Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 27427 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 211 

[Release No. SAB 112] 

Staff Accounting Bulletin No. 112 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Publication of Staff Accounting 

Bulletin. 

SUMMARY: This staff accounting bulletin 

amends or rescinds portions of the 

interpretive guidance included in the 

Staff Accounting Bulletin Series in 

order to make the relevant interpretive 

guidance consistent with current 

authoritative accounting and auditing 

guidance and Securities and Exchange 

Commission rules and regulations. 

Specifically, the staff is updating the 

Series in order to bring existing 

guidance into conformity with recent 

pronouncements by the Financial 

Accounting Standards Board, namely, 

Statement of Financial Accounting 

Standards No. 141 (revised 2007), 

Business Combinations, and Statement 

of Financial Accounting Standards No. 

160, Noncontrolling Interests in 

Consolidated Financial Statements. 

DATES: Effective Date: June 10, 2009. 

FOR FURTHER INFORMATION CONTACT: Eric 

C. West, Associate Chief Accountant, 

Office of the Chief Accountant, at (202) 

551–5314, or Steven C. Jacobs, Associate 

Chief Accountant, Division of 

Corporation Finance, at (202) 551–3403, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: The 

statements in staff accounting bulletins 

are not rules or interpretations of the 

Commission, nor are they published as 

bearing the Commission’s official 

approval. They represent interpretations 

and practices followed by the Division 

of Corporation Finance and the Office of 

the Chief Accountant in administering 

the disclosure requirements of the 

Federal securities laws. 

June 4, 2009. 

Elizabeth M. Murphy, 

Secretary. 

List of Subjects in 17 CFR Part 211 

Accounting, Reporting and 

recordkeeping requirements, Securities. 

PART 211—[AMENDED] 

■ Accordingly, Part 211 of Title 17 of 

the Code of Federal Regulations is 

amended by adding Staff Accounting 

Bulletin No. 112 to the table found in 

Subpart B. 

Staff Accounting Bulletin No. 112 

This staff accounting bulletin amends 

or rescinds portions of the interpretive 

guidance included in the Staff 

Accounting Bulletin Series in order to 

make the relevant interpretive guidance 

consistent with current authoritative 

accounting and auditing guidance and 

Securities and Exchange Commission 

(‘‘Commission’’) rules and regulations. 

Specifically, the staff is updating the 

Series in order to bring existing 

guidance into conformity with recent 

pronouncements by the Financial 

Accounting Standards Board (‘‘FASB’’), 

namely, Statement of Financial 

Accounting Standards No. 141 (revised 

2007), Business Combinations 

(‘‘Statement 141(R)’’), and Statement of 

Financial Accounting Standards No. 

160, Noncontrolling Interests in 

Consolidated Financial Statements 

(‘‘Statement 160’’). 

The following describes the changes 

made to the Staff Accounting Bulletin 

Series that are presented at the end of 

this release: 

1. Topic 2: Business Combinations 

a. Topic 2.A is retitled. It previously 

referred to the ‘‘purchase method,’’ 

which is a term rendered obsolete by 

Statement 141(R). That accounting 

method is now referred to as the 

‘‘Acquisition Method.’’ 

b. Topic 2.A.5 is removed. This topic 

provided guidance on assigning 

acquisition cost to loans receivable 

acquired in a business combination. In 

a business combination, Statement 

141(R) requires an entity to measure 

acquired receivables, including loans, at 

their acquisition-date fair value. 

Paragraph A57 of Statement 141(R) 

provides new guidance that precludes 

an acquirer from recognizing a separate 

valuation allowance as of the 

acquisition date for assets acquired in a 

business combination that are measured 

at their acquisition-date fair values 

because the effects of uncertainty about 

future cash flows are included in the 

fair value measure. 

c. Topic 2.A.6 is amended to conform 

to the requirement in paragraph 59 of 

Statement 141(R) that acquisitionrelated costs be accounted for as 

expenses in the period in which the 

costs are incurred and services are 

received, except for costs incurred to 

issue debt or equity securities which are 

recognized in accordance with other 

applicable generally accepted 

accounting principles (‘‘GAAP’’). 

d. Topic 2.A.7 is removed. This topic 

provided guidance on how an acquirer 

should account for and disclose 

contingent liabilities that have been 

assumed in a business combination. 

