. Incorrect. The financial expert need not be a CPA.
    2. Incorrect. The financial expert does not have to register with the PCAOB.
    3. Incorrect. The years of experience the financial expert has is not required.
    4. Correct. The requirement to disclose information regarding the financial expert and the person’s independence was a result of rulemaking mandated by the Sarbanes‐Oxley Act.
14.  
    1. Incorrect. Honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships, is included in the definition.
    2. Correct. The definition includes compliance with applicable governmental laws, rules and regulations — not GAAP.
    3. Incorrect. The definition includes full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by the registrant.
    4. Incorrect. The definition includes the prompt internal reporting to an appropriate person or persons identified in the code of violations of the code.
15.  
    1. Incorrect. Financial information systems and design implementation fees are not required
    2. Correct. Item 14 of Form 10‐K requires disclosure of fees billed to the company by its principal accountant broken out into the categories described here for the two most recent fiscal years.
    3. Incorrect. Tax fees are required to be disclosed, in addition to audit fees, audit‐related fees, and all other fees. Consulting services cannot be provided to SEC audit clients under Rule 2‐01(c)(4) of Regulation S‐X and, consequently, consulting fees are not required.
    4. Incorrect. Audit‐related fees are required to be disclosed, in addition to audit fees, tax fees, and all other services fees.
16.  
    1. Correct. Rules 14a‐3 and 14c‐3 require disclosure in the described proxy solicitation of the dividend policy, performance group, and market prices (per S‐K Item 201).
    2. Incorrect. Item 301 of Regulation S‐K requires five years of selected financial data.
    3. Incorrect. Item 301 of Regulation S‐K requires five years of selected financial data, and this data is not required for smaller reporting companies.
    4. Incorrect. Selected quarterly financial data for the last five years is not a required disclosure.
17.  
    1. Correct. Form 12b‐25 must be filed with the SEC no later than one day after the due date for the Form 10‐K (or other periodic report) in order to receive an extension on the due date. Form 10‐K must then be filed no later than the 15th day following the original due date of the report.
    2. Incorrect. Form 15 is filed when a company, upon meeting certain conditions, wishes to suspend its reporting requirements under the 1934 Act.
    3. Incorrect. Registrants are required to file a complete Form 10‐K.
    4. Incorrect. There is no Form 10‐K/L.

Chapter 5

Review question solutions

1. b. To be eligible as a WKSI, an issuer must have either (1) a worldwide market value of outstanding voting and non‐voting common equity held by non‐affiliates of $700 million or more or (2) during the past three years, issued at least $1 billion in aggregate principal amount of non‐equity, non‐convertible securities in primary offerings for cash. Another requirement is that the issuer must be eligible to register a primary offering of its securities on Form S‐3 or Form F‐3.
2. The public equity float test for WKSI eligibility determination is made within 60 days of the issuer’s eligibility determination date. The eligibility determination date is the later of the time of filing of the issuer’s most recent shelf registration statement or the time of its most recent Section 10(a)(3) amendment (requiring updates to a prospectus that is used more than nine months after the effective date of the registration statement).

Knowledge check solutions

1.  
   1. Incorrect. S‐1 is the general form to be used when no other form is specifically prescribed. This form is generally used for a domestic company’s initial public offering, including an IPO for a smaller reporting company and an emerging growth company.
   2. Incorrect. S‐3 is generally used by companies that have been reporting to the SEC for 12 or more months and have filed on a timely basis all reports required to be filed during the 12 calendar months preceding the filing.
   3. Incorrect. S‐4 is generally used for securities to be issued in certain business combinations that involve a public offering.
   4. Correct. 10‐K is the annual report required to be filed by companies whose securities are registered with the SEC.
2.  
   1. Incorrect. Information regarding use of proceeds from a securities offering should include disclosure of use of estimated proceeds for each purpose in order of priority.
   2. Correct. In addition, other required disclosures include descriptions of businesses or assets to be acquired, terms of debt to be reduced, and the amount and sources of further funds (if any) needed for each specified purpose.
   3. Incorrect. It would include information about other sources of funds that will be required for each purpose.
   4. Incorrect. It would include the terms of any indebtedness that will be repaid. If the indebtedness was incurred within one year, issuers should provide a description of the use of proceeds of the debt.
3.  
   1. Correct. The net tangible book value per share before and after the distribution is among the information required to be disclosed.
   2. Incorrect. Ratio of earnings to fixed charges is required when a company is registering debt or preference equity securities.
   3. Incorrect. The net tangible book value per share is required both before and after the distribution.
   4. Incorrect. The information regarding dilution does not require a capitalization table.
4.  
   1. Incorrect. This criterion applies to an issuer’s status as an accelerated filer.
   2. Correct. The criteria for WKSI includes having a worldwide public equity float of $700 million or more or having issued during the past three years at least $1 billion aggregate principal amount of non‐equity, non‐convertible securities in primary offerings for cash.
   3. Incorrect. The criteria for WKSI includes having a worldwide public equity float of $700 million or more or having issued during the past three years at least $1 billion aggregate principal amount of non‐equity, non‐convertible securities in primary offerings for cash.
   4. Incorrect. The public float requirement is $700 million met within 60 days of the determination date.
5.  
   1. Incorrect. The public float test for WKSI status is made within 60 days of the issuer’s eligibility determination date.
   2. Incorrect. If the WKSI does not meet the public float requirement, it can achieve WKSI status by having issued at least $1 billion aggregate principal amount of non‐equity, non‐ convertible securities in primary offerings for cash over the last three years.
   3. Incorrect. The WKSI criteria regarding Form S‐3 or Form F‐3 eligibility determination, other than determination of public float, is made at the time of filing of the issuer’s most recent shelf registration statement.
   4. Correct. The public float test for WKSI status is made within 60 days of the issuer’s eligibility determination date (that is, the date Form S‐3 or F‐3 eligibility is determined).
6.  
   1. Incorrect. Public notices permitted in accordance with Rule 134 are commonly known as “tombstone” ads.
   2. Correct. Rule 405 defines a free writing prospectus as any written communication that constitutes an offer to sell or buy securities relating to a registered offering that is used after the registration statement is filed (or, in the case of a well‐known seasoned issuer, whether or not such registration statement is filed) and is made by means other than a statutory prospectus.
   3. Incorrect. A free writing prospectus is any written communication that represents an offer to buy or sell securities relating to a registered offering that is used after the registration statement is filed and is made by means other than a statutory prospectus. In the case of WKSIs, it can be used regardless of whether a registration statement is filed.
   4. Incorrect. Free writing prospectuses are available to WKSIs even before a registration statement is filed and is available to all other issuers only after a statutory prospectus is on file with the SEC.
7.  
   1. Incorrect. The free writing prospectus must contain a prescribed legend, but disclaimers of responsibility or liability that are impermissible in a statutory prospectus are impermissible in the free writing prospectus.
   2. Correct. The prescribed legend must be included.
   3. Incorrect. Disclaimers of responsibility or liability that are impermissible in a statutory prospectus are impermissible in the free writing prospectus.
   4. Incorrect. Inclusion of information in a free writing prospectus that conflicts with information in the registration statement would be considered a prohibited offer.
8.  
   1. Correct. For well‐known seasoned issuers, a more flexible version of shelf registration, referred to as automatic shelf registration, has been established.
   2. Incorrect. The more flexible version of a shelf registration for WKSIs is an automatic shelf registration, not a pay‐as‐you‐go registration.
   3. Incorrect. The more flexible version of a shelf registration for WKSIs is an automatic shelf registration, not a well‐known seasoned registration.
   4. Incorrect. Immediate takedowns of securities covered by shelf registration statements are permitted, eliminating the so‐called 48‐hour waiting period for using a shelf registration statement once it becomes effective.
9.  
   1. Correct. Prior to the Securities Offering Reform rules, Form S‐1 did not provide for any incorporation by reference. The rules permit issuers to incorporate previously filed Exchange Act reports by reference into Form S‐1, so long as the reports are available on the issuers’ websites and the prospectus identifies all reports and materials incorporated by reference.
   2. Incorrect. Form S‐3 allowed incorporation by reference before the Securities Offering Reform.
   3. Incorrect. Form S‐8 allowed incorporation by reference before the Securities Offering Reform.
   4. Incorrect. Form S‐4 allowed incorporation by reference before the Securities Offering Reform.
10.  
    1. Correct. New Rule 430B provides that for Section 11 liability purposes of the issuer and any person that is at that date an underwriter, information omitted from a base prospectus and provided at a later date creates a new effective date for the registration statement.
    2. Incorrect. The Section 11 liability that applies to a prospectus supplement for issuers and underwriters does not extend to officers, directors, or experts, such as independent auditors.
    3. Incorrect. The Section 11 liability does not extend to independent auditors.
    4. Incorrect. The Section 11 liability extends to underwriters and not the experts.
11.  
    1. Incorrect. In 2007, the SEC adopted amendments to Form S‐3 and F‐3 to allow smaller reporting companies to use these forms to register primary offerings for securities if they have a class of common equity securities listed and registered on a national securities exchange such as NYSE or NASDAQ and eliminated the $75 million public float requirement.
    2. Incorrect. As part of the Smaller Reporting Company Regulatory Relief Act, the $75 million public float requirement no longer exists.
    3. Incorrect. As part of the Smaller Reporting Company Regulatory Relief Act, the $75 million public float requirement no longer exists.
    4. Correct. In 2007, the SEC adopted amendments to Form S‐3 and F‐3 to allow smaller reporting companies to use these forms to register primary offerings for securities if they have a class of common equity securities listed and registered on a national securities exchange such as NYSE or NASDAQ. To be eligible to use these forms, a registrant must meet the periodic reporting requirements under the Securities Exchange Act of 1934 and must have timely filed all required periodic reports for a period of at least one year immediately preceding the filing of the registration statement. The $75 million public float requirement was eliminated.

