Defining Issues 17-12 SEC grants relief for private ...

Defining Issues?

SEC grants relief for private company financial information included in a public company's filing

July 21, 2017

Many public companies' private, equity method investees

and acquired businesses will not be required to use public companies' adoption dates for revenue and leases.

Applicability

Private companies that are public business entities (PBEs) only because their financial statements or summarized financial information are included in an SEC filing, such as when an SEC registrant:

-- files separate financial statements or includes

summarized financial information for investees accounted for under the equity method of accounting; or

-- files separate financial statements of a

significant acquired business.

Key facts and impacts

On July 20, the SEC staff observer at the FASB's Emerging Issues Task Force (EITF) meeting announced that the SEC staff will not object if a PBE that otherwise would not meet the definition of a PBE except for a requirement to include, or the inclusion of, its financial statements or financial information in another entity's filing with the SEC (referred to as an `Excluded PBE'), uses private company adoption dates for the new standards on revenue recognition and leases.1

On June 15, KPMG released Defining Issues 1712, Some private companies may need to adopt

ASC 606 earlier than expected, to alert registrants that:

-- a public company's private, equity method

investee(s) may need to adopt ASC 606 as early as January 1, 2018;2 and

-- if a public company acquires a private

business in 2018, the acquired business may need to adopt ASC 606 as early as January 1, 2018, if its financial statements are filed with the SEC.

We have updated Defining Issues 17-12 to incorporate the SEC staff's announcement. The announcement applies only to Excluded PBEs and not other PBEs, and only to the application of the revenue and leases standards. It does not extend to other new FASB ASUs.

Public business entities

An otherwise private company meets the definition of a PBE if its financial statements are, or its financial information is, included or required to be included in an SEC filing.3 The definition of a PBE includes criteria that would make an entity ineligible to use private company exceptions and alternatives issued by the FASB. Under US GAAP, PBEs generally adopt new or amended

1 ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases 2 Assumes all entities are calendar-year reporting companies 3 ASU 2013-12, Definition of a Public Business Entity

?2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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accounting standards using the same adoption dates as public companies.

ASC 606 is effective for a PBE for annual and interim periods in fiscal years beginning after December 15, 2017. It is effective for all other entities for annual periods in fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019.

ASC 842 is effective for a PBE for annual and interim periods in fiscal years beginning after December 15, 2018. It is effective for all other entities for annual periods in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020.

SEC staff announcement The SEC staff's announcement at the EITF meeting is narrow and applies to a company that meets the definition of a PBE only because it meets the PBE criterion discussed above. A private company whose financial information is included in an SEC filing but also meets the definition of a PBE for other reasons, such as the filing of financial statements with a regulatory agency other than the SEC, is not eligible for the SEC's relief.

While this Defining Issues focuses mainly on relief for private company equity method investees and private acquired businesses, there are other situations where the SEC staff's relief may apply, including but not limited to:

-- acquired real estate operations; -- properties securing loans that represent an

asset concentration; -- significant lessees; and

-- affiliates whose securities constitute a substantial portion of the collateral of a security that is registered or being registered.

Investments accounted for under the equity method

An equity method investee is a PBE when the public company investor (the registrant) includes, or is required to include, certain investee information in its SEC filings, including:

-- separate investee annual financial statements

to comply with S-X Rule 3-09;4

-- summarized investee financial information to

comply with S-X Rule 8-035 when the investor is a smaller reporting company; or

-- summarized investee annual balance sheet

and income statement information to comply with S-X Rule 4-08(g),6 whether presented for an individual investee or more than one investee in an aggregated presentation.7

The SEC staff's July 20 announcement means that the SEC will not object if a registrant's PBE investee elects to adopt ASC 606 and ASC 842 using private company adoption dates, but only if the PBE investee meets the definition of an Excluded PBE.

Investor's equity method pickup An equity method investee does not become a PBE solely because a registrant investor is using the equity method to account for the investee. Therefore, an investor does not need to adjust its equity method pickup for investees that do not meet the PBE definition.8

However, an investor must compute its investee equity method pickup using the investee's financial statements prepared using PBE adoption dates for new accounting standards when the investee meets the definition of a PBE, excluding ASC 606 and ASC 842 for Excluded PBEs.

4 Regulation S-X, Rule 3-09, Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons

5 Regulation S-X, Rule 8-03, Financial statements of smaller reporting companies; Interim financial statements

6 Regulation S-X, Rule 4-08(g), Summarized financial information of subsidiaries not consolidated and 50 percent or less owned persons

7 ASU 2013-12, Definition of a Public Business Entity, paragraph BC12 8 Jonathan Wiggins, Associate Chief Accountant, Office of the Chief Accountant, Remarks before the 2016 AICPA

National Conference on Current SEC and PCAOB Developments

?2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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KPMG observation

The SEC staff announcement means that an equity method investee that is an Excluded PBE may have almost two more years to prepare its financial statements under ASC 606 because it does not need to apply ASC 606 to its interim periods in the year of adoption, and may have different adoption dates than its investor. Using a calendar-year example, an Excluded PBE can first prepare its financial statements or financial information under ASC 606 for the 2019 annual period, which will be included in the investor's 2019 Form 10-K that will be filed in early 2020. Absent the announcement, the Excluded PBE would have had to adopt ASC 606 in connection with its investor's first quarter 2018 Form 10-Q filing. The investor's equity method pickup for the Excluded PBE would not need to be adjusted for the application of ASC 606.

