A Roadmap to Initial Public Offerings 2019 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. 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Other Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Consolidation — Identifying a Controlling Financial Interest Contracts on an Entity’s Own Equity Convertible Debt Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees — SEC Reporting Considerations Foreign Currency Transactions and Translations Income Taxes Leases Noncontrolling Interests Non-GAAP Financial Measures Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows Complimentary printed copies of Deloitte Roadmaps can be ordered (or preordered) from Deloitte’s Roadmap Store. iii Acknowledgments Nick Roger and Mark Miskinis supervised the overall preparation of this Roadmap and extend their deepest appreciation to the following Deloitte Professional Practice Network professionals who contributed to its development: Chris Ahl Diana Cravotta Jeff Jones Andrea Perdomo Anish Alemao Megan Donnellon Sandie Kim Jonathan Tambourine Steve Barta Radwan Edlbi Kerry Lanigan Stefanie Tamulis Greg Bartholomew Scott Gerland Kathleen Malone Tom Viggiano Chris Cahill Daniel Harper Christine Mazor Elise Cheung Matt Himmelman Michael Morrissey We also appreciate the contributions of our Production group — especially Joseph Renouf, the lead technical editor on the project; Teri Asarito, who designed the publication’s graphic design and page layouts; and Geri Driscoll and Jeanine Pagliaro, who copyedited the document. iv Contents Preface xi Contacts xiii Chapter 1 — Introduction to Initial Public Offerings 1 1.1 Key Laws That Govern the Securities Industry 1 1.1.1 Securities Act of 1933 1 1.1.2 Securities Exchange Act of 1934 1 1.1.3 Sarbanes-Oxley Act 2 1.1.4 Dodd-Frank Act 2 1.1.5 JOBS Act 2 1.2 Types of Issuers 2 1.3 Types of IPOs 3 1.4 The IPO Registration Statement 4 1.4.1 Registration Statement Filing and Review Process 4 1.4.2 Nonpublic Review Process for Draft Registration Statements 5 1.5 Smaller Reporting Companies 6 1.5.1 What Are SRCs? 6 1.5.2 Accommodations Applicable to SRCs 6 1.6 EGCs 7 1.6.1 What Are EGCs? 7 1.6.2 Accommodations Applicable to EGCs 7 1.7 Special-Purpose Acquisition Companies 8 1.8 Offerings Made in Accordance With Regulation A 9 Chapter 2 — Identifying the Required Financial Statements for the Registration Statement 11 2.1 Registrant Financial Statements 11 2.1.1 Recently Organized Registrant Financial Statements 12 2.2 Predecessor Financial Statements 12 2.2.1 Carve-Out Financial Statements 13 2.2.2 Put-Together or Roll-Up Transactions 14 v Deloitte | A Roadmap to Initial Public Offerings (2019) 2.3 Financial Statement Periods Presented 15 2.3.1 Periods Required for Predecessor Entities 16 2.3.2 Interim Financial Statements 16 2.3.3 Age of Financial Statements 16 2.3.4 Omission of Certain Financial Information From Draft Registration Statements 16 2.3.5 Rule 3-13 Waivers and Other Requests 18 2.4 Financial Statements of Businesses Acquired or to Be Acquired (Rule 3-05) 18 2.4.1 Periods of Financial Statements Required 19 2.4.2 Form of Financial Statements 21 2.4.2.1 Full Financial Statements 21 2.4.2.2 Carve-Out Financial Statements 21 2.4.2.3 Abbreviated Financial Statements 21 2.4.3 Other Considerations 22 2.4.4 Omission of Financial Statements of Acquired Entities From Draft Registration Statements 26 2.5 Financial Statements of Real Estate Operations Acquired or to Be Acquired (Rule 3-14) 26 2.5.1 Periods of Financial Statements Required 28 2.5.2 Other Considerations 28 2.5.3 Test of Significance in an IPO for a Newly Formed Real Estate Investment Trust (REIT) 29 2.5.4 Reporting Requirements for REIT Spins and REIT Conversions 29 2.6 Reporting Requirements for Equity Method Investees 30 2.6.1 Separate Financial Statements (Rule 3-09) 30 2.6.2 Summarized Financial Information (Rule 4-08(g)) 31 2.6.3 Summarized Interim Financial Information (Rule 10-01(b)) 31 2.7 Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered (Rule 3-10) 32 2.7.1 Condensed Consolidating Financial Information 32 2.7.2 Narrative Disclosures About Each Subsidiary Issuer or Guarantor 33 2.7.3 Recently Acquired Guarantors 33 2.8 Issuers of Securities That Collateralize Registered Securities (Rule 3-16) 33 2.8.1 Determining What Constitutes a “Substantial Portion of the Collateral” 34 2.8.2 Subsidiary Financial Statement Requirements 34 Chapter 3 — Financial Statement Preparation and Disclosure Requirements 35 3.1 Introduction 35 3.2 U.S. GAAP for Public Entities 35 3.3 Transition to New Accounting Standards 36 3.4 PCC Accounting Standards 37 3.5 Changes in Accounting Principles 37 3.6 Regulation S-X 38 3.6.1 Financial Statement Schedules 38 3.6.2 Article 8 — Financial Statements of Smaller Reporting Companies 39 vi Contents 3.7 Restatements and Corrections of Accounting Errors 39 3.7.1 Identifying Accounting Errors 39 3.7.2 Evaluating Accounting Errors 40 3.7.3 Corrective Action 40 3.7.4 Impact on Internal Control 41 3.7.5 Additional IPO Considerations 41 Chapter 4 — Other Registration Statement Reporting 43 4.1 Selected Financial Data 43 4.2 Selected Quarterly Financial Data 44 4.3 Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 45 4.4 Pro Forma Financial Information 45 4.4.1 Circumstances in Which Presentation of Pro Forma Information Is Required 46 4.4.2 Basic Presentation Requirements 46 4.4.3 Pro Forma Periods Presented 46 4.4.4 Pro Forma Adjustments 47 4.4.5 Other Common IPO Considerations Related to Pro Forma Information 48 4.4.5.1 Distributions to Owners 48 4.4.5.2 Conversion of Outstanding Securities 48 4.4.5.3 Changes in Terms of Outstanding Equity 48 4.4.5.4 Changes in Tax Status 49 4.5 Non-GAAP Financial Measures 49 4.6 Metrics and Key Performance Indicators 51 Chapter 5 — Accounting Matters 52 5.1 Introduction 52 5.2 Structure of the IPO Transaction 52 5.2.1 Carve-Out Considerations 52 5.2.2 Spin-Off Transactions 52 5.2.3 Reorganization in Anticipation of a Transaction 54 5.3 Related-Party Transactions 54 5.3.1 Definition of a Related Party 54 5.3.2 Presentation and Disclosures Associated With Related-Party Transactions 55 5.3.3 Related-Party Disclosures Under U.S. GAAP 56 5.3.3.1 Related-Party Disclosures for SEC Registrants 57 5.3.4 Identifying Related-Party Transactions 57 5.3.5 Focus of SEC 58 5.3.6 Regulation S-K, Item 404(a)(5) — Transactions With Related Persons 58 5.3.7 Regulation S-K, Item 404(b) — Review, Approval, or Ratification of Transactions With Related Persons 58 5.4 Business Combinations 58 5.5 Financial Instruments 59 5.5.1 Valuation of Financial Instruments 59 vii Deloitte | A Roadmap to Initial Public Offerings (2019) 5.6 Liabilities, Equity, and Temporary Equity 60 [Sections 5.6.1 through 5.6.4 have been deleted.] 5.6.5 Distributions to Owners Under SAB Topic 1.B.3 61 5.6.6 Changes in Capitalization 62 5.6.6.1 Stock Splits in Contemplation of the IPO 62 5.6.6.2 Redemption or Conversion of Preferred Stock to Common Stock and Conversion of Debt 63 5.6.6.3 Presentation of Pro Forma Information Related to Changes in Capitalization 63 5.6.7 SAB Topic 4.E — Treatment of Receivables From the Sale of Stock 63 5.7 Accounting for Offering Costs — SAB Topic 5.A 64 5.7.1 Aborting or Postponing an Offering 65 5.8 Share-Based Compensation 66 5.8.1 Valuation 67 5.8.1.1 Pre-IPO Valuation Considerations 67 5.8.1.2 Valuation Considerations for Public Entities 72 5.8.2 Other Pre-IPO Issues 78 5.8.2.1 Repurchase Features 78 5.8.2.2 Substantive Classes of Equity 80 5.8.2.3 IPO Vesting Conditions 83 5.8.2.4 Escrowed Stock Arrangements 85 5.8.3 Modifications 86 5.8.4 Disclosures 89 5.8.4.1 Cheap Stock Disclosures 89 5.9 Income Taxes 91 5.9.1 Carve-Out Financial Statements 91 5.9.1.1 Separate-Return Method 92 5.9.2 Change in Tax Status 93 5.9.2.1 Predecessor/Successor Issues — Creation or Elimination of Layer of Tax 93 5.9.2.2 Tax Consequences of Transactions With Shareholders 95 5.9.3 Interim Reporting 96 5.9.4 Possible Limitations on Future