Chapter 6

Review question solutions

1. Form 10‐K requires an audit by accountants; Form 10‐Q requires only a review.
2. Earnings and dividends per share of common stock, the basis of the computation, and the number of shares used in the computation for all periods presented. Also, a reconciliation of basic‐to‐diluted earnings per share, as required under FASB ASC 260, Earnings per Share, must be included in a note.
3. b. For all accelerated filers, including large accelerated filers, the third quarter report must be filed by November 9, 20X8 (40 days after the issuer’s third quarter‐end).
4. Yes. The tests to determine an issuer’s filing category are made at year‐end based in part on information as of the issuer’s most recent second fiscal quarter. Thus, the first report an accelerated issuer files under a new filing category is always an annual report. In this example, if in 20X8 the issuer’s public equity float drops below $500 million on the last day of its second fiscal quarter, the issuer is still required to file its Form 10‐Qs for the quarters ending June 30 and September 30, 20X8, on an accelerated filer basis within 40 days of quarter‐end, but may file its Form 10‐K for the year ending December 31, 20X8 within 75 days of year‐end rather than the large accelerated filer 60 days.
5. The company remains an accelerated filer for purposes of its second and third quarter Form 10‐Qs because its public float has not dropped below $50 million. For reporting purposes, however, the company is a smaller reporting company and has the option of following the scaled disclosure rules. Filing status and reporting status are independent of each other, and a company can be both an accelerated filer and a smaller reporting company.
6. PCAOB Auditing Standard (AS) 3315, Reporting on Condensed Financial Statements and Selected Financial Data, and AS 4105, Reviews on Interim Financial Statements, cover condensed financial statements derived from audited financial statements and the requirements for reviews of interim financial statements.

Case study solutions

1. Disclosures regarding going concern issues are very facts‐ and circumstances‐oriented and require substantial judgment on the part of management in determining when and what to disclose. In XYZ Company’s case, even though management concluded that it did not need to make going concern disclosures in its year‐end reporting, it should consider such disclosures for its interim reporting. Management needs to revisit going concern issues on a continual basis, especially if there have been negative trends over the past several quarters or there are other indications that the company is struggling financially or may be in the near future.

   There are many factors besides operating results that indicate there could be substantial doubt about a company’s ability to continue as a going concern. AS 2415, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, lists the following factors to consider:

   • Negative trends. For example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and adverse key financial ratios.
   • Other indications of possible financial difficulties. For example, default on loan or similar agreements, arrearages of dividends, denial of usual trade credit from suppliers, restructuring of debt, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets.
   • Internal matters. For example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long‐term commitments, or need to significantly revise operations.
   • External matters that have occurred. For example, legal proceedings, legislation, or similar matters that might jeopardize an entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; or uninsured or underinsured catastrophe such as a drought, earthquake, or flood.

   Given XYZ’s negative earnings and liquidity trends that began in 20X7, additional disclosures are warranted in both the first and second quarter 10‐Q filings. Management should consider whether, based on its current financial condition, appropriate disclosures regarding operating performance and liquidity issues have been made in both the notes to the financial statements, as well as within MD&A. Expanded disclosures to consider could include

   • forward‐looking disclosure regarding future operating results;
   • the potential impact to the company as a result of having a downgrade in the company’s credit rating;
   • subsequent events that may affect the company’s future operating performance, liquidity, and capital resources;
   • early warning disclosures about the possibility of a future impairment, with a discussion of the conditions that would lead to such an impairment;
   • sources and availability of financing for current and long‐term liquidity needs; and
   • the current and future impact on the company of a lack of previously available funding sources.

   In addition, the company may need to provide an explanation of differences between perceived expectations about the company’s financial results and its actual results — such as why there is no goodwill impairment, no other‐than‐temporary impairment, or no valuation allowance despite the negative trends described in MD&A.

   Current going concern guidance requires an evaluation of an entity’s ability to continue as a going concern for a “reasonable period of time,” not to exceed one year beyond the date of the financial statements.¹ If, as of the end of the first or second quarter, management has identified conditions or events that, in the aggregate, indicate there could be substantial doubt about the company’s ability to continue as a going concern, disclosures should be made in MD&A and the financial statements similar to what would be made in an annual filing, including

   • the conditions and events giving rise to the assessment of substantial doubt about the company’s ability to continue as a going concern;
   • the possible effects of those conditions and events;
   • management’s plans to mitigate the effect of uncertainties and whether those plans alleviate the substantial doubt about its ability to continue as a going concern; and
   • information about the recoverability or reclassification of recorded assets amounts or the amounts or classification of liabilities.
2. Errors in financial statements filed with the SEC must be evaluated under Staff Accounting Bulletin (SAB) No. 108. SAB No. 108 requires the use of a “dual approach.” Under the dual approach, errors must be quantified and evaluated under both the “rollover” method and the “iron curtain” method. The rollover method focuses on the income statement and quantifies an error as the amount by which the current year income statement is misstated. The iron curtain method quantifies income statement errors based on the amount by which the current period income statement would be misstated if the accumulated amount of the error were corrected through the income statement.

   The SEC staff believes that SAB No. 108 should be applied to previously issued financial statements as follows: If the effect of a correction would not materially affect the previously issued financial statements, those financial statements may still be relied upon, and the correction may be made in future filings (that is, without amending the prior filings).

   If the error would not result in a material misstatement of the estimated income or loss for the year in which the adjustment is made or to the trend in earnings, the error can be corrected as an “out‐of‐period” adjustment. This is true even if the “out‐of‐period” adjustment is material to the interim financial statements in which it is recorded. If the “out‐of‐period” adjustment is material to the interim period financial statements in which it is recorded, it should be separately disclosed in the footnotes to those financial statements in accordance with the requirements of FASB ASC 270, Interim Reporting.

   Based on the guidance described, ABC company can correct the error prospectively, in its third quarter interim financial statements, because the error was determined not to be material to the prior year when evaluated using both the iron curtain method and the rollover method, and was also determined not to be material to the projected results for the current year. Because the adjustment to correct the error in the current third quarter was determined to be material to the current quarter, the company should separately disclose the error in the footnotes to the third quarter condensed financial statements, and should consider making similar disclosures in MD&A.

Knowledge check solutions

1.  
   1. Incorrect. Although a final phase‐in due date of 35 days after quarter‐end was initially adopted for accelerated filers for Form 10‐Q, the SEC dropped the final phase‐in date and the current 40 days after quarter‐end due date remains in place.
   2. Correct. The Form 10‐Q due date for large accelerated and accelerated filers is 40 days after fiscal quarter‐end.
   3. Incorrect. This filing deadline applies to non‐accelerated filers.
   4. Incorrect. This is the Form 10‐K filing deadline for accelerated filers.
2.  
   1. Incorrect. The first periodic form a company files under a new filing category is always an annual report.
   2. Incorrect. The first periodic form a company files under a new filing category is always an annual report.
   3. Correct. If the company determines on December 31, 2018, that it meets the requirements for accelerated filing status, it must file its 2018 Form 10‐K for that year on an accelerated filer basis. It must continue filing on an accelerated basis until it determines, as of its year‐end, that its public float has dropped below $50 million as of the end of its second fiscal quarter.
   4. Incorrect. Although the company would not transition out of smaller reporting company status for disclosure purpose until the quarter ended March 31, 2019, it would have been required to adhere to the accelerated filing deadlines beginning with its Form 10‐K filed for the year ended December 31, 2018.
3.  
   1. Incorrect. Article 3 sets forth the general instructions for full‐year financial statements.
   2. Correct. Article 10 contains a uniform set of instructions for interim financial statements of larger reporting companies; Article 8 contains the instructions for interim financial statements of smaller reporting companies.
   3. Incorrect. Article 11 sets forth the instructions for pro forma financial statements.
   4. Incorrect. Article 12 sets forth the instructions for financial statement schedules included in Form 10‐K.
4.  
   1. Incorrect. Regulation S‐X Article 10, which sets forth the requirements for interim financial statements, does not require financial statement schedules. Financial statements schedules, if applicable, are required in annual reports on Form 10‐K.
   2. Correct. Under Regulation S‐X Article 10, interim financial statements must include a balance sheet as of the end of the latest quarter and the end of the preceding fiscal year; statements of comprehensive income (income statements, including other comprehensive income in one continuous statement, or two consecutive statements), for the latest quarter and the year to date and for the corresponding periods of the prior year; statements of cash flows for the year to date and for the corresponding period of the prior year; and a reconciliation of changes in stockholders’ equity for the quarter and year‐to‐date periods and for the prior year comparable periods in the footnotes to the financial statements or as a separate statement.
   3. Incorrect. Many companies previously reported total other comprehensive income in the notes to the interim financial statements. FASB ASU No. 2011‐05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, eliminates this option andrequires a total for comprehensive income in either a single continuous statement or two consecutive statements.
   4. Incorrect. Regulation S‐X Article 10, which sets forth the requirements for interim financial statements, requires a statement of other comprehensive income, if applicable, as well as a cash flow statement and reconciliation of changes in stockholders’ equity.
5.  
   1. Incorrect. The 20% variance is correct based on Article 10 Rule 10‐01(a)(3).
   2. Correct. The 20% variance is the correct materiality for interim period disclosure. In calculating average net income, loss years should be excluded.
   3. Incorrect. The 25% variance applies to the materiality test for combining balance‐sheet captions.
   4. Incorrect. The 20% variance is correct based on Article 10 Rule 10‐01(a)(3).
6.  
   1. Incorrect. The registrant must disclose the effect of the disposal for all periods presented in the interim financial statements, including year‐to‐date periods presented. This would require disclosure in subsequent quarters of the year‐to‐date effect of the transaction.
   2. Correct. Regulation S‐X Rule 10‐01(b)(5) requires the registrant to disclose the effect of the disposal on revenues and net income (including earnings per share) for all periods presented in the interim financial statements.
   3. Incorrect. The registrant must disclose the effect of the disposal for all periods presented in the interim financial statements, including year‐to‐date periods presented, and in the annual financial statements. The disclosures must include the effect on total revenues and total net income and per share amounts for all periods disclosed.
   4. Incorrect. The registrant must disclose the effect of the disposal for all periods presented in the interim financial statements, including year‐to‐date periods presented, and in the annual financial statements. The disclosures must include the effect on total revenues and total net income and per share amounts for all periods disclosed.
7.  
   1. Correct. Regulation S‐X Rule 10‐01(b)(4) (for larger reporting companies); Rule 8‐03(b)(4) (for smaller reporting companies); and FASB ASC 805, Business Combinations, requires disclosure of pro forma information showing the results of operations as though the companies had combined at the beginning of the comparative prior year‐to‐date period. In addition, FASB ASC 805 requires disclosure of additional formation about transaction, including the name of the acquired entity, voting interest acquired, reason for the acquisition, period for which results of the acquisition are included in the income statement, and the cost of the acquired entity.
   2. Incorrect. A summarized income statement for the acquired business is not required to be included in a Form 10‐Q or 10‐K report.
   3. Incorrect. Historical financial information of the acquired business is not required to be included in the Form 10‐Q.
   4. Incorrect. Regulation S‐X specifically requires disclosure in Form 10‐Q of events occurring since the end of the latest fiscal year having a material impact on the financial statements, such as changes in the reporting entity resulting from business combinations or dispositions.
8.  
   1. Incorrect. The SEC requires that an accountant's review report be filed with the interim financial information if, in any filing, the entity states that the interim financial information has been reviewed by an independent public accountant.
   2. Incorrect. A consent is a written document signed by the auditor or other expert and indicating that the auditor or other expert consents to the use of his report and to the use of his name in the registration statement.
   3. Incorrect. Form 8‐K is not required to be filed to disclose a material accounting change. If the registrant did decide to file a Form 8‐K to announce the change, it would not be required to include a copy of that Form 8‐K with its Form 10‐Q report.
   4. Correct. A preferability letter from the accountants must be filed as an exhibit to Part II of Form 10‐Q, indicating whether the accountants believe the change was to a preferable alternative accounting principle under the circumstances. If the change was made in response to a FASB requirement, no such letter need be filed.
9.  
   1. Incorrect. Material changes in risk factors since the last annual report on Form 10‐K are required to be included in Form 10‐Q in the quarter in which the change takes place and in all subsequent 10‐Qs until the next 10‐K discloses the changed risk, but only for registrants that do not qualify as smaller reporting companies.
   2. Incorrect. Risk factor information is required in Form 10‐Q only if material changes in the risk factors have occurred since the last annual report on Form 10‐K.
   3. Correct. No disclosures about risks or changes in risk factors are required for registrants that qualify as smaller reporting companies.
   4. Incorrect. Smaller reporting companies are not required to provide risk factor information. Also, if there have been no material changes since year‐end, no disclosures are required.
10.  
    1. Incorrect. Exchange Act Rule 13a‐13 requires a Form 10‐Q to be filed for the first quarter subsequent to the quarter included in the registration statement.
    2. Correct. The filing deadline for the company’s first Form 10‐Q is 45 days after the end of the company’s fiscal quarter or 45 days after the effective date of the registration statement, whichever is later. In this case, 45 days after the effective date of the registration statement would be August 29, 2018, which is later than 45 days after its second quarter‐end (August 14, 2018).
    3. Incorrect. The Form 10‐Q would be due 40 days after the effective date of the registration statement only if the registrant were an accelerated filer.
    4. Incorrect. The filing deadline for the company’s first Form 10‐Q is 45 days after the end of the company’s fiscal quarter or 45 days after the effective date of the registration statement, whichever is later. In this case, 45 days after the effective date of the registration statement would be August 29, 2018, which is later than 45 days after its most recently completed second quarter‐end (August 14, 2018).