Statement 141(R), as amended by FASB 

Staff Position 141(R)–1 (‘‘FSP 141(R)– 

1’’), provides guidance on the 

recognition, measurement and 

disclosure of assets and liabilities 

arising from contingencies. 

e. Topic 2.A.8 is amended to remove 

the reference to Emerging Issues Task 

Force (‘‘EITF’’) Issue No. 88–16, Basis in 

Leveraged Buyout Transactions, which 

was superseded by Statement 141(R). 

f. Topic 2.A.9 is removed. This topic 

provided guidance on cash flow 

estimates used to determine the fair 

value of a contingent liability assumed 

in a business combination and 

referenced the need for disclosures in 

Management’s Discussion and Analysis 

(‘‘MD&A’’) for any adjustments made to 

the historical financial statements of the 

acquired entity. This guidance is no 

longer necessary because: Statement 

141(R), as amended by FSP 141(R)–1, 

provides guidance on the recognition, 

measurement and disclosure of assets 

and liabilities arising from 

contingencies; Statement of Financial 

Accounting Standards No. 157, Fair 

Value Measurements (‘‘Statement 157’’), 

provides guidance on fair value 

measurements; Statement of Financial 

Accounting Standards No.154, 

Accounting Changes and Error 

Corrections, provides guidance on error 

correction and disclosure; and Item 303 

of Regulation S–K provides guidance on 

MD&A disclosures. 

g. Topic 2.D is amended to remove the 

guidance on determining the basis of 

properties in ‘‘exchange offers’’ (also 

referred to as ‘‘roll-ups’’ or ‘‘puttogethers’’). This guidance is no longer 

necessary since Statement 141(R) 

provides measurement guidance for 

business combinations. 

2. Topic 5: Miscellaneous Accounting 

a. Topic 5.E is amended to reflect the 

issuance of FASB Interpretation No. 45, 

Guarantor’s Accounting and Disclosure 

Requirements for Guarantees, Including 

Indirect Guarantees of Indebtedness of 

Others (‘‘FIN 45’’), Statement 157, and 

Statement 160. Topic 5.E (as modified) 

expresses the views of the staff 

regarding the accounting for the 

divestiture of a subsidiary or other 

business operation. 

b. Topic 5.H is removed. This topic 

provided guidance on the accounting for 

the direct sale of unissued shares by a 

consolidated subsidiary that resulted in 

a decrease in the parent’s ownership 

percentage without resulting in 

deconsolidation of the subsidiary. 

Under this guidance, when an offering 

mstockstill on PROD1PC66 with RULES

27428 Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 

1As noted in the ‘‘Status’’ section of the Abstract 

to Issue 86–15, the term-extending provisions of the 

debt instrument should be analyzed to determine 

whether they constitute an embedded derivative 

requiring separate accounting in accordance with 

Statement 133 (as amended). 

takes the form of a subsidiary’s direct 

sale of its unissued shares, the parent 

could adopt an accounting policy 

whereby the amount in excess of the 

parent’s carrying value received may be 

reflected as a gain in the parent’s 

consolidated financial statements. 

Paragraphs 32 and 33 of Accounting 

Research Bulletin (‘‘ARB’’) 51, as 

amended by Statement 160, provide 

new guidance on the accounting for a 

change in a parent’s ownership interest 

when the parent retains its controlling 

financial interest. That guidance 

requires that changes in a parent’s 

ownership interest that do not result in 

deconsolidation shall be accounted for 

as equity transactions. Therefore, no 

gain or loss shall be recognized on the 

direct sale of unissued shares by a 

consolidated subsidiary if the parent 

does not deconsolidate the subsidiary. 

c. Topic 5.J is amended, in response 

to Statement 160, to clarify the basis of 

accounting for purchased assets and 

liabilities that should be used to 

establish a new accounting basis when 

a substantially wholly-owned subsidiary 

presents separate financial statements. 

d. Topic 5.U is removed. This topic 

provided guidance on the recognition of 

gains in certain exchanges in which the 

seller received non-cash proceeds, such 

as securities issued by the buyer, as 

consideration for the assets transferred. 

This guidance is no longer necessary 

due to the issuance of FIN 45, Statement 

157, and Statement 160. 

3. Topic 6: Interpretations of 

Accounting Series Releases and 

Financial Reporting Releases 

Topic 6.G.1.a and 2.a is amended to 

conform terminology to the Technical 

Amendments to Rules, Forms, 

Schedules and Codification of Financial 

Reporting Policies [Release Nos. 33– 

9026; 34–59775; FR–79 (April 15, 2009)] 

that the Commission adopted to 

conform to Statement 141(R) and 

Statement 160. 

Accordingly, the staff hereby amends 

the Staff Accounting Bulletin Series as 

follows: 

Note: The text of SAB 112 will not appear 

in the Code of Federal Regulations. 

Topic 2: Business Combinations 

A. Acquisition Method 

* * * * * 

5. Removed by SAB 112 

6. Debt Issue Costs 

Facts: Company A is to acquire the 

net assets of Company B in a transaction 

to be accounted for as a business 

combination. In connection with the 

transaction, Company A has retained an 

investment banker to provide advisory 

services in structuring the acquisition 

and to provide the necessary financing. 

It is expected that the acquisition will 

be financed on an interim basis using 

‘‘bridge financing’’ provided by the 

investment banker. Permanent financing 

will be arranged at a later date through 

a debt offering, which will be 

underwritten by the investment banker. 

Fees will be paid to the investment 

banker for the advisory services, the 

bridge financing, and the underwriting 

of the permanent financing. These 

services may be billed separately or as 

a single amount. 

