1.1 Introduction
To ensure that investors receive relevant financial information
about a registrant's significant activities, Regulation S-X requires registrants
that have a significant equity method investee (i.e., “50 percent or less owned
persons”) to provide financial information about the investee in their filings with
the SEC.1 The SEC has indicated that the term 50 percent or less owned persons refers to
all investments accounted for under the equity method2 even if the voting ownership exceeds this percentage. The applicable SEC
disclosure requirements are primarily in Regulation S-X, Rules 3-09, 4-08(g), 8-03 (related to smaller reporting companies
[SRCs]), and 10-01(b)(1)3 as well as Section
2400 of the SEC’s Financial Reporting Manual (FRM).
An SEC registrant that has an equity method investee must consider
whether financial information about the investee should be provided in any reports
filed with the SEC that include the registrant’s financial statements. If an equity
method investee is considered significant to a registrant, the registrant may be
required to provide (1) separate financial statements of the investee in certain
filings with the SEC, (2) summarized financial information of the investee in the
footnotes to its financial statements, or (3) both. Such filings may include annual
reports on Forms 10-K and 20-F (“annual reports”), quarterly reports on Form 10-Q
(“quarterly reports”), or both (“periodic reports”), registration statements, and
proxy statements.
The amount of information a registrant must present depends on the level of
significance of the equity method investee, which is determined by performing the
following significant subsidiary tests in Regulation S-X, Rule
1-02(w), as applicable:
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Investment test — Investments in and advances to the equity method investee.
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Income test — Proportionate share of the lower of (1) income from continuing operations before income taxes, exclusive of amounts attributable to any noncontrolling interest, or (2) revenue.
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Asset test — Proportionate share of total assets.
Registrants should ensure that they:
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Perform the significance tests each period — It is important to note that the significance of an equity method investee may change each period. For example, in some cases, such as a near-break-even year for the registrant or a large income or loss at the investee level, the equity method investee may become significant for the first time and, thus, the registrant may be required to provide audited financial statements for the current year and unaudited financial statements for prior years under Rule 3-09.
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Consider the need to update the tests each period — For example, when reporting a discontinued operation, registrants should reassess the significance tests for all periods affected by such retrospective change. Also, in such instances when considering significance under Rule 10-01(b)(1) for interim periods, registrants should use the balance sheet as of the end of the most recently completed fiscal year that is included in the subsequent quarterly report since it will reflect the impact of any such retrospective change. See paragraph 2410.8 and the note to paragraph 2420.7 of the FRM.
Footnotes
1
For a list of abbreviations used in this publication, see
Appendix
C.
2
The SEC disclosure requirements discussed in this Roadmap do
not apply to an entity that is accounted for at fair value or under the
practicability exception to fair value after the adoption of ASU 2016-01
under ASC 321-10-35-2. They do apply, however, to an investment that is
eligible for the equity method of accounting but for which a registrant
elects the fair value option. See Sections 3.1.3.6, 5.3, and 5.5 for more
information.
3
For a list of the titles of standards and other literature
referred to in this publication, see Appendix B.