Chapter 7

Review question solutions

1. e. The company would be required to file a Form 8‐K for each of the situations, with a warning notice from a listing standard that it is in danger of falling out of compliance with its listing standards. The company would not be required to file a Form 8‐K related to this matter unless it subsequently received a notice from the stock exchange on which it is listed that its stock was going to be delisted.
2. They mean financial statements and data prepared according to the requirements spelled out in the Federal Securities Law Regulation 210.11, also referred to as Article 11 of Regulation S‐X.

   Non‐GAAP financial measures means a numerical measure of historical or future financial performance, financial position or cash flow that

   • excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements); or
   • includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable GAAP measure.

   Non‐GAAP financial measures are subject to the requirements of Regulation G and, if included in a document filed with the SEC, Regulation G and Item 10(e) of Regulation S‐K. Non‐GAAP financial measures included in quarterly or annual earnings releases that must be filed on Form 8‐K are subject to the requirements of Regulation G and two of the requirements of Item 10 of Regulation S‐K, as follows:

   • The purpose for which management uses the non‐GAAP financial measure
   • To the extent material, any additional reasons that management believes the non‐GAAP financial measure provides useful information to investors
3. Seventy‐five days (4 business days after the event and 71 calendar days after the initial Form 8‐K was filed). The registrant may, at its option, include unaudited financial statements and pro formas in the initial report on Form 8‐K. If the financial statements are not available, they can be filed up to 71 days after the initial Form 8‐K report was filed. No further extensions beyond the 71 days are allowed.
4. A Form 8‐K is not specifically required, but if the company believes this is information of interest to the investing public, it may voluntarily disclose this information under Item 8.01 in a Form 8‐K. In addition, if the fire resulted in a material impairment loss, the company would have to report the following under Item 2.06 of Form 8‐K:
   • The date of determination that a material impairment charge is required, a description of the impaired assets, and the facts and circumstances leading to the determination
   • An estimate of the amount or range of amounts of the impairment charge
   • An estimate of the amount or range of amounts of the impairment charge that will result in future cash expenditures

   If an estimate of the amount or range of amounts of the impairment charge are not available at the time the company files the Form 8‐K, it may provide this disclosure when it formulates the estimates by filing an amended Form 8‐K within four business days of formulating the estimate.

5. A letter from the former accountant, in accordance with the Form 8‐K instructions mentioned at Item 4.01, and spelled out in detail in Item 304(a)(3) of Regulation S‐K.
6. It must disclose whether there was a disagreement with the former auditors and, if applicable, provide complete disclosures concerning the circumstances.

   It must disclose certain issues discussed with the newly engaged auditors during the registrant’s two most recent fiscal years and any subsequent interim period before the new accountants were engaged.

   It must also disclose whether

   • the former accountant resigned, declined to stand for re‐election, or was dismissed, and the date of this action;
   • there was an adverse opinion, disclaimer of opinion, or qualification or modification of opinion as to uncertainty, audit scope, or accounting principles issued by such accountant for either of the two most recent years, including a description of the nature of the opinion; or
   • the decision to change accountants was recommended or approved by the audit committee or a similar committee, or by the board of directors in the absence of such special committee.

   The registrant must also disclose various reportable events described in your text.

   The aforementioned disclosures are reported on a Form 8‐K.

7. A company must notify the SEC of an impending blackout by filing Form 8‐K on the same date the notice is transmitted to directors and executive officers, which under the rules must be no later than 4 business days after the issuer receives notice from the plan administrator or, if no such notice is received, 15 days before the actual or expected blackout.

   Item 5.04 of Form 8‐K requires a company to provide the same information to the SEC that is provided to the directors and executive officers regarding the blackout, as follows:

   • Reasons for the blackout
   • A description of the plan transactions to be suspended
   • The class of securities subject to the suspension
   • The expected beginning and ending dates (or calendar weeks) of the blackout period
   • The person to contact with questions
8. No. Letters of intent and other nonbinding agreements are specifically excluded from the disclosure requirements of new Item 1.01 of Form 8‐K.

Case study solutions—Acquiree financial statements in Form 8‐K

Case 7‐1

Acquisitions and dispositions must be reported under Item 2.01 after they are completed. Although this appears to be a probable acquisition, reporting is not yet required under Item 2.01 of Form 8‐K.

Case 7‐2

The definitions of acquisition and disposition (Instruction 2 to Item 2.01 of Form 8‐K) are very broad. This joint venture formation transaction consists of two potentially reportable transactions: (1) a disposition of 50% of the business being contributed to the joint venture by the registrant and (2) an acquisition of 50% of the business being contributed by the other company. Because of the interrelated nature of the transactions, both must be reported and reflected in pro formas if one is significant, although acquired business financial statements will be required only if the acquisition transaction is significant.

Case 7‐3

Based on the definition of a business in Rule 11‐01(d) of Regulation S‐X, because the fourth ship is newly constructed and has no continuing operations, it appears that it is an asset, not a business. Item 9.01(a) of Form 8‐K requires historical financial statements only of businesses acquired. Therefore, no historical financial statements are required.

Case 7‐4

It appears that (1) the nature of the revenue‐producing activity (that is, selling the acquired drug) will remain generally the same as before the transaction and (2) the following attributes remain after the transaction: customer base, operating rights, and production techniques. Based on the definition of a business in Rule 11‐01(d) of Regulation S‐X, it appears that a business has been acquired. Therefore, financial statements are required by Item 9.01(a) of Form 8‐K.

Case 7‐5

Because the receivables not acquired are regenerating assets and thus indicative of the level of working capital required to operate Subsidiary X in the future, all of the assets of Subsidiary X should be included in the numerator for the assets test. The significance is 25%.

If the assets not acquired were not regenerating assets (for example, real estate), they would be excluded from the numerator, and the significance would be 19%.

Case 7‐6

The mortgage note payable if legally assumed by the registrant is considered part of the capital structure of the business acquired, rather than an operating liability of the business acquired.

Therefore, the $6 of debt assumed must be added to the amount of the cash paid ($15) to determine the total investment. The total investment is $21, so the significance is 21%.

Case 7‐7

Significance under the income test is computed using total pretax income from continuing operations, regardless of how the income is presented on the face of the income statement. The calculation is as follows:

The denominator in the calculation is $400, as calculated in the table. The numerator is $90 (180 × the 50% acquired). Therefore, the significance is 22.5%.

Case 7‐8

In a Form 8‐K, the age of financial statements requirements for target company financial statements are measured on and frozen at the initial filing date (or due date, if filed late) of the Form 8‐K reporting the acquisition. In a Form 8‐K, the target’s most recent year‐end financial statements do not need to be provided if the filing is made less than 90 days after the target’s year‐end. Therefore, this Form 8‐K must include Company T financial statements for the year ended December 31, 2017, (audited) and the nine months ended September 30, 2018, and 2017 (unaudited).

