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SEC now: 2025 comment letter trends on transactions · PwC's accounting podcast

0:00
SPEAKER_00: Thought leadership from PWC's national office.
0:07
SPEAKER_02: Hello, and welcome to PWC's Accounting Podcast.
0:11
SPEAKER_02: I'm Heather Horn.
0:12
SPEAKER_02: Today we're continuing our SEC focused series with a look at another key area of staff attention, transaction-related matters.
0:21
SPEAKER_02: In today's episode, we're covering a range of transactions from IPOs to mergers and acquisitions and sharing insights from SEC pre-clearance discussions and comment letter trends.
0:36
SPEAKER_02: Joining us for today's episode, I'm happy to welcome Scott Feely and Katie Dreison, both partners in PWC's National Office who regularly support clients and engagement teams on these topics.
0:47
SPEAKER_02: And returning as today's guest hosts is Kyle Moffitt, PWC's National Office Professional Practice Leader.
0:54
SPEAKER_02: Let's get today's episode started.
0:57
SPEAKER_04: Scott and Katie, thanks for joining me today.
1:00
SPEAKER_04: Today we're going to continue our comment letter series with a focus on transaction-related matters, an area where the SEC staff often takes a very close look, especially when filings involve complex judgmental issues.
1:12
SPEAKER_04: We'll cover everything from IPOs to mergers and acquisitions to spin-offs and to vestitures.
1:18
SPEAKER_04: A lot to cover today.
1:19
SPEAKER_04: Scott, do you want to kick us off by helping contextualize the kinds of comments we're focusing on today and how we're going to structure the conversation?
1:27
SPEAKER_04: Sure.
1:27
SPEAKER_01: Yep.
1:28
SPEAKER_01: Happy to do it.
1:29
SPEAKER_01: So as you said, we're going to cover a broad range of topics here today.
1:34
SPEAKER_01: I would say maybe before we get going that, you know, we're going to really try and hone in on transaction-specific comments.
1:40
SPEAKER_01: There will be other uh podcasts in this series that will, you know, uh dive into other areas that the NCC tends to focus on, whether it be revenue, mDNA segments, deferred income taxes, risk factors, et cetera.
1:53
SPEAKER_01: So we'll dive into that in other series.
1:55
SPEAKER_01: Those are certainly applicable to transaction documents.
1:57
SPEAKER_01: We're just not going to cover it here today.
1:59
SPEAKER_01: We're going to try and really stay focused on transactions.
2:02
SPEAKER_01: Um certainly the SEC will tend to focus in on non-standard transactions.
2:06
SPEAKER_01: And so we thought it would be valuable to um to say a few words about it here today.
2:11
SPEAKER_01: We'll we'll do it in a bit of a uh what I'll call a matrix format, um, just because there's a number of different types of transactions.
2:18
SPEAKER_01: So we certainly have IPOs, we have MA, um, we'll touch a little bit on spins along the way.
2:24
SPEAKER_01: Um, but we'll we'll also introduce two different dimensions to this one just because this is perhaps um unique in the comment letter series where there's an element of anticipating, and there always is this element of anticipating what the SEC is going to say.
2:40
SPEAKER_01: But in a transaction environment where you know timing is of the essence and you know there's really judgmental issues to be wrestled with, um, you know, clients will often split um the manner in which they deal with what might otherwise attract comments.
2:55
SPEAKER_01: And in certain instances, they'll pre-clear some of their perspectives, and in other instances, they'll be what well called reactive to uh to how the SEC might react to something.
3:04
SPEAKER_04: And before you jump into that, I think it's as you were saying that, I was thinking how great it is to have both of you, just with your respective backgrounds, both of you capital markets practice over your career.
3:16
SPEAKER_04: Um, so you obviously have a lot of experience in dealing with these types of transactions.
3:20
SPEAKER_04: But then also, Scott, your perspective, you know, within the SEC and capital markets group, you're seeing a lot of these transactions, you see a lot of these deals.
3:28
SPEAKER_04: Um, and for KDU, you spent some time down at the SEC staff working on these consults.
3:34
SPEAKER_04: So I think I want to level set for the audience that I think it's it's this is um very useful, very helpful.
3:40
SPEAKER_04: A lot of people don't typically think of these types of comments as or issues as being something that you really need to be thinking about.
3:46
SPEAKER_04: You're more focused on the accounting, right?
3:48
SPEAKER_04: Some of the SEC reporting.
3:50
SPEAKER_04: This can actually hold up a deal.
3:51
SPEAKER_04: So um, so I think that it's great to highlight that um for the audience.
3:56
SPEAKER_04: So before we cover the commutator themes, um, I'd like to set the stage just for the audience of what are we seeing broadly in terms of the markets right now?
4:05
SPEAKER_04: Um, Scott, I'll I'll start with you before we turn to Katie.
4:08
SPEAKER_01: Sure.
4:09
SPEAKER_01: Yeah, maybe I'll cover the IPO market.
4:10
SPEAKER_01: Um, Katie will cover the MA market more broadly.
4:13
SPEAKER_01: Um, so in terms of IPOs, um, year to date, this is through through September, 60 traditional IPOs, um, excluding all of the SPAC IPOs, which we take out of our, out of our data and track it, um, track it separately.
4:27
SPEAKER_01: So 60 traditional IPOs raised approximately$29 billion again, year to date through September 30.
4:34
SPEAKER_01: That is up on a deal value basis, that's up 31% year over year.