Question 1: Should total fees paid to 

the investment banker for acquisitionrelated services and the issuance of debt 

securities be allocated between the 

services received? 

Interpretive Response: Yes. Fees paid 

to an investment banker in connection 

with a business combination or asset 

acquisition, when the investment 

banker is also providing interim 

financing or underwriting services, must 

be allocated between acquisition related 

services and debt issue costs. 

When an investment banker provides 

services in connection with a business 

combination or asset acquisition and 

also provides underwriting services 

associated with the issuance of debt or 

equity securities, the total fees incurred 

by an entity should be allocated 

between the services received on a 

relative fair value basis. The objective of 

the allocation is to ascribe the total fees 

incurred to the actual services provided 

by the investment banker. 

Statement 141(R) provides guidance 

for the portion of the costs that 

represent acquisition-related services. 

The portion of the costs pertaining to 

the issuance of debt or equity securities 

should be accounted for in accordance 

with other applicable GAAP. 

Question 2: May the debt issue costs 

of the interim ‘‘bridge financing’’ be 

amortized over the anticipated 

combined life of the bridge and 

permanent financings? 

Interpretive Response: No. Debt issue 

costs should be amortized by the 

interest method over the life of the debt 

to which they relate. Debt issue costs 

related to the bridge financing should be 

recognized as interest cost during the 

estimated interim period preceding the 

placement of the permanent financing 

with any unamortized amounts charged 

to expense if the bridge loan is repaid 

prior to the expiration of the estimated 

period. Where the bridged financing 

consists of increasing rate debt, the 

consensus reached in EITF Issue 86–15, 

Increasing Rate Debt, should be 

followed.1

7. Removed by SAB 112 

8. Business Combinations Prior to an 

Initial Public Offering 

Facts: Two or more businesses 

combine in a single combination just 

prior to or contemporaneously with an 

initial public offering. 

Question: Does the guidance in SAB 

Topic 5.G apply to business 

combinations entered into just prior to 

or contemporaneously with an initial 

public offering? 

Interpretive Response: No. The 

guidance in SAB Topic 5.G is intended 

to address the transfer, just prior to or 

contemporaneously with an initial 

public offering, of nonmonetary assets 

in exchange for a company’s stock. The 

guidance in SAB Topic 5.G is not 

intended to modify the requirements of 

Statement 141(R). Accordingly, the staff 

believes that the combination of two or 

more businesses should be accounted 

for in accordance with Statement 

141(R). 

9. Removed by SAB 112 

* * * * * 

D. Financial Statements of Oil and Gas 

Exchange Offers 

Facts: The oil and gas industry has 

experienced periods of time where there 

have been a significant number of 

‘‘exchange offers’’ (also referred to as 

‘‘roll-ups’’ or ‘‘put-togethers’’) to form a 

publicly held company, take an existing 

private company public, or increase the 

size of an existing publicly held 

company. An exchange offer transaction 

involves a swap of shares in a 

corporation for interests in properties, 

typically limited partnership interests. 

Such interests could include direct 

interests such as working interests and 

royalties related to developed or 

undeveloped properties and indirect 

interests such as limited partnership 

interests or shares of existing oil and gas 

companies. Generally, such transactions 

are structured to be tax-free to the 

individual or entity trading the property 

interest for shares of the corporation. 

Under certain circumstances, however, 

part or all of the transaction may be 

taxable. For purposes of the discussion 

in this Topic, in each of these situations, 

the entity (or entities) or property (or 

properties) are deemed to constitute a 

business. 

mstockstill on PROD1PC66 with RULES

Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 27429 

13See SAB 40, Topic 12.A.3.c. 

14As announced in Financial Reporting Release 

No. 2 (July 9, 1982). 

One financial reporting issue in 

exchange transactions involves deciding 

which prior financial results of the 

entities should be reported. 

Question 1: In Form 10–K filings with 

the Commission, the staff has permitted 

limited partnerships to omit certain of 

the oil and gas reserve value 

information and the supplemental 

summary of oil and gas activities 

disclosures required by Statement 69 in 

some circumstances. Is it permissible to 

omit these disclosures from the 

financial statements included in an 

exchange offering? 

Interpretive Response: No. Normally 

full disclosures of reserve data and 

related information are required. The 

exemptions previously allowed relate 

only to partnerships where valueoriented data are otherwise available to 

the limited partners pursuant to the 

partnership agreement. The staff has 

previously stated that it will require all 

of the required disclosures for 

partnerships which are the subject of 

exchange offers.13 These disclosures 

may, however, be presented on a 

combined basis if the entities are under 

common control. 