Case 7‐9

Notes to pro forma condensed consolidated financial statements (unaudited)

The registrant acquired all of the capital stock of Acquired. The acquisition was consummated as of May 1, 2018, pursuant to a Stock Purchase Agreement of the same date.

The aggregate consideration for the acquisition was $4,950,000 and warrants to purchase 227,273 shares of the registrant’s common stock for $11.00 per share. $2,550,000 of the purchase price was paid in cash at closing. $1,150,000 of the purchase price was paid by subordinated secured promissory notes payable due on the first anniversary of the closing. The remaining $1,250,000 was paid by subordinated secured promissory notes payable due on the second anniversary of the closing.

The registrant financed the acquisition with proceeds from the sale of its Series C Preferred Stock, which was completed on April 30, 2018, in which the company raised $6,175,000.

The unaudited pro forma statements of operations of the registrant for the year December 31, 2017, and the three months ended March 31, 2018, give effect to (i) the Stock Purchase Agreement by applying the purchase method of accounting, (ii) certain adjustments that are directly attributable to the Stock Purchase Agreement, and (iii) the sale of $2,550,000 of Series C Preferred Stock as if the transaction was consummated as of January 1, 2017.

The unaudited pro forma condensed balance sheet as of March 31, 2017, is presented as if the Stock Purchase Agreement and sale of all of the Series C Preferred Stock had occurred on March 31, 2018.

The fair value of the net assets acquired has been estimated pending completion of a valuation by an independent appraiser.

These pro forma condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the Stock Purchase Agreement been consummated as of the dates indicated or of the results that may be obtained in the future.

These pro forma condensed financial statements and notes thereto should be read in conjunction with the registrants’ consolidated financial statements and the notes thereto.

See accompanying notes to pro forma condensed consolidated financial statements.

See accompanying notes to pro forma condensed consolidated financial statements.

See accompanying notes to pro forma condensed consolidated financial statements.

Notes to pro forma condensed consolidated financial information (unaudited)

(A) BASIS OF PRESENTATION

The purchase method of accounting has been used in the preparation of the accompanying unaudited pro forma condensed financial statements. Under this method of accounting, the purchase consideration is allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values. For purposes of the unaudited pro forma condensed consolidated financial statements, the preliminary fair values of Acquired’s assets were estimated by Acquired’s and Registrant’s management. The final allocation of the purchase price will be determined after the completion of a valuation by an independent appraiser and a comprehensive final evaluation of tangible and identifiable intangible assets acquired (including their estimated useful lives).

(B) CONSIDERATION

The aggregate consideration for the acquisition was $4,950,000 and warrants to purchase 227,273 shares of the Registrant’s common stock for $11.00 per share. $2,550,000 of the purchase price was paid in cash at closing. $1,150,000 of the purchase price was paid by subordinated secured promissory notes payable on the first anniversary of the closing. The remaining $1,250,000 was paid by subordinated secured promissory notes payable on the second anniversary of the closing. These notes payable accrue interest at a rate of 5% per annum. The notes payable are secured by cash, cash equivalents, accounts receivable, inventory, fixed and other assets of the Registrant.

The fair value of the warrants is $27,000 based on a value of approximately $0.12 per warrant. The Registrant financed the acquisition with proceeds from the sale of its Series C Preferred

Stock, which was completed on April 30, 2018, in which the company raised $6,175,000.

(C) DETAILS OF THE PRO FORMA ADJUSTMENTS RELATING TO THE PREFERRED STOCK SALE AND ACQUISITION OF ACQUIRED ARE AS FOLLOWS:

1. To record proceeds from the sale of Registrant’s Series C Preferred Stock, in which the company raised $6,175,000.
2. To record the effect of the purchase of Acquired on cash balances, equity accounts and short‐term notes and long‐term notes.

   The pro forma financial statements have been prepared on the basis of assumptions relating to the allocation of the consideration paid to the acquired assets and liabilities of Acquired, based on management’s best estimates.

   Following is a summary of the preliminary estimate of the total purchase price as of March 31, 2018:

   The purchase price consisted of the following:

   Cash paid at closing	$ 2,550,000
   Notes payable	2,400,000
   Liabilities assumed	2,308,000
   Fair value of warrants issued	27,000
   Total	$ 7,285,000

   The purchase price was allocated as follows:

   Current assets	$ 1,780,000
   Property and equipment	211,000
   Identified intangible assets	950,000
   Goodwill	4,344,000
   Total	$ 7,285,000

   The final allocation of the purchase price will be determined, after the completion of a valuation by an independent appraiser and a comprehensive final evaluation of the fair value of Acquired’s tangible and identifiable assets acquired at the time of the Stock Purchase Agreement.

   Registrant believes that the intangible assets acquired from Acquired included in the five‐ year category are made up principally of customer lists. In addition, Registrant intends to continue to expand the combined company’s existing lines of business, develop new businesses by leveraging the products of Acquired and take advantage of synergies that exist between Registrant and Acquired. Registrant believes that it will benefit from the Stock Purchase Agreement for a period of time of approximately five years and, therefore, a five‐ year amortization period is appropriate.

3. To record amortization expense of intangibles for $190,000 for the year ended December 31, 2016, and $47,500 for the three months ended March 31, 2018.
4. To record interest expense on promissory notes payable. Interest expense for the year ended December 31, 2017, was $120,000 for both the $1,150,000 and $1,250,000 notes payable (both notes have interest rates of 5% per annum). Interest expense for the three months ended March 31, 2018, was $15,625 on only the $1,250,000 note payable due to the pro forma assumption that the first‐year note of $1,150,000 has been paid off by December 31, 2017.
5. To record dividends paid on the portion of the preferred stock sold to fund the acquisition ($2,550,000). Dividends for the year ended December 31, 2017, were $153,000. Dividends for the three months ended March 31, 2016, were $38,250.

Case 7‐10

1. The company would disclose the announcement of its earnings release under Item 2.02 of Form 8‐K, “Results of Operations and Financial Condition” within four business days of the public disclosure. In addition, the text of the press release and any additional exhibits would be filed under Item 9.01, “Financial Statements and Exhibits.”
2. In addition to the press release, the company is required to file any other information released publicly in connection with the earnings release, such as financial statements and any other financial or statistical schedules provided with the press release.

   Because the company has disclosed non‐GAAP earnings, it must provide the disclosure required by Regulation G. Regulation G provides that whenever a registrant publicly discloses material information that includes a non‐GAAP financial measure, the registrant must accompany the non‐GAAP financial measure with

   1. a presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP; and
   2. a reconciliation of the differences between the non‐GAAP financial measure disclosed with the most comparable financial measure calculated and presented in accordance with GAAP.
3. The following disclosures in the press release may have triggered a prior requirement to file a Form 8‐K:
   1. Charges related to store impairments of $12 million; goodwill impairment of $8 million; $75 million in inventory reductions through aggressive price reductions; and a valuation reserve on foreign tax credits.
      1. The company may have been required to file one or more Form 8‐Ks to provide the disclosure required by Item 2.06, “Material Impairments” when its board of directors, committee of the board, or authorized officer determined that a material charge for impairment of one or more assets was required. Disclosures required include (1) the date of determination that a material impairment charge is required, (2) an estimate of the amount or range of amounts of the impairment charges, and (3) an estimate of the amount or range of amounts of the impairment charges that will result in future cash expenditures.

         If the conclusion regarding the impairment charges was made in connection with the preparation, review, or audit of the company’s financial statements included in a prior periodic report (for example, a Form 10‐K or 10‐Q) and the report was filed on a timely basis, the disclosure regarding the impending impairment charge could have been made in the periodic report instead of a Form 8‐K.

      2. Although the press release does not indicate that inventory was impaired, the significant inventory reduction related to aggressive price reductions is an indication that inventory was overvalued, and an impairment charge (and disclosure of the impairment on Form 8‐K) may have been warranted.
   2. If the company has loan covenants under its outstanding debt, the significant write‐offs of goodwill and inventory and the valuation allowance on deferred tax assets could have eroded certain ratios it was required to meet under the loan covenants. A violation of loan covenants could have accelerated the company’s obligations or increased its interest rate under the debt agreements, triggering an obligation to file an 8‐K and disclose the acceleration under Item 2.04, “Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off‐Balance Sheet Arrangement.”
   3. $34 million in savings from closure of approximately 115 underperforming stores and other savings from the company’s cost reduction plan
      1. The store closures and other cost savings under the company’s cost reduction plan would have triggered a requirement to report the plan under Item 2.05, “Costs Associated with Exit or Disposal Activities.” Item 2.05 requires disclosure when a company’s board of directors, a committee of the board, or an authorized officer commits to an exit or disposal plan or otherwise disposes of long‐lived assets under a plan of termination described in FASB ASC 420, Exit or Disposal Cost Obligations. A company is required to disclose (1) the commitment date and a description of the course of action, including the facts and circumstances leading to the expected action and the expected completion date, (2) for each major type of cost associated with the exit or disposal plan, an estimate of the amount or range of amounts expected to be incurred, (3) the total amount estimated for all cost categories combined, and (4) the company’s estimate of the amount or range of amounts of the charge that will result in future cash expenditures.
   4. $21 million in savings from staff reductions, including 20 executive level positions
      1. If any of the reduction in executive level positions included termination or replacement of the company’s principal executive officer, principal financial officer, principal accounting officer, or principal operating officer, the company would have been required to report these events under Item 5.02 of Form 8‐K, “Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.” Terminations are required to be reported under Item 5.02(b) of Form 8‐K; appointments of new officers are required to be reported under Item 5.02(c), and the entry into a material compensation contract with any of these officers is required to be reported under Item 5.02(e) of Form 8‐K.