4:39
SPEAKER_01: So last year, year to date, we had 48 IPOs that raised about$22 billion billion dollars.
4:45
SPEAKER_01: Um in September alone, we had 13 IPOs, raised just over$8 billion,$8 billion.
4:50
SPEAKER_01: That was the busiest month for new for new IPOs since uh since November 2021.
4:56
SPEAKER_01: Um and in terms of sector mix, no, no real, no real surprises there.
4:59
SPEAKER_01: So technology, energy, financial services um leading leading the way.
5:04
SPEAKER_01: I know I I disaggregated the market between traditional IPOs and the spAC market.
5:08
SPEAKER_01: Just say the spAC market, which has been dead for a very long time, um, is you know, it kind of continues to rebound, right?
5:15
SPEAKER_01: So we've got a bit of a new model, yeah, for better or worse.
5:19
SPEAKER_01: We've got a new uh new model from the SEC.
5:21
SPEAKER_01: We had rulemaking a few years back.
5:24
SPEAKER_01: Um, I guess the SPAC market has adapted to that, and there's quite a few um SPAC IPOs that we're seeing.
5:29
SPEAKER_01: I also say that at the time of um taping, we're in the midst of the government, um, the government shutdown.
5:36
SPEAKER_01: It looks like it is about to come to uh come to an end shortly.
5:39
SPEAKER_01: So hopefully that will be the case.
5:41
SPEAKER_01: But you know, the government shutdown, you know, we'll talk about it in in other in other forums.
5:46
SPEAKER_01: Um the government shutdown will certainly have an impact on the number of IPOs that will have um you know closed in the last call it four, four to five weeks.
5:55
SPEAKER_01: So watch for that in the data for Q4.
5:57
SPEAKER_01: But I would say, again, year to date, a modest uptick in um IPO-related activity compared to last um last year.
6:04
SPEAKER_04: Well, and then and Katie, you dodged a bullet.
6:06
SPEAKER_04: You're you're you're not there at the SEC staff and dealing with a shutdown and not not getting paychecks for, I mean, many, I guess a few uh paychecks now at the SEC that these guys have missed out on.
6:16
SPEAKER_04: So you definitely dodged a bullet there.
6:18
SPEAKER_04: But um, what are we seeing in an MA space?
6:21
SPEAKER_03: For sure.
6:21
SPEAKER_03: Um our data is as of the beginning of September, and uh were observed that there were 144 deals that were worth between 1 billion and$5 billion.
6:30
SPEAKER_03: So we refer to those as large deals, and then 47 mega deals where the deal value is over$5 billion.
6:35
SPEAKER_03: So if we were to annualize that um and the pace continues for the rest of 2025, then the year would have approximately 17% more large deals and 31% more mega deals than in prior year.
6:46
SPEAKER_03: So quite a bit opening up compared to prior year in terms of the deals market.
6:49
SPEAKER_03: I think we've seen a slight uptick in terms of divestitures globally that are being reported in SEC registrants.
6:55
SPEAKER_03: And from a spin perspective, as of the beginning of this month, there were 11 announced spin-offs from companies in the S P 500, which is something to note because it's the highest number of such announcements since 2016.
7:06
SPEAKER_04: No, that is that's interesting.
7:07
SPEAKER_04: Um, so appreciate that overview and kind of going back to the manner in which you guys have you know set up the discussion.
7:14
SPEAKER_04: You talked about anticipating comments via preparation of a high quality document, um, as well as the potential pre-clearance of issues with the SEC staff.
7:24
SPEAKER_04: Um, and then of course, then you know separately reacting to those comments, right?
7:28
SPEAKER_04: There may be comments that are related to some of those judgmental areas that may be uh part of the pre-clearance.
7:34
SPEAKER_04: Um so let's organize our conversation around those two themes and start with the types of issues that we typically see clients contemplate pre-clearing with the SEC staff and how that works.
7:44
SPEAKER_04: And obviously, I I've I've always said it's it's a best practice, um, whether it's doing so with respect to pre-clearing something with the office chief accountant or even something from the reporting perspective and clearing pre-clearing with uh the Corp FEN's chief accountant's office.
7:57
SPEAKER_04: But um, Scott, we'll we'll talk to you quickly about pre-clearance, kind of get your insights there.
8:02
SPEAKER_01: Yep, happy to do that.
8:03
SPEAKER_01: Um so so uh maybe I'll repeat just a few things that we've set up to now just to reinforce them.
8:07
SPEAKER_01: Um so as I said above, pre-clearance tends to come with a set of um attributes that make pre-clearance, you know, a far more attractive um path rather than following a reactive, um, a reactive path.
8:19
SPEAKER_01: So one, they certainly tend to be highly judgmental issues.
8:22
SPEAKER_01: Um, two, and perhaps most importantly, is that the risk reward dynamics are heavily in favor of addressing um whatever that particular issue is really early in the process.
8:34
SPEAKER_01: And the reason is that if you get it wrong, it's really foundational.
8:38
SPEAKER_01: And if it if it's if it's wrong and it's uncovered in connection with the actual post-filing review, you're gonna have a timing problem, right?
8:46
SPEAKER_01: And that's terribly unattractive in a transaction environment.
8:49
SPEAKER_01: And so normally when the the risk reward is upside down like that and the risk is to timing, um, you know, clients will opt opt into a pre-clearance, pre-clearance process, despite there being no requirement to do so.