The staff believes that the financial 

statements in an exchange offer 

registration statement should provide 

sufficient historical reserve quantity and 

value-based disclosures to enable 

offerees and secondary market public 

investors to evaluate the effect of the 

exchange proposal. Accordingly, in all 

cases, it will be necessary to present 

information as of the latest year-end on 

reserve quantities and the future net 

revenues associated with such 

quantities. In certain circumstances, 

where the exchange is accounted for 

using the acquisition method of 

accounting, the staff will consider, on a 

case-by-case basis, granting exemptions 

from (i) the disclosure requirements for 

year-to-year reconciliations of reserve 

quantities, and (ii) the requirements for 

a summary of oil and gas producing 

activities and a summary of changes in 

the net present value of reserves. For 

instance, the staff may consider requests 

for exemptions in cases where the 

properties acquired in the exchange 

transaction are fully explored and 

developed, particularly if the 

management of the emerging company 

has not been involved in the exploration 

and development of such properties. 

Question 2: If the exchange company 

will use the full cost method of 

accounting, does the full cost ceiling 

limitation apply as of the date of the 

financial statements reflecting the 

exchange? 

Interpretive Response: Yes. The full 

cost ceiling limitation on costs 

capitalized does apply. However, as 

discussed under Topic 12.D.3, the 

Commission has stated that in unusual 

circumstances, registrants may request 

an exemption if as a result of a major 

purchase, a write-down would be 

required even though it can be 

demonstrated that the fair value of the 

properties clearly exceeds the 

unamortized costs. 

Question 3: How should ‘‘common 

control accounting’’ be applied to the 

specific assets and liabilities of the new 

exchange company? 

Interpretive Response: Consistent 

with SAB Topic 12.C.2, under ‘‘common 

control accounting’’ the various 

accounting methods followed by the 

offeree entities should be conformed to 

the methods adopted by the new 

exchange company. It is not appropriate 

to combine assets and liabilities 

accounted for on different bases. 

Accordingly, all of the oil and gas 

properties of the new entity must be 

accounted for on the same basis (either 

full cost or successful efforts) applied 

retrospectively. 

Question 4: What pro forma financial 

information is required in an exchange 

offer filing? 

Interpretive Response: The 

requirements for pro forma financial 

information in exchange offer filings are 

the same as in any other filings with the 

Commission and are detailed in Article 

11 of Regulation S–X.14 Rule 11–02(b) 

specifies the presentation requirements, 

including periods presented and types 

of adjustments to be made. The general 

criteria of Rule 11–02(b)(6) are that pro 

forma adjustments should give effect to 

events that are (i) directly attributable to 

the transaction, (ii) expected to have a 

continuing impact on the registrant, and 

(iii) factually supportable. In the case of 

an exchange offer, such adjustments 

typically are made to: 

(1) Show varying levels of acceptance 

of the offer. 

(2) Conform the accounting methods 

used in the historical financial 

statements to those to be applied by the 

new entity. 

(3) Recompute the depreciation, 

depletion and amortization charges, in 

cases where the new entity will use fullcost accounting, on a combined basis. If 

this computation is not practicable, and 

the exchange offer is accounted for as a 

transaction among entities under 

common control, historical 

depreciation, depletion and 

amortization provisions may be 

aggregated, with appropriate disclosure. 

(4) Reflect the acquisition in the pro 

forma statements where the exchange 

offer is accounted for using the 

acquisition method of accounting, 

including depreciation, depletion and 

amortization based on the measurement 

guidance in Statement 141(R). 

(5) Provide pro forma reserve 

information comparable to the 

disclosures required by paragraphs 10 

through 17 and 30 through 34 of SFAS 

69. 

(6) Reflect significant changes, if any, 

in levels of operations (revenues or 

costs), or in income tax status and to 

reflect debt incurred in connection with 

the transaction. 

In addition, the depreciation, 

depletion and amortization rate which 

will apply for the initial period 

subsequent to consummation of the 

exchange offer should be disclosed. 

Question 5: Are there conditions 

under which the presentation of other 

than full historical financial statements 

would be acceptable? 

Interpretive Response: Generally, full 

historical financial statements as 

specified in Rules 3–01 and 3–02 of 

Regulation S–X are considered 

necessary to enable offerees and 

secondary market investors to evaluate 

the transaction. Where securities are 

being registered to offer to the security 

holders (including limited partners and 

other ownership interests) of the 

businesses to be acquired, such 

financial statements are normally 

required pursuant to Rule 3–05 of 

Regulation S–X, either individually for 

each entity or, where appropriate, 

separately for the offeror and on a 

combined basis for other entities, 

generally excluding corporations. 

However, certain exceptions may apply 

as explained in the outline below: 

A. Acquisition Method Accounting 

1. If the registrant can demonstrate 

that full historical financial statements 

of the offeree businesses are not 

reasonably available, the staff may 

permit presentation of audited 

Statements of Combined Gross 

Revenues and Direct Lease Operating 

Expenses for all years for which an 

income statement would otherwise be 

required. In these circumstances, the 

registrant should also disclose in an 

unaudited footnote the amounts of total 

exploration and development costs, and 

general and administrative expenses 

along with the reasons why presentation 

of full historical financial statements is 

not practicable. 