Knowledge check solutions

1.  
   1. Correct. Under Item 2.01 of Form 8‐K, a company must describe any acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business within four business days after the occurrence of the event.
   2. Incorrect. Item 2.05 of Form 8‐K requires reporting when a company’s board of directors, a committee of the board, or an authorized officer commits to an exit or disposal plan or otherwise disposes of long‐lived assets under a plan of termination described in FASB ASC 420, under which material charges will be incurred.
   3. Incorrect. Based on the significant subsidiary test in Rule 1‐02(w) of Regulation S‐X, Rule 3‐05 of Regulation S‐X defines the number of years of audited financial statements that are required in a Form 8‐K filing for a significant business acquisition.
   4. Incorrect. Item 9.01 of Form 8‐K relates to pro forma information. Information regarding a significant acquisition or disposition of assets must be reported under Item 2.01 of Form 8‐K.
2.  
   1. Incorrect. Form 8‐K requires reporting only of completed acquisitions.
   2. Correct. The Regulation S‐X Rule 1‐02(w) test of significance is applied when a company has acquired or sold an interest in a business. Form 8‐K Item 2.01 directs the registrant to Regulation S‐X Rule 11‐01(d), which indicates that a business is significant if it meets the Regulation S‐X Rule 1‐02(w) test of significance, substituting 20% for 10% if the transaction is an acquisition.
   3. Incorrect. Instruction 4 to Item 2.01 of Form 8‐K states that an acquisition or disposition of assets (not a business) is deemed significant if the net book value of the assets or the amount paid or received exceeds 10% of the registrant’s consolidated assets before the transaction.
   4. Incorrect. The Regulation S‐X Rule 1‐03(w) test of a significant subsidiary (that is, at the 25% level) does not exist and is therefore not the correct regulation.
3.  
   1. Incorrect. For all registrants, the most recent year and any interim periods of financial statements are required if any condition exceeds 20% but none exceed 40%.
   2. Correct. For a registrant that is a smaller reporting company, the two most recent years and any interim periods of financial statements are required if any condition exceeds 40%.
   3. Incorrect. Three years of financial statements and any interim periods are required for a registrant that is not a smaller reporting company when any of the conditions exceeds 50% unless the acquired business’ revenues are less than $50 million in its most recent year, in which case the earliest of the three years may be omitted.
   4. Incorrect. More than just the most recent interim period is required. For a registrant that is a smaller reporting company, the two most recent years and any interim periods of financial statements are required if any condition exceeds 40%.
4.  
   1. Incorrect. The information to be reported under Item 2.01 regarding a significant acquisition of a business includes the transaction date, a description of the assets, the purchase price, the parties involved and any relationships between them, and, if a material relationship exists between the registrant or its affiliates and the sources of funds used in the acquisition, and the identity of sources of funds used.
   2. Incorrect. Item 2.03 of Form 8‐K is used to report the creation of a direct financial obligation or an obligation under an off‐balance‐sheet arrangement.
   3. Correct. Item 9.01 of Form 8‐K requires historical financial statements for business acquired, pro forma financial information for transactions required to be described in Item 2.01 of Form 8‐K, and any required exhibits.
   4. Incorrect. Item 2.06 of Form 8‐K is used to report material impairments.
5.  
   1. Incorrect. In addition to Regulation G, a non‐GAAP financial measure included in an earnings release is subject to the disclosure requirements of Regulation S‐K Item 10(e)(1)(i).
   2. Incorrect. Regulation M‐A contains rules for disclosures regarding mergers and acquisitions.
   3. Correct. A non‐GAAP financial measure included in an earnings release is subject to the disclosure requirements of Regulation G and Regulation S‐K Item 10(e)(1)(i), which requires additional information regarding the purpose for which management uses the non‐GAAP financial measure and, if material, any additional reasons for which management uses the non‐GAAP measure.
   4. Incorrect. Rule 3‐05 of Regulation S‐X defines the number of years of audited financial statements that are required in a Form 8‐K filing for a significant business acquisition. Regulation G addresses non‐GAAP financial measures.
6.  
   1. Correct. The information required by Regulation S‐K Items 304(a)(1) and 304(a)(3) must be disclosed in Form 8‐K as a result of the resignation (or declination to stand for re‐ election) or dismissal of a registrant’s independent accountant.
   2. Incorrect. Regulation S‐X, Rule 2‐04 sets forth the rules for examination of financial statements when the registrant is required to file financial statements of any other person.
   3. Incorrect. Regulation S‐K Item 308 defines the requirements for management’s report on internal control over financial reporting required in the registrant’s annual report filed on Form 10‐K.
   4. Incorrect. Under Regulation S‐X Rule 11‐02(b)(6), pro forma adjustments related to the pro forma income statement should include those that give effect to events directly attributable to the transaction and factually supportable regardless of whether they have a continuing effect or are nonrecurring.
7.  
   1. Incorrect. Item 1.01 of Form 8‐K requires disclosure of entry into a material agreement other than an agreement related to compensation arrangements.
   2. Correct. Item 5.02(e) of Form 8‐K requires disclosure of entry into a material compensation arrangement with a named executive officer.
   3. Incorrect. FASB ASC 718, Stock Compensation, defines the U.S. GAAP accounting and reporting requirements for stock compensation, not the SEC current reporting requirements for compensation arrangements for named executive officers.
   4. Incorrect. Item 2.01 of Form 8‐K addresses a significant acquisition of a business, noting that disclosure would include the transaction date, a description of the assets, the purchase price, the parties involved and any relationships between them, and if a material relationship exists between the registrant or its affiliates and the sources of funds used in the acquisition, and the identity of sources of funds used.
8.  
   1. Incorrect. Under Item 2.02 of Form 8‐K, a company is required to furnish the text of quarterly and annual earnings releases and announcements with the SEC within four business days of the public disclosure.
   2. Correct. A company can report changes in or waivers to its code of ethics that applies to its senior executive and financial officers under Item 5.05 of Form 8‐K within four business days of the change or waiver.
   3. Incorrect. Item 2.01 requires disclosure when a company has completed any acquisition or disposition of a significant amount of assets other than in the ordinary course of business.
   4. Incorrect. Item 9.01 of Form 8‐K requires historical financial statements for business acquired, pro forma financial information for transactions required to be described in Item 2.01 of Form 8‐K, and any required exhibits.
9.  
   1. Incorrect. The four‐business‐day due date applies to the items in Sections 1‐6 and 9 of Form 8‐K.
   2. Incorrect. The 75‐business‐day due date applies to historical and pro forma financial statements required to be provided in a Form 8‐K for acquired businesses when the registrant takes advantage of the 71‐day extension (beyond due date of the initial Form 8‐K) available for providing these financials.
   3. Correct. A registrant either furnishing a report under Item 7.01 (Regulation FD Disclosure) or electing to file a report under Item 8.01 (Other Events) solely to satisfy its obligations under Regulation FD must either furnish or file such report, as applicable, in accordance with the requirements of Rule 100(a) of Regulation FD, which requires the disclosure to be made either (a) simultaneously, in the case of intentional disclosure or (b) promptly, in the case of non‐intentional disclosure.
   4. Incorrect. Regulation M‐A contains rules for disclosures regarding mergers and acquisitions.
10.  
    1. Incorrect. Under the adopted XBRL rules, pro forma financial statements prepared under Article 11 of Regulation S‐X are not subject to the XBRL requirements.
    2. Correct. Regulation S‐K Item 601 has been amended to add XBRL as an exhibit that is required when updated or revised versions of financial statements that appeared in a periodic report are included in a Form 8‐K filing.
    3. Incorrect. Regulation S‐K Item 601 requires an XBRL exhibit when financial statements are updated or revised for any reason and are included in a Form 8‐K filing, not just for discontinued operations.
    4. Incorrect. Regulation M‐A addresses mergers and acquisition requirements in Form 8‐K. An XBRL exhibit is required when updated or revised versions of financial statements that appeared in a periodic report are included in a Form 8‐K filing.
11.  
    1. Correct. Such an event is reportable under Form 8‐K Item 1.01, Entry into a Material Definitive Agreement.
    2. Incorrect. Item 7.01, Regulation FD Disclosure, is triggered when nonpublic information is provided to a broker or dealer, investment adviser, investment company, or a holder of the company’s securities who would likely trade on the information.
    3. Incorrect. Item 1.02 of Form 8‐K requires disclosure if a material agreement not made in the ordinary course of business is terminated for reasons other than expiration of the agreement or completion of the obligations under the agreement.
    4. Incorrect. Item 9.01 of Form 8‐K requires historical financial statements for businesses acquired.

Chapter 8

Review question solutions

1. A proxy statement is used to facilitate voting on company matters by voters who are widely dispersed geographically. A proxy is broadly defined as any authorization given to someone by shareholders to act on their behalf at a shareholders’ meeting. The proxy statement includes information necessary to assist the shareholders in making informed decisions on matters that are voted on at the shareholders’ meeting.
2. The proxy statement is the only filing for which copies must be sent directly to all shareholders. Of the other filings, only the 10‐K must be sent to a shareholder who specifically requests one. All filers are required to post proxy materials, other than those related to business combinations, on the internet.
3. Because the SEC requires that, if management solicits proxies for the election of directors, the annual report must precede or accompany the proxy statement.
4. For certain proxies, the age of the available financial statements. For example, if the proxies will be mailed more than 45 days after the fiscal year‐end, and year‐end audited statements are not yet available, the mailing of the proxy might have to be delayed until audited financial statements are available (Rule 3‐12 of Regulation S‐X).
5. Rule 14a‐6 generally requires that preliminary proxy materials be filed with the SEC for review at least 10 days prior to the date definitive copies of materials are sent to shareholders. The SEC has, however, provided relief in the area of proxy review. Preliminary proxy materials need not be filed with the SEC if the solicitation relates to an annual meeting of shareholders where the only matters to be voted on relate to
   • the election of directors,
   • the election, approval, or ratification of accountants,
   • a shareholder proposal,
   • the approval or ratification of certain compensation plans, such as restricted stock or stock options, or
   • say on pay.
6. The following information must be included in the “summary section” of the proxy:
   • General information about the purpose of the solicitation, date and place of meeting, securities entitled to vote, record date, and appraisal rights, and a brief description of the securities being offered
   • A brief outline of the proposals to be voted upon, including the exchange rates
   • A summary of the tax consequences
   • A brief identification of the businesses of the parties to the merger and a description of companies’ status, business, and corporate existence following the merger
   • Information about the management of the surviving company, including the status of present management of the companies
   • Comparative stock prices for an appropriate period
   • Comparative net income, dividends, and book values per share on a historical and pro forma basis
7. b. Under Item 7(d), Directors and executive officers, registrants are required to make specific proxy statement disclosure on whether it has a process for shareholders to send communications to directors and, if so, a description of the process.
8. b. The information regarding the compensation committee must be furnished under Item 7(d) of Schedule 14A and Item 407(e) of Regulation S‐K.