9:01
SPEAKER_01: Um, these preclearances are just as they as they sound, they're done prior to filing documents with the um with the SEC and they de-risk um the process going forward.
9:11
SPEAKER_01: And then Kyle, as you as you said, depending on their nature, and we'll hit a little bit of a little bit of each, but if they're you know accounting in nature, they're gonna go to OCA within the SEC, the office of the chief accountant.
9:22
SPEAKER_01: And you know, if it's reporting in nature, so think significance tests, acquisition of a business or something like that, and separate from the actual transaction or yeah, determination of predecessor things like this.
9:33
SPEAKER_01: We'll hit a few of these.
9:34
SPEAKER_01: Those would go to a different office inside of the SEC.
9:37
SPEAKER_01: So those would go to the chief accountant inside of the division of corporation finance.
9:41
SPEAKER_01: Okay.
9:41
SPEAKER_01: And sometimes we'll have issues that you know, you'll have an accounting issue and a reporting issue, and we'll send it both um both at the same time.
9:48
SPEAKER_04: Yeah, yeah.
9:49
SPEAKER_04: No, I I think I think that's helpful.
9:51
SPEAKER_04: Um, as far as just kind of bringing it to life for the audience, Katie, um, you know, you you spent your some time obviously working on these on the PDBC side of the fence, but then also um while at the SEC.
10:04
SPEAKER_04: Um, you want to get us started with some some examples of the types of issues that that we see clients really considering uh whether they should pre-clear, you know, with the staff.
10:13
SPEAKER_03: Yeah, absolutely.
10:14
SPEAKER_03: And I would say that it tends to be something that's judgmental.
10:17
SPEAKER_03: The guidance isn't always clear and understanding the facts and circumstances around each transaction is important.
10:23
SPEAKER_03: Um, but these particular issues that we're gonna talk through are often items that will get staff comments.
10:28
SPEAKER_03: And so the pre-clear process will help in potentially avoiding those comments if you're working through the thought process and the accounting analysis with the staff prior to going into your filings themselves.
10:39
SPEAKER_03: So the first one that I wanted to touch on is determination of asset versus business when you're dealing with an MA transaction.
10:45
SPEAKER_03: Um, definitely can be judgment.
10:47
SPEAKER_03: And we have seen the staff comment on why an asset acquisition isn't a business combination or vice versa.
10:52
SPEAKER_03: And it's really key because there's two different accounting models for these two types of acquisitions.
10:56
SPEAKER_03: In a business combination, generally you're recording at fair value and recognizing goodwill or bargain purchase gain.
11:02
SPEAKER_03: Yeah.
11:02
SPEAKER_03: Different treatment for in-process research and development.
11:05
SPEAKER_03: There's a measurement period that does apply for a business combination that gives you up to one year for valuations to be completed and transaction costs are expensed.
11:12
SPEAKER_03: On the other hand, asset acquisitions are recorded at costs, there's no goodwill or bargain purchase gain, and there's no measurement period, and you're capitalizing the transaction costs.
11:20
SPEAKER_03: These are the primary differences, but there are definitely others, especially when there's contingent consideration involved or non-controlling interests.
11:26
SPEAKER_03: And um, I just want to reiterate, I think this applies to all of the issues, but it's important for the assessment of all of the facts and reaching the conclusions and having controls around your process for that determination.
11:36
SPEAKER_03: That's a great point to help respond to the SEC comments.
11:38
SPEAKER_04: That's a great point.
11:39
SPEAKER_01: Can I introduce one other layer of complexity there?
11:41
SPEAKER_01: Absolutely.
11:41
SPEAKER_01: Um, just for our audience, because we certainly have a definition of a business inside of ASC 805 and you know what makes the difference between an asset acquisition and a business combination.
11:51
SPEAKER_01: You know, to make things even more confusing, we have a different, potentially more inclusive definition of what constitutes a business for SEC reporting purposes.
12:01
SPEAKER_01: And so I would just caution our listeners to be alert to the possibility that, you know, they may have an asset acquisition for US GAAP purposes, but for SEC reporting purposes, it meets the definition of a business.
12:13
SPEAKER_01: Okay, so it can be a pretty um complicated area for people to work through.
12:17
SPEAKER_03: Scott, we're working on that in a lot of deal recently.
12:19
SPEAKER_03: So uh another couple of topics.
12:22
SPEAKER_03: So accounting acquirer in an MA transaction, when you're looking at um how that's recognized, one entity is going to be identified as the accounting acquirer.
12:30
SPEAKER_03: And that will drive which of the entities will have the step up in basis and have to go through acquisition accounting.
12:34
SPEAKER_03: Again, judgment in this in this assessment.
12:36
SPEAKER_04: Would you get this wrong though?
12:37
SPEAKER_04: This is a significant impact, right?
12:39
SPEAKER_04: Significant impact.
12:40
SPEAKER_03: Um we see this often when you're dealing with mergers that may be effectuated primarily through the exchange of equity interests, might be ambiguous control if there's 50-50 ownership, um, complex structures, if there's a change in governance that happens contemporaneous with the transaction.
12:54
SPEAKER_03: Um the guidance in 805 talks through a set of factors where you have to identify the appropriate accounting acquirer.
12:59
SPEAKER_03: And we'll sometimes see the staff ask for feedback in terms of how did management consider these scenarios.
13:05
SPEAKER_04: I've issued that, I've issued that comment more than once.
13:07
SPEAKER_03: There you go.