2. The staff will consider requests to 

waive the requirement for prior year 

mstockstill on PROD1PC66 with RULES

27430 Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 

6The guidance in this SAB should also be 

considered for Company B’s separate financial 

statements included in its public offering following 

Company B’s spin-off or carve-out from Company 

A. 

7The guidance in this SAB should also be 

considered where Company A has financed the 

acquisition of Company B through the issuance of 

mandatory redeemable preferred stock. 

8The staff does not believe Company B’s financial 

statements must reflect the debt in this situation 

because in the event of default on the debt by 

Company A, the debt holder(s) would only be 

entitled to Company B’s stock held by Company A. 

Other equity or debt holders of Company B would 

retain their priority with respect to the net assets 

of Company B. 

financial statements of the offerees and 

instead allow presentation of only the 

latest fiscal year and interim period, if 

the registrant can demonstrate that the 

prior years’ data would not be 

meaningful because the offerees had no 

material quantity of production. 

B. Common Control Accounting 

The staff would expect that the full 

historical financial statements as 

specified in Rules 3–01 and 3–02 of 

Regulation S–X would be included in 

the registration statement for exchange 

offers accounted for as transactions 

among entities under common control, 

including all required supplemental 

reserve information. The presentation of 

individual or combined financial 

statements would depend on the 

circumstances of the particular 

exchange offer. 

Registrants are also reminded that 

wherever historical results are 

presented, it may be appropriate to 

explain the reasons why historical costs 

are not necessarily indicative of future 

expenditures. 

* * * * * 

Topic 5: Miscellaneous Accounting 

* * * * * 

E. Accounting for Divestiture of a 

Subsidiary or Other Business Operation 

Facts: Company X transferred certain 

operations (including several 

subsidiaries) to a group of former 

employees who had been responsible 

for managing those operations. Assets 

and liabilities with a net book value of 

approximately $8 million were 

transferred to a newly formed entity— 

Company Y—wholly owned by the 

former employees. The consideration 

received consisted of $1,000 in cash and 

interest bearing promissory notes for 

$10 million, payable in equal annual 

installments of $1 million each, plus 

interest, beginning two years from the 

date of the transaction. The former 

employees possessed insufficient assets 

to pay the notes and Company X 

expected the funds for payments to 

come exclusively from future operations 

of the transferred business. Company X 

remained contingently liable for 

performance on existing contracts 

transferred and agreed to guarantee, at 

its discretion, performance on future 

contracts entered into by the newly 

formed entity. Company X also acted as 

guarantor under a line of credit 

established by Company Y. 

The nature of Company Y’s business 

was such that Company X’s guarantees 

were considered a necessary predicate 

to obtaining future contracts until such 

time as Company Y achieved profitable 

operations and substantial financial 

independence from Company X. 

Question: If deconsolidation of the 

subsidiaries and business operations is 

appropriate, can Company X recognize 

a gain? 

Interpretive Response: Before 

recognizing any gain, Company X 

should identify all of the elements of the 

divesture arrangement and allocate the 

consideration exchanged to each of 

those elements. In this regard, we 

believe that Company X would 

recognize the guarantees at fair value in 

accordance with FIN 45, Guarantor’s 

Accounting and Disclosure 

Requirements for Guarantees, Including 

Indirect Guarantees of the Indebtedness 

of Others; the contingent liability for 

performance on existing contracts in 

accordance with Statement 5, 

Accounting for Contingencies; and the 

promissory notes in accordance with 

APB 21, Interest on Receivables and 

Payables, and Statements 114, 

Accounting by Creditors for Impairment 

of a Loan, and 118, Accounting by 

Creditors for Impairment of a Loan— 

Income Recognition and Disclosures. 

* * * * * 

H. Removed by SAB 112 

* * * * * 

J. New Basis of Accounting Required in 

Certain Circumstances 

Facts: Company A (or Company A 

and related persons) acquired 

substantially all of the common stock of 

Company B in one or a series of 

purchase transactions. 

Question 1: Must Company B’s 

financial statements presented in either 

its own or Company A’s subsequent 

filings with the Commission reflect the 

new basis of accounting arising from 

Company A’s acquisition of Company B 

when Company B’s separate corporate 

entity is retained? 

Interpretive Response: Yes. The staff 

believes that purchase transactions that 

result in an entity becoming 

substantially wholly owned (as defined 

in Rule 1–02(aa) of Regulation S–X) 

establish a new basis of accounting for 

the purchased assets and liabilities. 

When the form of ownership is within 

the control of the parent, the basis of 

accounting for purchased assets and 

liabilities should be the same regardless 

of whether the entity continues to exist 

or is merged into the parent’s 

operations. Therefore, Company B’s 

separate financial statements should 

reflect the new basis of accounting 

recorded by Company A upon 

acquisition (i.e., ‘‘pushed down’’ basis). 

Question 2: What is the staff’s 

position if Company A acquired less 

than substantially all of the common 

stock of Company B or Company B had 

publicly held debt or preferred stock at 

the time Company B became wholly 

owned? 