Knowledge check solutions

1.  
   1. Correct. Proxy statements are used to provide shareholders with information related to matters requiring shareholder approval through voting, either in person or by proxy.
   2. Incorrect. Information statements are used to provide shareholders with information in connection with shareholder meetings when management is not soliciting votes.
   3. Incorrect. Proxy statements do not replace a quorum; they are used to facilitate voting and to obtain a quorum.
   4. Incorrect. Proxy statements do not eliminate the need for shareholder meetings; they are used to facilitate voting and to obtain a quorum at the meetings.
2.  
   1. Incorrect. Under such circumstances only a proxy statement would be required.
   2. Incorrect. The election of directors and ratification of the independent auditors require only a proxy statement.
   3. Correct. When a vote is solicited in connection with certain transactions involving the registration of securities on Form S‐4 (for example, exchange offers, mergers, transfer of assets), the S‐4 prospectus may be expanded to serve as the proxy statement or informational statement for the transaction under Section 14 of the 1934 Act. In such cases, the filing is commonly referred to as a “joint proxy statement or prospectus.”
   4. Incorrect. Under such circumstances, only a proxy statement would be required.
3.  
   1. Correct. Regulation 14A sets forth the filing requirements for preliminary and definitive proxy statements.
   2. Incorrect. Regulation 14E contains rules related to tender offers.
   3. Incorrect. Item 10 in Form 10‐K requires certain disclosures that are also required by Regulation 14A, including Regulation S‐K Item 401 — directors, executive officers, promoters, and control persons; Item 407(d)(4) and d(5) — audit committee disclosures; and Item 405 compliance with Section 16a related to insider trading and reporting.
   4. Incorrect. Item 11 in Form 10‐K requires certain disclosures that are also required in Regulation 14A, including in Regulation S‐K Item 402 — compensation of directors and executive officers and Item 407(e)(4) and (e)(5) — compensation committee interlocks and compensation committee report.
4.  
   1. Correct. Information regarding audit committee financial experts is required both in the proxy statement and in the Form 10‐K.
   2. Incorrect. Information regarding audit committee financial experts is also required in a registrant’s proxy or information statement.
   3. Incorrect. Audit committee financial expert disclosure is required in Part III of Form 10‐K, and also in a registrant’s proxy or information statement under Item 7.
   4. Incorrect. It is required in both the Form 10‐K and the proxy statement.
5.  
   1. Incorrect. The SEC adopted Rule 10‐C‐1 to implement Section 952 of the Dodd‐Frank Act. This rule implements the act’s requirement for the SEC to direct the national securities exchanges to adopt listing standards related to the compensation committees of an issuer’s board of directors as well as its compensation advisers.
   2. Incorrect. Each member of an issuer’s compensation committee must be a member of the board of directors and must be independent.
   3. Incorrect. Each compensation committee is responsible for the appointment, compensation, and work of the compensation adviser.
   4. Correct. The proxy disclosure rules require disclosure of whether the company retained or obtained the advice of a compensation adviser, whether the compensation adviser’s work raised any conflict of interest, and the nature of any conflict of interest.
6.  
   1. Correct. The information required by Item 7 (Directors and Executive Officers), Item 8 (Compensation of Directors and Executive Officers), and Item 9 (Independent Public Accountants) of Schedule 14A must be provided when stockholders are voting on the election of directors.
   2. Incorrect. Information regarding properties is required by Item 2 of Form 10‐K, not proxy statements.
   3. Incorrect. Information regarding risk factors is required by Item 1a of Form 10‐K
   4. Incorrect. Submission of matters to a Vote of Security Holders is reported on Item 5.07 of Form 8‐K.
7.  
   1. Correct. The amounts to be disclosed for audit services include amounts billed and expected to be billed for audit services provided for the two most recent fiscal years.
   2. Incorrect. Fees for services other than audit services that are included in the “audit fees” category (that is, fees for comfort letters, consents, reports on internal controls, and review of SEC documents) should reflect amounts billed for services rendered during the fiscal year. Fees for audit services should reflect amounts billed and expected to be billed for audit services provided for the current year.
   3. Incorrect. Tax fees are captured in a separate category for tax compliance, planning, and advice performed by professional staff in the audit firm’s tax division.
   4. Incorrect. The disclosure of fees is required only for the current auditor. Predecessor fees may be disclosed at the company’s option.
8.  
   1. Correct. Such materials should be marked as “Preliminary Copies,” and the date that definitive materials are to be mailed to the shareholders must be stated in the filing.
   2. Incorrect. Twenty or more days is not required; however, it is advisable to allow more than the required 10 days for any changes that may be required as a result of the SEC’s selective review process.
   3. Incorrect. The proxy material must be given to the shareholders at least 20 days prior to the meeting date.
   4. Incorrect. Companies listed on the New York Stock Exchange must send proxy materials to shareholders 30 days prior to the meeting date.
9.  
   1. Incorrect. Item 9 requires detailed disclosure concerning auditor fees, audit‐related fees, tax fees, and all other fees billed.
   2. Incorrect. Item 10 of Schedule 14A is required when stockholders are voting on a compensation plan.
   3. Incorrect. Item 11 of Schedule 14A must be completed if action is to be taken regarding authorization or issuance of securities other than for exchange.
   4. Correct. Item 14 Schedule 14A must be completed if proxies are being solicited for mergers, consolidations, acquisitions, and similar matters.
10.  
    1. Correct. This procedure is intended to avoid inconsistencies and misleading comments of which the accountant may have knowledge and to ascertain that the financial statements include disclosures mentioned in the text.
    2. Incorrect. Before the registrant files the preliminary material, the accountant should read the entire text and compare it with the financial statements.
    3. Incorrect. The accountant should read the entire document and compare it to the financial statements to avoid inconsistencies and misleading comments.
    4. Incorrect. The independent accountant is not required to issue an audit opinion on all of the financial information contained in the proxy material. The independent accountant is required to read the information and compare it to the financial statements.
11.  
    1. Incorrect. Financial per share data that must be included in a proxy statement includes both historical and pro forma per share data.
    2. Correct. Among the historical and pro forma per share data required is book value per share as of financial statement date, cash dividends per share for the periods presented, and income (loss) per share from continuing operations for the periods presented.
    3. Incorrect. Per share data is required for the other company on a historical and pro forma basis. If securities are to be issued in an exchange of shares, pro forma per share data must be presented for the other company on an equivalent pro forma basis. Equivalent pro forma per share amounts are calculated by multiplying the pro forma amount (for the registrant) by the exchange ratio.
    4. Incorrect. Both historical and pro forma per share data are required.
12.  
    1. Incorrect. Compensation of executives is not generally required by the SEC in the summary.
    2. Correct. Among the information the SEC generally requires in a summary is a presentation of the tax consequences of the transaction to be voted upon.
    3. Incorrect. The summary information section should include information pertinent to the merger and acquisition. Compensation plan summary information is not generally required by the SEC in the summary section.
    4. Incorrect. The summary information section should include the relevant pro forma data, but is not required to contain financial forecasts.

Chapter 9

REVIEW QUESTION solutions

1. Their purpose is to provide reporting and disclosure requirements relief for smaller companies by
   • allowing scaled disclosure and reporting requirements for smaller companies with less than $250 million in public equity float or, having revenues of less than $100 million in the last fiscal year for companies that do not have a calculable public equity float or less than $700 million in public equity float; and
   • permitting all foreign companies to qualify as smaller reporting companies if they choose to file on domestic company forms and provide financial statements prepared in accordance with U.S. GAAP.
2. Smaller reporting companies must comply with Regulation S‐K (the rules for nonfinancial disclosure) and Article 8 of Regulation S‐X (the rules relating to financial statements). Within certain Regulation S‐K Items, there are scaled disclosure options for smaller reporting companies. A smaller reporting company can choose to comply with the scaled nonfinancial and financial item requirements on an item‐by‐item basis each quarter. To the extent that the smaller reporting company scaled item requirement is more rigorous than the same larger company item requirement, smaller reporting companies will be required to comply with the smaller reporting company item requirement.
3. b. False. Smaller reporting companies are required to evaluate and report on internal control over financial statements; however, smaller reporting companies that are also accelerated filers are not exempt from auditor reporting on ICFR required by the Section 404(c) of the Sarbanes‐Oxley Act.
4. It must present analysis for the number of years of income statements that it includes in the filing (two years, if it elects to comply with Regulation S‐X Article 8, or three years if it elects to comply with Regulation S‐X Rule 3‐02).
5. b. False.
6. Yes. Under Rule 8‐03 of Regulation S‐X, a smaller reporting company’s interim financial statements must be reviewed by an independent public accountant prior to the filing of Form 10‐Q.