13:09
SPEAKER_03: Um, another thing is just so the reverse merger occurs when the legal form of the transaction doesn't follow the accounting form.
13:15
SPEAKER_03: So you may have a legal acquirer end up being the accounting acquiry.
13:19
SPEAKER_03: We see this pretty often in D SPAC transactions, but this plays into the reporting implications that you're profile.
13:24
SPEAKER_03: Yeah.
13:25
SPEAKER_03: Um and then just one addition is for situations involving the acquisition of a variable interest entity.
13:29
SPEAKER_03: Um, there is specific guidance for those transactions and it was recently amended by the FASB.
13:34
SPEAKER_03: So um there have been some comments specific to the application of that guidance that we've seen.
13:38
SPEAKER_03: And just following that train of thought in terms of legal form versus what you may conclude from an accounting perspective, um, the concept of a forward versus a reverse spin-off.
13:47
SPEAKER_03: You may have a legal entity being spun off, but that is actually the spin-off for accounting purposes.
13:52
SPEAKER_03: Some factors include the size of the entities and the fair value, senior management, that type of thing.
13:57
SPEAKER_03: Um, and it has really significant reporting impacts in terms of the financial statements that are presented in the legal Remain Co.
14:04
SPEAKER_03: Um and then the spin co itself.
14:06
SPEAKER_03: Um, we have a podcast in October on spin-offs and the accounting treatment.
14:10
SPEAKER_03: So I would encourage our listeners to refer back to that if they'd like a more detailed discussion.
14:13
SPEAKER_04: What what of all those of those you mentioned, what what did you see most during your tenure at the SEC?
14:20
SPEAKER_03: I would say um accounting acquirer and asset versus business.
14:25
SPEAKER_03: Um the asset versus business guidance was updated um in and incorporating the screen test, but there's still judgment involved.
14:31
SPEAKER_03: There is.
14:32
SPEAKER_04: Yeah, that's a great point.
14:33
SPEAKER_04: Yeah.
14:33
SPEAKER_04: Scott, did anything you want to add on that?
14:35
SPEAKER_01: Yeah, I was gonna maybe add just a couple of uh a couple of issues, just building on what um what Katie said.
14:39
SPEAKER_01: So uh certainly a handful of issues that, and these would typically go into um Corp Fin, not OCA, but um determination of a reporting predecessor.
14:48
SPEAKER_01: So, you know, I think in situations where you don't have a full complement of financial statements for the registrant itself, the legal entity, um, you would need to go looking to see if you have a reporting predecessor, right?
15:01
SPEAKER_01: To to build out that full complement of financial statements.
15:04
SPEAKER_01: A lot of times that determination is really married up to the determination that's being made for gap purposes in terms of who the accounting acquirer is, because the criteria that you're considering are very um very similar.
15:16
SPEAKER_01: I would also highlight you can have situations where there are multiple predecessors, although I would say that that is not um the most common scenario.
15:24
SPEAKER_04: But that's a big throws a big wrench in things, right?
15:27
SPEAKER_04: Because you're looking at getting the financial statements for two entities for a period of time prior to um.
15:35
SPEAKER_01: Yeah, that's the that's the challenge here, is that painful, you know, the the impacts are you know maybe two or threefold.
15:41
SPEAKER_01: So, you know, one is that if you're a reporting predecessor, your audit needs to be performed under PCOB audit standards, not AI CPA.
15:49
SPEAKER_01: But secondarily, you'll recall that you know, we had a rule change back in 2020 that limited the number of periods for a significant acquiree, right, under Rule 305 to two years.
16:01
SPEAKER_01: Prior to that, it was three years.
16:03
SPEAKER_01: Well, if you're a predecessor, you're going to need three years or potentially periods that you wouldn't otherwise need if you looked at it, the entity through the lens of um of a significant acquiree.
16:14
SPEAKER_01: And so again, there can be impacts here, and that's why this is often on the list of pre-clearance type issues, or at least issues to consider pre-clearance on.
16:23
SPEAKER_01: I was going to hit basis of presentation.
16:25
SPEAKER_01: So looking to, you know, either subsidiary IPOs or spin-offs, you know, we often wrestle with questions around the basis of presentation for the carve out financial statements for that, um, for that business.
16:38
SPEAKER_01: And without really going deep on this, there's two basic approaches to the basis of presentation for the carve out financials.
16:46
SPEAKER_01: One is what we call a legal entity approach, and the other is a transaction perimeter approach.
16:50
SPEAKER_01: So in a transaction perimeter, you'll focus on what is actually net being contributed to Spin Co or the IPO co.
16:59
SPEAKER_01: Whereas in a legal entity approach, it will be very form-driven.
17:02
SPEAKER_01: Okay, so if you have commingled legal entities that house, you know, businesses that will be contributed to SpinCo, as well as businesses that will be retained by Remain Co.
17:12
SPEAKER_01: And the legal entity that houses them is being contributed to the SpinCo or IPO co, you can find yourself with a disconnect between a legal entity approach and a transaction perimeter approach.
17:24
SPEAKER_01: Okay, again, pretty fundamental issues.
17:27
SPEAKER_01: And if you find yourself with the wrong approach, you know, deep into the filing process, again, that would be pretty unwelcome from a timing standpoint.
17:35
SPEAKER_04: Well, because you're dealing with not just a new set of accounts, but you're dealing with having to have it all audited again and changes to pretty much everything.
