Retrospective application of accounting rules in the context of Form S-3

Compliance Week reports that SEC staff recently told the Center for Audit Quality's SEC Regulations Committee that it would expect companies to perform certain retrospective adjustments to financial statements based on new accounting rules when using Form S-3 to conduct an offering. This is an issue to keep in mind in planning the time schedule for S-3 filings (if anyone ever files an S-3 again).

Item 11(b) of Form S-3 requires the inclusion of restated financial statements when there has been a change in accounting principles that requires a material retroactive restatement of financial statements. When a company adopts in the first quarter a new accounting pronouncement that requires retrospective application and then files a Form S-3 that incorporates the most recent annual report on Form 10-K in addition to financial statements for an interim period that includes the date of adoption, the company may be required to include financial statements that have been restated to reflect adoption of the pronouncement. Apparently, this issue has become more acute as FASB increasingly adopts standards requiring retrospective effect in historical financial statements, Accordingly, the SEC Regulations Committee asked the staff its views with respect to several recent pronouncements that require retrospective application in financial statements for earlier periods.

With regard to FAS 160, Noncontrolling Interests in Consolidated Financial Statements, and FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion, the SEC staff told the SEC Regulations Committee that, if a company were filing a Form S-3 and had filed interim financial statements for a period that includes the date of adoption, Item 11(b) of Form S-3 would require the company to recast its prior period annual financial statements that are incorporated by reference to reflect material retrospective application of FAS 160 or FSP APB 14-1, as the case may be. With regard to EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, however, the staff told the Committee that companies would not necessarily have to restate if, (assuming the company and its auditors conclude that the financial statements being incorporated by reference do not require revision as a result of the application of the EITF and the independent auditor consents to the use of its report without the revision), the company instead discloses EPS revised to reflect the effect of the pronouncement in the selected financial data included in the registration statement, or in a Form 10-Q or Form 8-K incorporated by reference, with "full, robust disclosure" regarding the implications. The staff occasionally makes an exception of this kind where the retrospective effects are not likely to be pervasive. In contrast, according to the article, the effect of adopting FAS 160 in particular is likely to be pervasive. The article quotes the chair of the SEC Regulations Committee to the effect that, if companies are planning to raise capital before year-end, they'll need to consider the effects of FAS 160 and FSP APB 14-1 much sooner than otherwise necessary.

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