Knowledge check solutions

1.  
   1. Correct. Item 10(f) of Regulation S‐K defines a smaller reporting company as a company having less than $250 million in public float, determined as of the end of its second fiscal quarter.
   2. Incorrect. If a company does not have a calculable public equity float, a company would qualify as a smaller reporting company if it had revenues of less than $100 million in the last fiscal year.
   3. Incorrect. $700 million is the public float threshold for large accelerated filers.
   4. Incorrect. $25 million was the public float threshold under the prior SEC rules for small business issuers.
2.  
   1. Incorrect. Under Item 10(f)(i) of Regulation S‐K, a company must perform the public float test to determine whether it meets the definition of a smaller reporting company as of the end of its second fiscal quarter.
   2. Incorrect. Under Item 10(f)(iii) of Regulation S‐K, the “less than $200 million” public float threshold applies to a registrant that is no longer a smaller reporting company because it failed the smaller reporting company public float test in a prior year.
   3. Incorrect. Under Item 10(f)(iii) of Regulation S‐K, a company with no public float must have $100 million or less of revenue (not $1 million) for the latest fiscal year to qualify as a smaller reporting company.
   4. Correct. Under Item 10(f)(iii) of Regulation S‐K, a company with no public float (such as a company that has only public debt) would determine its filing status based on revenues. If annual revenues during the most recently completed fiscal year for which financial statements are available are less than $100 million, the company qualifies as a smaller reporting company.
3.  
   1. Incorrect. The smaller company regulatory relief rules expand eligibility for smaller reporting company status to all non‐U.S. companies that meet certain requirements.
   2. Correct. Non‐U.S. companies are eligible for smaller reporting company status if they file with the SEC using domestic forms.
   3. Incorrect. Non‐U.S. companies are eligible for smaller reporting company status if they file with the SEC using domestic forms and include financial statements that are prepared according to U.S. GAAP, not IFRS as issued by the IASB.
   4. Incorrect. The smaller company regulatory relief rules expand eligibility for smaller reporting company status to all non‐U.S. companies that meet certain requirements.
4.  
   1. Correct. A larger reporting company that has determined it meets the criteria for a smaller reporting company as of the last day of its most recently completed second fiscal quarter can transition to the scaled disclosure requirements in the Form 10‐Q quarterly report corresponding to that same quarter.
   2. Incorrect. This was the timing under the prior S‐B rules, where the determination as to S‐B status was made at year‐end and transition to S‐B forms was made in the first quarter of the year following the year of determination.
   3. Incorrect. The larger reporting company need not wait until the next quarter to take advantage of the smaller reporting company reporting relief.
   4. Incorrect. The transition to or from large accelerated, accelerated, or non‐accelerated filing status is effective with the first annual report filed for the year in which a registrant makes this determination.
5.  
   1. Incorrect. Although a smaller reporting company makes the determination as to whether it qualifies as a smaller reporting company in the second quarter of its fiscal year, if it determines at that time that it no longer qualifies as a smaller reporting company, it does not have to transition into the larger reporting company disclosure system until the first quarter of the following fiscal year.
   2. Correct. Although a smaller reporting company can opt to comply with any or all of the larger reporting company rules at any time, if it must transition to the larger reporting company system because it no longer meets the smaller reporting company public float criteria, it can wait until the first quarter after the determination date fiscal year before it begins to comply with the larger reporting company rules.
   3. Incorrect. A smaller reporting company that is required to transition to the larger reporting company disclosure system is not required to do so in a Form 10‐Q for the fiscal year in which it makes this determination. It does not need to transition to the larger reporting company disclosure system until the first quarter of the following fiscal year.
   4. Incorrect. A smaller reporting company that is required to transition to the larger reporting company disclosure system is not required to do so with the first Form 10‐K filed for the fiscal year in which it makes this determination. The company can wait until the first quarter after filing the Form 10‐K.
6.  
   1. Correct. Once an issuer fails to qualify for smaller company status, it will remain unqualified until it determines that its public float, as calculated in accordance with the definition, is less than $200 million as of the last business day of its second fiscal quarter (under the public float test) and its revenues are more than $100 million (under the revenue test).
   2. Incorrect. A company will initially qualify as a smaller reporting company, under the public float test, if it has public float of less than $250 million. Once a company enters a larger reporting company filing status, it is unable to re‐enter smaller reporting company status until its public float is less than $200 million (80% of its initial qualification threshold).
   3. Incorrect. A company will initially qualify as a smaller reporting company, under the revenue test, if it has revenues of less than $100 million. Once a company enters a larger reporting company filing status, it is unable to re‐enter smaller reporting company status until its revenues are less than $80 million (80% of its initial qualification threshold).
   4. Incorrect. The revenue test applies only to issuers that do not have a public float or public float that is less than $700 million and there is no asset test.
7.  
   1. Incorrect. The company would not qualify as a smaller reporting company because the public float threshold of $250 million was exceeded.
   2. Incorrect. The tests for accelerated filer status are based on public float; because the company has no public float, it would not qualify as an accelerated filer.
   3. Correct. Because the company would qualify as neither a smaller reporting company (because its public float is above the $250 million threshold) nor an accelerated filer (because it has no public float), it would fall into the “non‐accelerated filer” status.
   4. Incorrect. Although the company would qualify as a non‐accelerated filer, it would not be able to take advantage of any smaller reporting company filing relief (because its public float is above the $250 million threshold).
8.  
   1. Correct. The smaller reporting company rules permit a larger reporting company that determines it is a smaller reporting company on the last day of its most recently completed second fiscal quarter to begin reporting as a smaller reporting company immediately.
   2. Incorrect. A larger reporting company whose public float fell below $50 million need not wait until its annual report to begin reporting as a smaller reporting company. It may begin reporting as a smaller reporting company immediately.
   3. Incorrect. Because the company met the criteria for non‐accelerated filer as of June 30, 20X0, it would file its 20X0 Form 10‐K on a non‐accelerated filer basis (that is, 90 days after its year‐end).
   4. Incorrect. The tests to determine whether a company is an accelerated filer are not made until year‐end. Therefore, a company whose public float was less than $50 million as of the end of its second fiscal quarter cannot exit accelerated filer status until it files its next annual report. Consequently, the company’s June 30, 20X0, Form 10‐Q is due 40 days, not 45 days, after quarter‐end.

Chapter 10

Review question solutions

1. The Sarbanes‐Oxley Act requires accounting firms to register with the PCAOB in order to prepare, issue, or play a substantial role in preparing audit reports of issuers, brokers, and dealers. Non‐U.S. accounting firms that furnish, prepare, or play a substantial role in preparing an audit report for any issuer, broker, or dealer are also subject to PCAOB rules.
2. Section 109 of the Sarbanes‐Oxley Act of 2002 provides that accounting support fees are to be collected from issuers, as defined in Rule 7101.
3. Under the rules, the PCAOB may conduct two types of inspections of registered public accounting firms: regular inspections and special inspections. Regular inspections will be conducted either annually or triennially, depending on the size of a firm’s practice relating to the issuance of audit reports for U.S. public companies. In general, a registered public accounting firm that annually issues audit reports for more than 100 U.S. public companies would be subject to an annual inspection, but any other firm that regularly issues an audit report for any U.S. public company would be subject to inspection every three years.

   A special inspection may be authorized by the PCAOB or requested by the SEC at any time as to any firm, and would involve the steps and procedures necessary or appropriate to address issues specified in the authorization or request.

4. a. Relevant financial statement assertions.
5. a. AS 2820, Evaluating Consistency of Financial Statements, provides guidance about the auditor’s evaluation of, and reporting on, consistency of financial statements.
6. c. AS 2410, Related Parties, requires the auditor to ask the audit committee about whether any member of the audit committee has concerns regarding related parties and, if so, the substance of those concerns.
7. a. The standard applies to integrated audits of public companies.