17:42
SPEAKER_04: Exactly.
17:43
SPEAKER_04: Exactly.
17:43
SPEAKER_04: Definitely a lot of work involved.
17:44
SPEAKER_01: Yep, no, exactly.
17:45
SPEAKER_01: And then the last thing I would highlight, Kyle, is um it's like an anomalous outcome.
17:49
SPEAKER_01: So if you have an acquisition, if a an IPO company or an existing registrant goes out and makes a significant acquisition, there are instances where they go and they test the significance of the acquisition to see if they need pre-acquisition financial statements for the target.
18:03
SPEAKER_01: Um and in certain instances, they get what they believe to be anomalous results.
18:09
SPEAKER_01: Okay.
18:09
SPEAKER_01: So a result of a significance test that is indicating a higher level of significance than they believe is really warranted in the circumstances.
18:18
SPEAKER_01: This used to be easily the most common write-in to the SEC, but we got the rule changes back in 2020.
18:25
SPEAKER_01: That kind of codified a lot of what people used to write in in terms of how they asserted anomalous outcomes.
18:32
SPEAKER_01: And so we've we see far fewer of these these days, but they still um they still exist.
18:37
SPEAKER_01: Okay.
18:38
SPEAKER_01: So if you have a situation like that, you believe you have an anomalous result and you know the financial statements of the target, pre-acquisition are perhaps not needed for you know for investor consumption, um, you might consider a preclearance in that scenario as well.
18:51
SPEAKER_04: Yeah.
18:51
SPEAKER_04: The great, great, great points there.
18:53
SPEAKER_04: And and obviously seeing and hearing all of those uh points um really highlights how you know fundamental all of this is to um kind of the transaction, getting these things right.
19:04
SPEAKER_04: You get it wrong, huge consequences.
19:07
SPEAKER_04: Um, you're not gonna have the right information in the filing.
19:09
SPEAKER_04: And if you're dealing with any kind of filing with the SEC, you have to restate, you're amending, you're going through, you're jumping through hoops, and obviously that impacts timing.
19:17
SPEAKER_04: It's gonna slow down your capital formation transaction.
19:20
SPEAKER_04: So um a lot, a lot to think about there.
19:22
SPEAKER_04: I think the other piece that you highlighted for me, I think that really stands out, and we've we've talked about this a lot, is when you think about some of these deals, these new issuers.
19:30
SPEAKER_04: The way that I always like to frame it for people is look, if you are the new issuer, uh you're issuing these securities, you know, whether your predecessor or successor, you're still looking at a larger period of financial information than you would if it's an acquisition of a business, right?
19:47
SPEAKER_04: And subject to other SEC requirements, which you you highlighted is only two years versus a lot of times it could be three years in some situations, especially for a spinoff transaction.
19:56
SPEAKER_04: So um great points there.
19:58
SPEAKER_04: Um so I want to pivot now to say a little bit about some of the types of comments we typically see really during the ordinary course of the reviews.
20:07
SPEAKER_04: I'm sure there are things that would bubble up to the office chief accountant um as well.
20:12
SPEAKER_04: But um, Scott, I'll kind of start with you.
20:14
SPEAKER_04: Um, anything from the review process you want to share?
20:17
SPEAKER_01: Sure.
20:17
SPEAKER_01: Yeah, maybe just for context.
20:19
SPEAKER_01: So we'll we'll pivot now.
20:20
SPEAKER_01: So what we just talked about pre-clearance, as I said, prior to actually submitting or filing a document with the SEC.
20:27
SPEAKER_01: So now we're gonna pivot.
20:28
SPEAKER_01: So when you file typically a registration statement, could also be other documents, but we'll focus on registration statements.
20:34
SPEAKER_01: When you file those with the SEC, you know, 30 days later, you're going to get a letter from the SEC with their comments on the document.
20:43
SPEAKER_01: And so again, these contemplate the types of comments that you might be able to be a bit more reactive to rather than having to anticipate because of the risk-reward equation.
20:54
SPEAKER_01: Um, you know, so we thought we would highlight a handful of those that we see frequently in transactions, but again, that companies ordinarily opt to deal with on a reactive, reactive basis.
21:05
SPEAKER_04: Okay.
21:06
SPEAKER_04: So as I think about some of this, you know, obviously to me, it's more useful to have some real life examples.
21:14
SPEAKER_04: Um Katie, obviously you you you do have a lot of those insights on what you've seen.
21:20
SPEAKER_04: You talk a little bit about what what we what we see in this space.
21:23
SPEAKER_03: Yeah, definitely.
21:24
SPEAKER_03: And I would say to reiterate Scott's point, we will see consistency in comment letter themes in normal course of business for any registrant versus specific to transactions.
21:32
SPEAKER_03: So you'll see that pop up a bit here.
21:34
SPEAKER_03: First one I wanted to talk about was um related to valuations as you're going through a business combination.
21:40
SPEAKER_03: They can be very complex and do often give rise to SEC staff comments.
21:44
SPEAKER_03: They'll look to ask about the methods and key inputs that are being used for significant intangibles and specific assumptions that were used, such as the discount rate or royalty rate, attrition, growth, contributory asset charges, that type of thing.
21:57
SPEAKER_03: Um there may be questions as to why these inputs.
22:00
SPEAKER_03: Are considered reasonable by management and to quantify ranges and sensitivities.
22:04
SPEAKER_03: There may be assertions around useful lives that are used in the valuation models.