Interpretive Response: The staff 

recognizes that the existence of 

outstanding public debt, preferred stock 

or a significant noncontrolling interest 

in a subsidiary might impact the 

parent’s ability to control the form of 

ownership. Although encouraging its 

use, the staff generally does not insist on 

the application of push down 

accounting in these circumstances. 

Question 3: Company A borrows 

funds to acquire substantially all of the 

common stock of Company B. Company 

B subsequently files a registration 

statement in connection with a public 

offering of its stock or debt.6 Should 

Company B’s new basis (‘‘push down’’) 

financial statements include Company 

A’s debt related to its purchase of 

Company B? 

Interpretive Response: The staff 

believes that Company A’s debt,7 related 

interest expense, and allocable debt 

issue costs should be reflected in 

Company B’s financial statements 

included in the public offering (or an 

initial registration under the Exchange 

Act) if: (1) Company B is to assume the 

debt of Company A, either presently or 

in a planned transaction in the future; 

(2) the proceeds of a debt or equity 

offering of Company B will be used to 

retire all or a part of Company A’s debt; 

or (3) Company B guarantees or pledges 

its assets as collateral for Company A’s 

debt. Other relationships may exist 

between Company A and Company B, 

such as the pledge of Company B’s stock 

as collateral for Company A’s debt.8

While in this latter situation, it may be 

clear that Company B’s cash flows will 

service all or part of Company A’s debt, 

the staff does not insist that the debt be 

reflected in Company B’s financial 

statements providing there is full and 

prominent disclosure of the relationship 

between Companies A and B and the 

actual or potential cash flow 

commitment. In this regard, the staff 

mstockstill on PROD1PC66 with RULES

Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 27431 

9For example, the staff has noted that certain 

registrants have indicated on the face of such 

financial statements (as part of the stockholder’s 

equity section) the actual or potential financing 

arrangement and the registrant’s intent to pay 

dividends to satisfy its parent’s debt service 

requirements. The staff believes such disclosures 

are useful to highlight the existence of arrangements 

that could result in the use of Company B’s cash 

to service Company A’s debt. 

10A material asset pledge should be clearly 

indicated on the face of the balance sheet. For 

example, if all or substantially all of the assets are 

pledged, the ‘‘assets’’ and ‘‘total assets’’ captions 

should include parenthetically: ‘‘pledged for parent 

company debt—See Note X.’’ 

11See question 5 for a discussion of the meaning 

of components of an entity as used in Item 

302(a)(2). 

believes that Statements 5 and 57 as 

well as Interpretation 45 require 

sufficient disclosure to allow users of 

Company B’s financial statements to 

fully understand the impact of the 

relationship on Company B’s present 

and future cash flows. Rule 4–08(e) of 

Regulation S–X also requires disclosure 

of restrictions which limit the payment 

of dividends. 

Therefore, the staff believes that the 

equity section of Company B’s balance 

sheet and any pro forma financial 

information and capitalization tables 

should clearly disclose that this 

arrangement exists.9 Regardless of 

whether the debt is reflected in 

Company B’s financial statements, the 

notes to Company B’s financial 

statements should generally disclose, at 

a minimum: (1) The relationship 

between Company A and Company B; 

(2) a description of any arrangements 

that result in Company B’s guarantee, 

pledge of assets 10 or stock, etc. that 

provides security for Company A’s debt; 

(3) the extent (in the aggregate and for 

each of the five years subsequent to the 

date of the latest balance sheet 

presented) to which Company A is 

dependent on Company B’s cash flows 

to service its debt and the method by 

which this will occur; and (4) the 

impact of such cash flows on Company 

B’s ability to pay dividends or other 

amounts to holders of its securities. 

Additionally, the staff believes 

Company B’s Management’s Discussion 

and Analysis of Financial Condition and 

Results of Operations should discuss 

any material impact of its servicing of 

Company A’s debt on its own liquidity 

pursuant to Item 303(a)(1) of Regulation 

S–K. 

* * * * * 

U. Removed by SAB 112 

* * * * * 

Topic 6: Interpretations of Accounting 

Series Releases and Financial 

Reporting Releases 

* * * * * 

G. Accounting Series Releases 177 and 

286—Relating to Amendments to Form 

10–Q, Regulation S–K, and Regulations 

S–X Regarding Interim Financial 

Reporting. 

* * * * * 

1. Selected Quarterly Financial Data 

(Item 302(a) of Regulation S–K) 

a. Disclosure of Selected Quarterly 

Financial Data 

Facts: Item 302(a)(1) of Regulation S– 

K requires disclosure of net sales, gross 

profit, income before extraordinary 

items and cumulative effect of a change 

in accounting, per share data based 

upon such income (loss), net income 

(loss), and net income (loss) attributable 

to the registrant for each full quarter 

within the two most recent fiscal years 

and any subsequent interim period for 

which financial statements are 

included. Item 302(a)(3) requires the 

registrant to describe the effect of any 

disposals of components of an entity 11

and extraordinary, unusual or 

infrequently occurring items recognized 

in each quarter, as well as the aggregate 

effect and the nature of year-end or 

other adjustments which are material to 

the results of that quarter. Furthermore, 

Item 302(a)(2) requires a reconciliation 

of amounts previously reported on Form 

10–Q to the quarterly data presented if 

the amounts differ. 