Similar relief will be provided for ASC 842 in the following year.

Are different adoption dates and transition methods permitted?

A registrant is not required to conform the adoption dates and transition methods of its equity method investees to its own. For example, if a registrant adopts ASC 606 using the full retrospective method, its PBE investee (including an Excluded PBE) may adopt ASC 606 using the modified retrospective method. The registrant and the PBE investee may also adopt ASC 606 and ASC 842 on different dates if the Excluded PBE investee elects to use private company adoption dates.

Emerging growth companies

An emerging growth company (EGC) may elect to adopt accounting standards using private .

company adoption dates. EGC status is unique to SEC registrants.

PBEs that are not registrants cannot be EGCs but may elect to use private company adoption dates for ASC 606 and ASC 842 if the investee is an Excluded PBE.

PBE investees who are not Excluded PBEs would adopt all new accounting standards using public company adoption dates and thus may be required to adopt ASC 606, ASC 842 and other new standards before their EGC investor when the EGC registrant has elected to adopt new accounting standards using nonpublic entity effective dates

Example

This chart summarizes ASC 606's effective dates and other adoption requirements for calendar yearend non-EGC and EGC registrants and their investees under S-X Rules 3-09, 8-03 or 4-08(g).

Filing status Registrant Registrant Registrant EGC EGC EGC

Investor Effective date 2018 2018 2018 2018 or 2019 2018 or 2019 2018 or 2019

Note

(3) (3) (3)

Investee (1)

Filing status

Effective date

Registrant

2018

Not a Registrant (5) 2018 or 2019

EGC

2018 or 2019

Registrant

2018

Not a Registrant (5) 2018 or 2019

EGC

2018 or 2019

Note

(2) (3) (4)

(2) (3) (4)

Notes:

(1) Conclusions apply whether investor has one significant investee or several individually insignificant investees that are significant in the aggregate for S-X Rule 4-08(g).

(2) Because the financial statements or financial information are included in the investor's filings, the investee is a PBE. Therefore, the investee should adopt ASC 606 using the PBE effective date. However, the SEC staff will not object if the investee uses private company adoption dates when the investee is an Excluded PBE Investee.

?2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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(3) An EGC is not subject to accounting standards adopted or revised on or after April 5, 2012, unless and until these standards are also required for nonpublic entities. The EGC issuer can elect to use the nonpublic entity effective dates of new accounting standards on an 'all or nothing' basis and must comply with the transition provisions for all new or revised accounting standards in the same manner. If the investor has elected to follow PBE dates, it will adopt ASC 606 on January 1, 2018. If the investor has elected to follow the nonpublic entity adoption dates, it is required to adopt for the annual reporting period beginning January 1, 2019 and can elect to adopt in interim periods within that year or interim periods beginning January 1, 2020. The investor can also early adopt as of January 1, 2018.

(4) The EGC investee's effective date is based on its own elections to adopt new accounting standards using public or nonpublic entity effective dates and does not depend on the investor's elections about effective dates.

(5) Private company investees that are not registrants are Excluded PBEs as long as they don't meet any other aspects of the definition of a PBE.

Acquired businesses A private acquired business meets the definition of a PBE if its financial statements are included in a registrant's SEC filing (usually in a Form 8-K or a registration statement to satisfy S-X Rule 3-059 for acquired businesses).

This means that if a calendar year-end registrant acquires a calendar year-end significant business in 2018, the acquired business would potentially need to adopt ASC 606 as of January 1, 2018 in its financial statements filed to comply with S-X Rule 3-05.

However, the SEC staff has indicated it will not object if an Excluded PBE investee uses private company adoption dates for ASC 606 when preparing its financial statements to satisfy S-X Rule 3-05.

If a registrant adopts ASC 606 as of a different date or under a different transition method from a significant acquired business, the pro forma information provided under S-X Article 1110 should be presented under ASC 606 using the same transition date and method as the acquiring registrant.

Other accounting standards

The relief provided by the SEC staff is limited to ASC 606 and ASC 842. The SEC staff's comments did not extend to other accounting standards. PBE investees will still need to comply with US GAAP and adopt other new accounting standards that have different adoption dates for public and private companies using the public company adoption dates.

Contributing authors Melanie Dolan; Dan Langlois; Paul Munter; Ellen Russo KPMG's Financial Reporting View us/frv

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The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the standard or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors. Defining Issues? is a registered trademark of KPMG LLP. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

9 Regulation S-X, Rule 3-05, Financial statements of businesses acquired or to be acquired 10 Regulation S-X, Article 11, Pro forma financial information

?2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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