22:07
SPEAKER_03: And the staff may ask for specific synergy drivers that have been included in Goodwill.
22:11
SPEAKER_03: And that I think dovetails nicely into the next topic that we wanted to speak to, which are cheap stock considerations in an IPO.
22:18
SPEAKER_03: The staff will often focus on a registrant's pre-IPO stock valuation versus that in an IPO.
22:24
SPEAKER_03: So specifically understanding the rationale for a difference between fair value measurements of the underlying common stock of a share-based award that was issued in the year prior to IPO and the anticipated IPO price, understanding if it's significantly lower and also considering secondary transactions.
22:40
SPEAKER_03: Were there transactions where the price paid by investors in the recent acquisitions of similar stock are higher compared to the valuations that were used for these share-based comp awards?
22:50
SPEAKER_03: Companies may have to justify what the difference is to reconcile that out and looking to events or potentially changes and assumptions that have occurred in that intervening time period.
22:59
SPEAKER_03: And if that difference is not reasonably reconciled, the entity may have to record something called a cheap stock charge, maybe material and lead to restatement of financial statements.
23:08
SPEAKER_03: So something really critical to keep in mind.
23:09
SPEAKER_03: I don't know, Sarah.
23:10
SPEAKER_04: No, that's that's great.
23:11
SPEAKER_04: Before I go on to Scott, I wanted to so just the the point there about the cheap stock and the valuations is an area that like you highlighted it perfectly well of hey, you look at the basically the last year and the staff is gonna do that and they're gonna say, I mean, they are gonna look at these secondary transactions, and you especially when you think about like a lot of the private equity, the money going to the private equity, you know, the the kind of the those, the unicorns um uh that that might go public, the staff is absolutely gonna look at at that information or look at valuations, what what is in the press, what people have said over time.
23:45
SPEAKER_04: So I think that's a great point to highlight.
23:48
SPEAKER_01: Yeah, so maybe maybe carrying on a similar theme, we'll do a bit of a uh a laundry list here and give Katie Katie a break.
23:55
SPEAKER_01: Um so I'll cover a couple of topics that um we often see you know the staff focused on in um in reviews of transaction-oriented documents.
24:03
SPEAKER_01: So maybe I'll start with pro forma.
24:04
SPEAKER_01: Okay, so if you have a uh, let's take a significant acquisition, a disposition, something like this, um, you're gonna prepare pro forma financial statements.
24:13
SPEAKER_01: And those will, those will consist of a tabular presentation, a balance sheet, an income statement, and a uh a full complement of um supporting notes that lay out, you know, the critical assumptions that are being made in the preparation of the proformas and and so on and so forth.
24:27
SPEAKER_01: Um we see a wide variety of comments as it relates to pro forma financial statements, um, not least of which is um going back to one of our preclearance topics, is you know, how did you in an acquisition scenario, how did you make the determination around who the accounting acquirer is, right?
24:44
SPEAKER_01: Take if you haven't pre-cleared that, you know, take me through the thought process on that, because again, that's pretty fundamental to the um to the preparation of the pro formas.
24:52
SPEAKER_01: Um we we also see, you know, comments frequently around, you know, just being um robust in terms of the disclosure of the critical, again, the critical assumptions that are underlying the preparation of those pro forma financial statements.
25:06
SPEAKER_01: And then in certain instances, most notably in spin-offs, we can see some debate around how you categorize your pro forma adjustments.
25:17
SPEAKER_01: So, as a quick refresher, in the rules, there's three types of pro forma adjustments: transaction accounting adjustments, autonomous entity adjustments, and management adjustments.
25:25
SPEAKER_01: They each apply in certain circumstances.
25:29
SPEAKER_01: And while the first two are required, if applicable, um management adjustments are strictly voluntary.
25:36
SPEAKER_01: But we can see in spin-offs a little bit of friction between or judgment to be applied between what constitutes an autonomous entity adjustment versus a management adjustment.
25:46
SPEAKER_01: So sometimes we'll see um comments along those lines in connection with the preparation of pro forma financials.
25:52
SPEAKER_04: Do we see anyone presenting or utilizing the autonomous entity adjustments for any transactions other than spin-off transactions?
26:02
SPEAKER_01: Well, you could you could have it in the subsidiary IPO, but one of the baseline requirements is that you were formerly part of a larger entity, right?
26:10
SPEAKER_01: And so that naturally limits the population of um registrants that are going to need to deal with autonomous entity adjustments, but very common um to have them in subsidiary IPOs and or um andor spin-offs.
26:24
SPEAKER_04: You also mentioned transaction accounting adjustments.
26:27
SPEAKER_04: And obviously the first thing that popped into my mind, Katie, was you you were talking about the valuation.
26:32
SPEAKER_04: You start thinking of all right, you have uh a merger that's being voted on, you know, or you know, whatever the document might be, they're gonna present proformas, assuming right, that the two comp one company acquired another company.
26:44
SPEAKER_04: Do we see the staff um going down the rabbit eye issuing questions or comments on the the valuation that's involved with respect to proformas?
26:54
SPEAKER_04: Or do we are they do they take a lighter touch on kind of some of those adjustments, the valuations?
26:59
SPEAKER_04: Because like you mentioned, Katie, like, oh, you're putting in maybe growth rates, you would talk about you know various aspects, royalty rates, right?
27:06
SPEAKER_04: When you think about really from royalty approaches for valuations.
