Day (118). Your investment banking client, Tom Hansen, calls with a question about one of his most fickle clients, Summer Industries. Summer is thinking about doing an equity offering, but won’t seriously commit to an offering, despite Tom’s belief that this offering is “meant to be.”
Summer has a December 31 year-end, and it’s already January 25, so Tom wants to convince Summer to commit to the offering before it’s too late. “I know we have to worry about getting comfort on the third quarter numbers from Summer’s auditors, but I can’t remember what the exact issue is,” Tom says. “Can you help? I really want to impress Summer so they see that I’m the only banker for them.”
The “135-day Rule”
What Tom is struggling with is commonly known as the “135-day Rule.” The 135-day Rule comes from SAS 72/AU 634 (see paragraphs .46 and .47). Under SAS 72, auditors will generally provide full comfort (including negative assurance) on financial statements that are less than 135 days old.
So, if Summer were to do an offering on its third quarter financial statements after its December 31 year-end but before releasing year-end financials, Summer’s auditors may provide comfort on the third quarter financials (the “latest reviewed financial statements”) through February 11 (i.e., 134 days after Summer’s third quarter end of September 30). February 12 does not work because at that point the date is not “less than 135 days from the most recent period for which the accountants have performed an audit or a review,” as the 135-day Rule requires.
Here is a chart1 of the key dates that apply to an issuer with a December 31st year-end:
|Financial Statements for the period ending:||Last day on which comfort will be provided (the 134th day)2|
|March 31||August 12|
|June 30||November 11|
|September 30||February 11|
|December 31||May 13 or May 14 (depending on Leap Year)|
1 For a printable version of this chart, click here.2 When the 134th day falls on a Sunday, it’s always worth asking the auditors to consider rolling forward to the next business day for purposes of the calculation, even though the accounting literature lacks a direct analog to Exchange Act Rule 0-3(a).
It’s important not to get the 135-day Rule confused with the date that the issuer’s financials go stale, which we discuss here. The staleness date will always be after the 134th day has passed. If your fiscal year ends on December 31, you can get staleness dates for the current year on the Desktop Staleness Calendar that we jointly prepare annually with KPMG or you can use our online staleness calculator for any fiscal year end in any year.
135-day rule and comfort letter negotiation
In the context of negotiating a comfort letter and a bring-down comfort letter, the first question presented by the 135-day Rule is what date has to be within 135 days of the latest reviewed financial statements? Auditors will generally issue a comfort letter after 134 days have passed, provided that the cutoff date (see paragraphs .23 and .24) for the auditors’ procedures is less than 135 days from the date of the latest reviewed financial statements.
But, “better that you find out now...”The next interesting question that the 135-day Rule presents is how long after the cutoff date the underwriters or initial purchasers will accept a comfort letter or a bring-down comfort letter. If you expect to be dancing with the 135-day Rule based on the proposed timing of your deal, you can avoid a lot of heartbreak if you raise the issue at the outset with the bankers and auditors.