* * * * * 

2. Amendments to Form 10–Q 

a. Form of Condensed Financial 

Statements 

Facts: Rules 10–01(a)(2) and (3) of 

Regulation S–X provide that interim 

balance sheets and statements of income 

shall include only major captions (i.e., 

numbered captions) set forth in 

Regulation S–X, with the exception of 

inventories where data as to raw 

materials, work in process and finished 

goods shall be included, if applicable, 

either on the face of the balance sheet 

or in notes thereto. Where any major 

balance sheet caption is less than 10% 

of total assets and the amount in the 

caption has not increased or decreased 

by more than 25% since the end of the 

preceding fiscal year, the caption may 

be combined with others. When any 

major income statement caption is less 

than 15% of average net income 

attributable to the registrant for the most 

recent three fiscal years and the amount 

in the caption has not increased or 

decreased by more than 20% as 

compared to the corresponding interim 

period of the preceding fiscal year, the 

caption may be combined with others. 

Similarly, the statement of cash flows 

may be abbreviated, starting with a 

single figure of cash flows provided by 

operations and showing other changes 

individually only when they exceed 

10% of the average of cash flows 

provided by operations for the most 

recent three years. 

Question 1: If a company previously 

combined captions in a Form 10–Q but 

is required to present such captions 

separately in the Form 10–Q for the 

current quarter, must it retroactively 

reclassify amounts included in the 

prior-year financial statements 

presented for comparative purposes to 

conform with the captions presented for 

the current-year quarter? 

Interpretive Response: Yes. 

Question 2: If a company uses the 

gross profit method or some other 

method to determine cost of goods sold 

for interim periods, will it be acceptable 

to state only that it is not practicable to 

determine components of inventory at 

interim periods? 

Interpretive Response: The staff 

believes disclosure of inventory 

components is important to investors. In 

reaching this decision, the staff 

recognizes that registrants may not take 

inventories during interim periods and 

that managements, therefore, will have 

to estimate the inventory components. 

However, the staff believes that 

management will be able to make 

reasonable estimates of inventory 

components based upon their 

knowledge of the company’s production 

cycle, the costs (labor and overhead) 

associated with this cycle as well as the 

relative sales and purchasing volume of 

the company. 

Question 3: If a company has years 

during which operations resulted in a 

net outflow of cash and cash 

equivalents, should it exclude such 

years from the computation of cash and 

cash equivalents provided by operations 

for the three most recent years in 

determining what sources and 

applications must be shown separately? 

Interpretive Response: Yes. Similar to 

the determination of average net 

income, if operations resulted in a net 

outflow of cash and cash equivalents 

during any year, such amount should be 

excluded in making the computation of 

cash flow provided by operations for the 

three most recent years unless 

operations resulted in a net outflow of 

cash and cash equivalents in all three 

years, in which case the average of the 

mstockstill on PROD1PC66 with RULES

27432 Federal Register / Vol. 74, No. 110 / Wednesday, June 10, 2009 / Rules and Regulations 

net outflow of cash and cash equivalents 

should be used for the test. 

* * * * * 

[FR Doc. E9–13511 Filed 6–9–09; 8:45 am] 

BILLING CODE 8010–01–P 

DEPARTMENT OF THE TREASURY 

Fiscal Service 

31 CFR Part 285 

RIN 1510–AB22 

Disbursing Official Offset 

AGENCY: Financial Management Service, 

Fiscal Service, Treasury. 

ACTION: Interim final rule. 

SUMMARY: The Department of the 

Treasury, Financial Management 

Service, is amending its regulations 

governing the offset of Federal payments 

to collect nontax debts owed to the 

United States and States through the 

Treasury Offset Program. This 

amendment changes the priorities for 

collecting debt when a debtor owes 

more than one debt which has been 

referred to the Treasury Offset Program 

for collection by offset, consistent with 

a change in the statute on which the 

priority is based. The statutory change, 

enacted as part of the Deficit Reduction 

Act of 2005, amends the priority given 

to the collection of certain past-due 

support debts. 

DATES: This final rule is effective June 

10, 2009. 

ADDRESSES: The Financial Management 

Service participates in the U.S. 

government’s eRulemaking Initiative by 

publishing rulemaking information on 

www.regulations.gov. Regulations.gov 

offers the public the ability to comment 

on, search, and view publicly available 

rulemaking materials, including 

comments received on rules. 