27:09
SPEAKER_04: Are we seeing the staff ask questions even on the proformas on the adjustments when thinking about some of the just assumptions they've used?
27:16
SPEAKER_01: Yeah, I would say I would disaggregate the the valuation conversation into two pieces.
27:20
SPEAKER_01: One is the purchase price, and there can be in in share transactions, there can be um questions around how to derive that that purchase price.
27:29
SPEAKER_01: There can be questions there, but there's pretty clear guidance.
27:31
SPEAKER_01: And you know, we've got a public company with a with a public share price and and um and so on and so forth.
27:37
SPEAKER_01: But so I put that off to the side.
27:39
SPEAKER_01: And then as it relates to everything else in terms of valuation of intangibles, customer relationships, you know, so on and so forth, going back to the point that Katie was making earlier, these are really critical um assumptions.
27:51
SPEAKER_01: And, you know, I was highlighting that the SEC will ask for robust disclosure around those assumptions.
27:57
SPEAKER_01: They'll certainly ask questions.
27:58
SPEAKER_01: But but I guess my experience has been that it's a it's a bit more balanced because of the fact that, you know, these are in fact proformas at that stage, right?
28:08
SPEAKER_01: They're not historical financial statements.
28:09
SPEAKER_01: And so I sometimes say, you know, proformas are best available information at any point in point in time.
28:16
SPEAKER_01: And so there's probably a little bit of a push and a pull.
28:18
SPEAKER_01: They're important assumptions for the development of the proformas, but maybe simultaneously recognize that you know they are in fact proformas and you know, they're based on a preliminary set of data that is, you know, by definition imperfect at the time you prepare it.
28:32
SPEAKER_01: Yeah, yeah.
28:32
SPEAKER_04: Any anything else there?
28:34
SPEAKER_04: Um PFI, I know is one thing that we we had talked about in prepping for this.
28:38
SPEAKER_04: Anything you wanted to address there?
28:40
SPEAKER_01: I I would just say, again, you know, PFI is prospective financial information.
28:43
SPEAKER_01: So in merger transactions, you have some forward-looking, let's call them simplistically forecasts.
28:48
SPEAKER_01: Um, you know, very similar to Proformas, where the SEC will push pretty hard on the underlying assumptions that have been used to develop the PFI and making sure those are um clearly disclosed in the um in the document.
29:03
SPEAKER_01: And then we did see in connection with um this the SPAC craze back in 2021, you know, some of those transactions took a very long time to play out.
29:12
SPEAKER_01: And so you had a very interesting dynamic where they had PFI in a document for periods where, because of how long the transaction took to close, you would end up with the historical periods in those documents side by side with um with the previously prepared PFI.
29:29
SPEAKER_01: And so that created a lot of um a lot of tension.
29:32
SPEAKER_01: And, you know, a lot of times those those the the projections and the actuals were pretty disconnected.
29:38
SPEAKER_01: Um and so there was a push to get really robust disclosure into those documents as it relates to that PFI and and and those disconnects.
29:46
SPEAKER_04: And Katie, anything to add on that front?
29:49
SPEAKER_04: What what we'd see in the real world?
29:52
SPEAKER_03: Yeah, definitely.
29:52
SPEAKER_03: I think a pretty common topic can also be complicated, um, is related to compensation versus purchase consideration determination.
30:00
SPEAKER_03: So there can often be a number of payouts that are contemplated when you're entering into a deal.
30:05
SPEAKER_03: Um, could be an earnout, rollover replacement awards, retention or bonus plans, um, settlements of pre-existing relationships.
30:11
SPEAKER_03: And the staff will ask questions as to whether they are purchase consideration or compensation that should be accounted for separately and recognized in earnings.
30:20
SPEAKER_03: Um, looking to understand if that arrangement was primarily for the benefit of the combined company or the acquirer, um, and understanding who initiated it, what's the timing and purpose?
30:30
SPEAKER_03: Um, I would say that it's something where if you're looking at automatic forfeiture upon termination, clear line for compensation, but there is a lot of judgment as to the types of these arrangements.
30:39
SPEAKER_03: Is there a pre-existing clause in someone's stock comp arrangement that'll have to be considered when thinking through this particular issue?
30:46
SPEAKER_04: Those are great points.
30:46
SPEAKER_04: And I I think, yeah, but I'm guessing that's not something that people are really necessarily pre-clearing.
30:51
SPEAKER_04: You're just looking at, I mean, maybe some stuff in there, but you're you're you're you're looking at the nature of the arrangement to figure it out.
30:57
SPEAKER_04: But I think it's it shouldn't be lost on people.
31:00
SPEAKER_04: That's something that they need to be looking at and evaluating because it's it's gonna actually it's gonna impact the disclosures in the document.
31:06
SPEAKER_03: Absolutely.
31:07
SPEAKER_04: So um I guess the the the last thing, and I'm just curious, and and I think this is one that for people to think about is really just segments, Katie.
31:15
SPEAKER_04: Um I I think I think it it's some people kind of get lost in the in the shuffle and and probably may not realize that that they need to be thinking about the impacts, changes in the business, that sort of thing.
31:25
SPEAKER_04: Any anything you wanted to cover there?
31:27
SPEAKER_03: I think you hit the nail on the head.
31:28
SPEAKER_03: Um segment reporting represents management's approach to how they're viewing the business and how they assess performance.
31:33
SPEAKER_03: So when you're thinking through an MA transaction, there may be realignment of the post-deal reporting structure.