Knowledge check solutions

1.  
   1. Incorrect. The FASB establishes U.S. GAAP.
   2. Incorrect. The SEC establishes SEC rules.
   3. Correct. The duties of the PCAOB include establishing or adopting auditing standards for registered public accounting firms.
   4. Incorrect. The IASB establishes IFRS.
2.  
   1. Incorrect. The PCAOB issued these standards so that an appropriate risk‐assessment process would be applicable and reflected in all public company audits. The process is not expected to be a one‐size‐fits‐all approach to risk assessment, and as such, the standards have incorporated guidance about how the risk‐assessment process can be tailored to a company’s size and complexity.
   2. Incorrect. The risk standards provide guidance on all stages of a risk‐based audit, from initial planning through evaluation.
   3. Correct. The risk standards describe the auditor’s responsibilities for assessing risk, responding to risk, and evaluating audit results in the context of an integrated audit of financial statements and internal control over financial reporting, which should help auditors better understand how certain procedures required by AS 2201 can be integrated with financial statement audit procedures.
   4. Incorrect. The risk assessment standards do not provide guidance regarding differences from risk assessment standards of other standard‐setters, although the eight risk standards reflect the PCAOB’s effort to reduce unnecessary differences with the risk assessment standards of other auditing standard‐setters, including the IAASB and the ASB.
3.  
   1. Incorrect. AS 2201 eliminated the requirement to test controls over a “large portion” of the company’s operations and financial position, as previously required under Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.
   2. Correct. Under AS 2201, auditors are required to obtain an understanding of management’s process as a starting point to understanding the company’s internal control.
   3. Incorrect. AS 2201 eliminated the requirement to opine on management’s assessment, which was previously required under Auditing Standard No. 2.
   4. Incorrect. AS 2201 does not require walkthroughs, although the standard indicates that walkthroughs are frequently the most effective way of achieving the objectives set forth in the standard.
4.  
   1. Incorrect. AS 1220 permits the engagement quality reviewer to be a partner within the firm issuing the report or another individual in an equivalent position (when the legal structure of the firm is not a partnership). AS 1220 also permits the engagement quality reviewer to be an individual from outside the firm, as long as he or she is competent and meets other qualification requirements.
   2. Incorrect. AS 1220 permits the engagement quality reviewer to be an individual from outside the firm, but does not require it.
   3. Incorrect. AS 1220 requires a “cooling off” period that prohibits an engagement partner from serving as the engagement quality reviewer for at least two years following his or her last year as the engagement partner. To address concerns of smaller firms with fewer personnel, the standard exempts firms that qualify for the exemption from the SEC partner rotation requirements from the “cooling off” period under this standard.
   4. Correct. AS 1220 requires the engagement quality reviewer to be independent of the company, perform the review with integrity, and maintain independence.
5.  
   1. Incorrect. AS 3101 retains the existing “pass or fail” model in the auditor’s report.
   2. Incorrect. Critical audit matters include any matter that is communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements, and (2) involves especially challenging, subjective, or complex auditor judgment.
   3. Incorrect. Requirements regarding critical audit matters do not apply to audits of brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a‐5.
   4. Correct. A statement is required to be included in the auditor’s report regarding how many years the auditor has served as the company’s auditor.
6.  
   1. Correct. Under AS 1301, Communications with Audit Committees, the auditor is required to communicate contentious or difficult matters for which the auditor consulted outside the engagement team.
   2. Incorrect. Under AS 1301, communications with the audit committee are required to occur before the issuance of the audit report.
   3. Incorrect. AS 1301 cautions the auditor not to compromise the effectiveness of the audit procedures by communicating details about specific audit procedures that might reduce the effectiveness of those procedures.
   4. Incorrect. Although AS 1301 requires the auditor to communicate significant accounting policies and practices to the audit committee, the standard acknowledges that such communications may be made by management and if the auditor meets certain conditions, these communications need not be duplicated by the auditor.
7.  
   1. Correct. AS 2410 requires the auditor to perform procedures to obtain an understanding of the company’s financial relationships and transactions with its executive officers.
   2. Incorrect. AS 2410 does not require obtaining an understanding of the company’s financial relationships with its board of directors.
   3. Incorrect. AS 2410 does not require obtaining an understanding of the company’s financial relationships with its suppliers.
   4. Incorrect. AS 2410 does not require obtaining an understanding of the company’s financial relationships with its outside consultants.
8.  
   1. Incorrect. The auditor would not be required to withdraw from the engagement if there was substantial doubt about the company’s ability to continue as a going concern.
   2. Incorrect. The auditor would not be required to obtain advice from legal counsel if there was substantial doubt about the company’s ability to continue as a going concern.
   3. Correct. If the auditor believes there is substantial doubt about the company’s ability to continue as a going concern, he or she should obtain information about management’s plans to mitigate the effect of such conditions or events, and assess the likelihood that such plans can be effectively implemented.
   4. Incorrect. Management, not the auditor, is responsible for plans to mitigate the effect of such conditions or events.
9.  
   1. Incorrect. This is not a key factor to consider in determining the extent of the firm’s involvement in audit work performed by assistants engaged from outside the firm.
   2. Incorrect. The engagement quality reviewer would not make recommendations as to the appropriate level of involvement in the assistants’ work.
   3. Correct. Appropriate supervision and review necessarily entail overcoming any language barriers.
   4. Incorrect. This is not a key factor to consider in determining the extent of the firm’s involvement in audit work performed by assistants engaged from outside the firm; however, whether the auditor would be able to properly plan and supervise the work of the assistants engaged from outside the firm would be a key factor to consider.
10.  
    1. Incorrect. The names and locations of all partners who participated in the audit are not required to be disclosed on Form AP.
    2. Correct. The name of the engagement partner is required to be disclosed on Form AP.
    3. Incorrect. The number of years the engagement partner has served on the audit is not required to be disclosed on Form AP.
    4. Incorrect. The engagement partner’s industry experience is not required to be disclosed on Form AP.
11.  
    1. Correct. Other accounting firms for Form AP purposes include affiliated firms, such as firms in a global network, and nonaffiliated firms.
    2. Incorrect. Certain information is required to be reported in Form AP for other accounting firms that participated in the audit.
    3. Incorrect. Supervision of a professional employee in a secondment arrangement does not necessarily mean that the other accounting firm participated in the audit. Professional employees in a secondment arrangement in which a professional employee of an accounting firm in one country is physically located in another country, in the offices of another accounting firm, for at least three consecutive months, performing audit procedures with respect to entities in that other country (and not performing more than de minimis audit procedures over the term of the secondment in relation to entities in the country of his or her employer) should be treated as if they were employed by the accounting firm to which they were seconded.
    4. Incorrect. The names, locations, and extent of participation of other accounting firms that participated in the audit are required to be reported on Form AP if their work constituted 5% or more of the total audit hours. Additionally, the number and aggregate extent of participation of all other accounting firms whose individual participation was less than 5% of total hours are required to be reported on Form AP.
12.  
    1. Correct. Rule 2100 requires all U.S. accounting firms to be registered with the PCAOB if they wish to prepare or issue audit reports on U.S. public companies, or to play a substantial role in the preparation or issuance of such reports.
    2. Incorrect. A public accounting firm is required to register with the PCAOB if it prepares or issues audit reports on at least one U.S. public company.
    3. Incorrect. Public accounting firms are required to be registered with the PCAOB if they wish to prepare or issue audit reports on U.S. public companies, or to play a substantial role in the preparation or issuance of such reports.
    4. Incorrect. The SEC does not ask public accounting firms to register with the PCAOB.
13.  
    1. Incorrect. An auditor is not independent of its audit client if the auditor or any affiliate of the auditor provides any service or product to the audit client for a contingent fee or a commission or receives from the audit client a contingent fee, directly or indirectly. Fees that are fixed by courts or other public authorities and not dependent on a finding or result are excluded from the PCAOB’s definition of contingent fee.
    2. Incorrect. Tax services may be provided to non‐executive members of the board of directors of the audit client.
    3. Incorrect. Tax services may be provided to employees in a financial reporting oversight role at an affiliate of an audit client if the financial statements are immaterial to the consolidated financial statements of the audit client or the affiliate’s financial statements are audited by an auditor other than the principal auditor.
    4. Correct. A registered public accounting firm is not independent from a public audit client if the firm provides services related to marketing, planning, or opining in favor of the tax treatment of a transaction that is considered a confidential transaction (that is, transactions with tax‐adviser‐imposed conditions of confidentiality).
14.  
    1. Incorrect. The firm designated in Form 4 as the predecessor must not withdraw from registration.
    2. Incorrect. A Form 4 must be filed within 14 days after the change in the registered firm’s form of organization takes effect.
    3. Correct. Inaccuracies or omissions in Form 4 could result in disciplinary sanctions.
    4. Incorrect. If an eligible firm does not file a timely Form 4, the firm may still file a completed Form 4 with a request for leave to file the form out of time, accompanied by an exhibit describing why the form was not timely filed. The PCAOB will then evaluate the request.

Chapter 11

Knowledge check solutions

1.  
   1. Incorrect. A company must have less than $1.07 billion of revenue in its most recently completed fiscal year to meet the EGC filing status.
   2. Correct. A company must have issued less than $1 billion (not $5 billion) of nonconvertible debt in a three‐year period (not in the most recently completed fiscal year).
   3. Incorrect. A company must not have had its first sale of common equity securities in an effective registration statement in order to meet the EGC filing status.
   4. Incorrect. A company must have issued less than $1 billion of nonconvertible debt in a three‐year period.
2.  
   1. Correct. Filers will maintain EGC status for five years following their IPO unless any of the disqualifying provisions are met.
   2. Incorrect. Filers will maintain EGC status for five years, not three years, following their IPO unless any of the disqualifying provisions are met.
   3. Incorrect. Filers will maintain EGC status for five years, not four years, following their IPO unless any of the disqualifying provisions are met.
   4. Incorrect. Filers will maintain EGC status for five years, not two years, following their IPO unless any of the disqualifying provisions are met.
3.  
   1. Incorrect. Emerging growth companies are permitted to comply with only some of the smaller reporting company requirements.
   2. Correct. Emerging growth companies are permitted to adopt new accounting standards using the effective dates applicable to nonpublic companies (if the standard applies to nonpublic companies).
   3. Incorrect. Emerging growth companies are not permitted to exclude management’s report on internal controls.
   4. Incorrect. EGCs are not permitted to omit selected financial data.
4.  
   1. Incorrect. EGCs are generally not permitted to omit MD&A discussion from a confidentially submitted registration statement.
   2. Incorrect. EGCs may limit the MD&A discussion to two years, not one year, if two years of audited financial statements are presented.
   3. Incorrect. EGCs may limit the MD&A discussion to two years if two years of audited financial statements are presented (not if three years of audited financial statements are presented).
   4. Correct. EGCs may limit the MD&A discussion to two years if two years of audited financial statements are provided.
5.  
   1. Incorrect. An EGC must present two years of audited financial statements in its effective initial registration statement.
   2. Correct. Under the FAST Act, an EGC may omit historical periods from its financial statements if it reasonably expects that such periods will not be included in its effective initial registration statement.
   3. Incorrect. An EGC may not omit interim financial statements that are otherwise required in its effective registration statement.
   4. Incorrect. An EGC may not omit interim financial statements that are otherwise required if they relate to annual periods that will be required at the time of the offering.
6.  
   1. Incorrect. An EGC can elect to present only two years of financial statements in its registration statement.
   2. Incorrect. EGCs are not exempt from the requirement to provide financial statements of a significant acquired business.
   3. Correct. An EGC that elects to present only two years of financial statements in its registration statement is not required to present more than two years of financial statements for a significant acquired business.
   4. Incorrect. An EGC may only omit financial statements of a significant acquired business before its completed offering if it expects that such financial statements will not be required at the time of the offering.
7.  
   1. Incorrect. An EGC can confidentially submit a draft registration statement for review purposes in an exchange offer or merger that constitutes an IPO of its common equity securities.
   2. Correct. An EGC that files a registration statement under the Exchange Act (for example, because it desires to list its securities or is required to register a class of securities because it has more than $10 million of assets and more than 2,000 shareholders, or more than 500 shareholders that are not accredited investors) must provide 3 years of audited financial statements in its registration statement on Form 20‐F or Form 10. Only Securities Act registration statements covering the IPO of common equity securities are eligible to present two years of financial statements.
   3. Incorrect. If an EGC became an SEC registrant by filing a registration statement other than a Securities Act registration statement covering an offering of common equity securities (for example, it registered an offering of debt securities or filed an Exchange Act registration statement), it may remain an EGC indefinitely assuming no disqualifying triggers are met. The fifth anniversary provision does not apply until the first sale of common equity securities pursuant to an effective Securities Act registration statement.
   4. Incorrect. An issuer that is a subsidiary or carve‐out of an existing registrant can qualify as an EGC as long as the issuer or its parent is not engaging in the transaction solely to take advantage of the benefits available to an EGC.