Comments on this rule, identified by 

docket FISCAL–FMS–2008–0005, 

should only be submitted using the 

following methods: 

• Federal eRulemaking Portal: 

www.regulations.gov. Follow the 

instructions on the Web site for 

submitting comments. 

• Mail: Thomas Dungan, Policy 

Analyst, Financial Management Service, 

401 14th Street, SW., Washington, DC 

20227. 

The fax and e-mail methods of 

submitting comments on rules to FMS 

have been retired. 

Instructions: All submissions received 

must include the agency name 

(‘‘Financial Management Service’’) and 

docket number FISCAL–FMS–2008– 

0005 for this rulemaking. In general, 

comments will be published on 

Regulations.gov without change, 

including any business or personal 

information provided. Comments 

received, including attachments and 

other supporting materials, are part of 

the public record and subject to public 

disclosure. Do not enclose any 

information in your comment or 

supporting materials that you consider 

confidential or inappropriate for public 

disclosure. 

You may also inspect and copy this 

rule at: Treasury Department Library, 

Freedom of Information Act (FOIA) 

Collection, Room 1428, Main Treasury 

Building, 1500 Pennsylvania Avenue, 

NW., Washington, DC 20220. Before 

visiting, you must call (202) 622–0990 

for an appointment. 

FOR FURTHER INFORMATION CONTACT: 

Thomas Dungan, Policy Analyst, at 

(202) 874–6660 or Tricia Long, Senior 

Attorney, at (202) 874–6680. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Deficit Reduction Act of 2005 

(Pub. L. 109–171) amended section 6402 

of the Internal Revenue Code (26 U.S.C. 

6402) by changing the order of priority 

for collecting debt when a debtor owes 

more than one debt which is subject to 

collection by tax refund offset. Prior to 

this change, the order of priority was as 

follows: (1) Past-due support debts 

which had been assigned to a State 

under section 402(a)(26) or 471(a)(17) of 

the Social Security Act; (2) nontax debt 

owed to Federal agencies; (3) other pastdue support debts; and (4) other 

reductions allowed by law. Effective 

October 1, 2008, the order of priority is: 

(1) All past-due support debts; (2) 

nontax debt owed to Federal agencies 

and (3) other reductions allowed by law. 

The changes to this rule conform to 

the statutory change by reordering the 

order of priority for collecting debt 

through the Treasury Offset Program. 

Although the statutory change is 

directed to the offset of tax refund 

payments, the portions of this rule that 

govern offset of nontax payments are 

also being changed to conform to the 

new priority order. This is necessary for 

operational consistency and to create 

uniformity in how offsets are 

conducted. 

II. Procedural Analyses 

Administrative Procedures Act 

This rule is being issued without prior 

public notice and comment as to tax 

refund payments, because the changes 

to the rule are being made to conform 

to statutory requirements. As to other 

payments, the change does not 

adversely affect the rights of the public. 

Under 5 U.S.C. 553(b) and (d)(3), good 

cause exists to determine that notice 

and comment rulemaking is 

unnecessary and contrary to the public 

interest. The amendments made by this 

rule regarding the offset of tax refund 

payments are required due to 

amendments enacted into law. The 

amendments made by this rule 

regarding the offset of nontax payments 

mirror those statutory amendments and 

are necessary to achieve consistency in 

how non-judicial offsets are conducted. 

These changes relate to procedures 

between and among agencies that are 

owed delinquent debt; therefore, public 

comment is not necessary. Further delay 

in making these amendments is contrary 

to the public interest because it would 

create an inconsistency both between 

the law and the regulations and between 

the regulations themselves, and would 

cause confusion. 

Request for Comment on Plain Language 

Executive Order 12866 requires each 

agency in the Executive branch to write 

regulations that are simple and easy to 

understand. We invite comment on how 

to make the proposed rule clearer. For 

example, you may wish to discuss: (1) 

Whether we have organized the material 

to suit your needs; (2) whether the 

requirements of the rules are clear; or (3) 

whether there is something else we 

could do to make these rules easier to 

understand. 

Regulatory Planning and Review 

The final rule does not meet the 

criteria for a ‘‘significant regulatory 

action’’ as defined in Executive Order 

12866. Therefore, the regulatory review 

procedures contained therein do not 

apply. 

Regulatory Flexibility Act Analysis 

Because no notice of rulemaking is 

required, the provisions of the 

Regulatory Flexibility Act (5 U.S.C. et 

seq.) do not apply. 

List of Subjects in 31 CFR Part 285 

Administrative practice and 

procedure, Child support, Child welfare, 

Claims, Credits, Debts, Disability 

benefits, Federal employees, 

Garnishment of wages, Hearing and 

appeal procedures, Loan programs, 

Privacy, Railroad retirement, Railroad 

unemployment insurance, Salaries, 

Social Security benefits, Supplemental 

Security Income (SSI), Taxes, Veteran’s 

benefits, Wages. 

■ For the reasons set forth in the 

preamble, we are amending 31 CFR part 

285 as follows: 

mstockstill on PROD1PC66 with RULES