31:39
SPEAKER_03: Um, the CODM um will maybe have a different package involved where they're seeing different information.
31:44
SPEAKER_03: And so if there's been a new alignment that changes the operating segment structure that has a retrospective recast of all earlier periods to this new structure, um, maybe more of a lift than originally contemplating, but that does change.
31:56
SPEAKER_03: I also would say in an IPO context, um, the staff will sometimes ask for an understanding of how management is actually running the business and understanding what's being reported up to the CODM to validate the segment conclusions being presented in the S1 filing.
32:10
SPEAKER_03: Um something else we also see pretty often is to understand if operating segments are being aggregated for reportable segment purposes.
32:18
SPEAKER_03: You know, why does that make sense in the context of the guidance?
32:22
SPEAKER_03: And is it possible that more disaggregation is actually more decision useful?
32:25
SPEAKER_03: So we'll push back on some of the assumptions being used by management.
32:27
SPEAKER_04: Yeah, absolutely.
32:28
SPEAKER_04: I think it it was always the thing at the staff where it's you're looking at the operating segments, they determine the appropriate operating segments, but then you're you're going both directions.
32:36
SPEAKER_04: You're going one direction to what you just said of, okay, did you get the right reportable segments?
32:40
SPEAKER_04: And then you're going the other direction and saying, all right, if you have goodwill, have you determined your reporting units you know appropriately?
32:46
SPEAKER_04: A lot of of tension there, a lot of things to think about.
32:49
SPEAKER_04: Um, these are are really great points.
32:52
SPEAKER_04: I appreciate um you guys um joining today.
32:55
SPEAKER_04: And and obviously, um, as I think about kind of the messaging, if you had to distill today's conversation on challenges related to transactions into a takeaway um for our listeners.
33:06
SPEAKER_04: Um, Katie, I'll start with you.
33:08
SPEAKER_04: Um Scott will always have him go at the end so you can steal whatever it is that that he was planning on saying.
33:14
SPEAKER_04: Um but but what's that takeaway um for the audience?
33:18
SPEAKER_04: What's your closing thought?
33:19
SPEAKER_03: I think I have a couple.
33:20
SPEAKER_03: Um first, I would say that the nature of transactions is that they're gonna continue to evolve and facts and circumstances will change.
33:27
SPEAKER_03: So while the pre-clearance process can be incredibly helpful, it's also helpful to know that when things are changing, the preclearance may need to go through again.
33:34
SPEAKER_03: I think sometimes people get caught up in that.
33:36
SPEAKER_04: That's a great point.
33:37
SPEAKER_03: They've gotten one conclusion and then something changes all around.
33:39
SPEAKER_03: Um, just I think a pitfall that I've seen some of our clients come up against.
33:44
SPEAKER_03: And then I just wanted to call out the number of resources that we have available.
33:48
SPEAKER_03: We have different guides, the business combinations guide, um, financial statement presentations guide.
33:52
SPEAKER_03: We have a roadmap for an IPO and it goes into some of these reporting and accounting considerations in detail.
33:57
SPEAKER_03: Um, and also have the podcast series.
33:59
SPEAKER_03: So specifically our recent one on comment letters and uh the spin-off podcast series.
34:04
SPEAKER_04: Yeah, spin-off one's definitely a great one.
34:06
SPEAKER_04: Scott?
34:07
SPEAKER_01: Well, I'll go back to, I know I do this often, Kyle, but maybe I'll go back to where we started and just reiterate one of the points and dynamics that are unique to a transaction environment, which is, you know, to encourage um clients to really deliberately focus on these two aspects to, you know, resolving comments.
34:24
SPEAKER_01: I would say one, you know, anticipating the comments.
34:27
SPEAKER_01: And that can be through preparation of a high quality document with lawyers, advisors, auditors, et cetera.
34:33
SPEAKER_01: Um, but secondarily, you know, considering if there are issues where the risk-reward equation is just so skewed that they ought to go through a pre-clearance process on that.
34:42
SPEAKER_01: And then secondarily, um, to deal with the the reactive side of the comment letter process separately.
34:48
SPEAKER_01: So I would just think, again, encourage people to be deliberate about, you know, put putting their their questions into those two different buckets so that they have a strategy going into their into their project.
34:58
SPEAKER_04: No, I think those are all great points.
35:00
SPEAKER_04: The the thing that I would add, and one of the things that stands out to me is there's a lot of nuances, obviously, with with these types of transactions.
35:07
SPEAKER_04: And I think engaging with you know with other parties um that have done this and seen this to your point um to get that level of expertise, I think is is absolutely a must.
35:18
SPEAKER_04: Um, and and I know that, you know, as we think about our teams working on this, um, there's a lot of questions that arise throughout the process as well.
35:26
SPEAKER_04: And is I think the biggest thing you highlighted for me, Katie, is you do need to revisit that things change, evolve, um, and they certainly could change um obviously the the nature of the deal, transaction, and of course the reporting disclosure.
35:38
SPEAKER_04: So I want to thank you both again for joining me today.
35:41
SPEAKER_04: I I know that uh this series gets a lot of attention, um, but this is a great topic for us to kind of kick off um some of the other sessions that we have coming.
35:49
SPEAKER_04: Um, but again, thank you both.
35:50
SPEAKER_04: Thank you.
35:51
SPEAKER_03: Thank you.
35:52
SPEAKER_02: That's our show for today.
35:54
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36:14
SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
36:18
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