Chapter 2 — Form and Content of Financial Information

2.2 Separate Financial Statements

Rule 3-09 requires a registrant to provide separate financial statements of equity method investees in its annual report, registration statement, or proxy statement if the investee is greater than 20 percent significant to the registrant (see Section 3.1 for further discussion of the significance tests and thresholds applied).

Under Rule 3-09(b), if the equity method investee and the registrant have the same fiscal year-end, the dates and periods covered by the separate financial statements should be the same as those of the registrant’s audited consolidated financial statements required by Regulation S-X, Rules 3-01 and 3-02 (i.e., two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of changes in stockholders’ equity, and cash flow statements).

If the equity method investee and the registrant have different fiscal year-ends, the separate financial statements of the equity method investee may be as of the equity method investee’s year-end.

For each significant equity method investee, registrants are required to provide two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of changes in stockholders’ equity, and cash flow statements, even if the applicable significance tests are not met in all periods. A registrant may, however, provide unaudited financial statements for years in which the significance test is not met. See Section 2.2.3 for further discussion.

If the registrant has not used the equity method to account for an equity method investee for all periods reflected in its historical financial statements, the registrant should only provide the financial statements of the equity method investee for the period in which the equity method was used. If a registrant wants to provide financial statements for the entire year rather than only for the period in which the equity method was used, it may consider preclearance with the SEC staff (see paragraph 2405.4 of the FRM). In such cases, registrants should consider consultation with their auditors and SEC legal counsel.

Rule 3-09 does not apply to quarterly reports. Accordingly, even if the audited financial statements of an equity method investee are presented in the registrant’s annual report, the interim financial statements of the equity method investee do not have to be included in the registrant’s subsequent quarterly reports. See Section 2.4 for quarterly reporting considerations.

Registrants that have multiple equity method investments should test each investment under Rule 3-09. As indicated in Rule 3-09(c), if financial statements are required for two or more equity method investees that are considered significant, a registrant may present one of the following:

Separate financial statements for each investee.
Combined or consolidated financial statements of two or more equity method investees (if appropriate under U.S. GAAP and if such presentation clearly exhibits the financial position, results of operations, and cash flows of the consolidated or combined1 group). Registrants that seek to satisfy the separate financial statement requirements of Rule 3-09 for two or more equity method investees by presenting combined or consolidated financial statements under Rule 3-09(c) may consider consulting with or obtaining preclearance from the SEC staff.

2.2.1 Accounting Standards and Disclosure Requirements

At the April 2004 AICPA SEC Regulations Committee joint meeting with the SEC staff, the staff indicated that if an equity method investee is a public company, its financial statements should comply with U.S. GAAP and all provisions of Regulation S-X. If the equity method investee is a nonpublic company, it is not required to comply with U.S. GAAP standards that apply only to public companies, such as ASC 260 (earnings per share) and ASC 280 (segment reporting); however, the form and content of the financial statements, including the schedule requirements, must comply with Regulation S-X. Further, at the March 2019 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff indicated that Regulation S-X, Article 12, schedules are considered part of the financial statements and that registrants are required to include such schedules, as applicable, with the financial statements of their significant equity method investees under Rule 3-09. However, if a required Article 12 schedule is burdensome to prepare and not material to investors, a registrant may request relief under Rule 3-13 from providing the schedule.

In accordance with U.S. GAAP, entities that meet the definition of a public business entity (PBE) are not eligible to elect certain accounting and reporting alternatives in U.S. GAAP, including those developed by the Private Company Council and subsequently endorsed by the FASB. Therefore, the effects of any previously elected private-company accounting alternatives cannot be applied in the investee’s financial statements under Rule 3-09 and would have to be eliminated from them.

In general, equity method investees’ financial statements should be presented in accordance with U.S. GAAP; however, exceptions exist for investees that meet the definition of a foreign investee. See Section 2.6 for further discussion of foreign investees.

2.2.2 Adoption Dates of Accounting Standards

New or modified accounting standards under U.S. GAAP generally have different adoption dates, which depend on whether a company is a PBE. At the 2016 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff noted that if an equity method investee’s financial statements are included in a registrant’s filing under Rule 3-09 because the investee is significant to the registrant, the investee is considered a PBE under U.S. GAAP. Therefore, such an equity method investee would generally be required to use the adoption dates for PBEs when preparing its financial statements.

In November 2019, the FASB issued ASU 2019-10, which provides a framework to stagger effective dates and amends the effective dates for some standards to give implementation relief to certain types of entities. Specifically, the standard introduces a new “two-bucket” framework for determining the effective dates for future major accounting standards. The buckets in the framework are defined as follows:

Bucket 1 — All PBEs that are SEC filers (as defined in U.S. GAAP), excluding SRCs.
Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.

Since equity method investees whose financial statements are included in a registrant’s filing under Rule 3-09 only because the investee is significant to the registrant are PBEs but not SEC filers, their financial statements may comply with Bucket 2 effective dates for future accounting standards that apply the two-bucket approach. See Deloitte’s November 19, 2019, Heads Up.

Example 2-1

Registrant A has a nonpublic equity method investee, Company B, that is significant under Rule 3-09 and is not an SEC filer. Company B’s financial statements are included in A’s annual report only because of its significance under Rule 3-09. Since B is not considered to be an SEC filer and its financial statements are included only because of Rule 3-09, B’s financial statements may comply with Bucket 2 effective dates.

Example 2-2

Registrant C has a public equity method investee, Company D, that is significant under Rule 3-09 and is an SEC filer. Company D’s financial statements are included in C’s annual report because of its significance under Rule 3-09. Since D is considered to be an SEC filer, D’s financial statements must comply with Bucket 1 effective dates.

2.2.3 Audit Requirements

The separate financial statements of equity method investees are required to be audited only for years in which the applicable significance tests exceed 20 percent.

If the equity method investee becomes significant at the greater than 20 percent level in the current year, the registrant is required to present two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of stockholders’ equity, and cash flow statements for the equity method investee even if the investee was not significant in the earliest two years. However, in such a case, Rule 3-09(b) permits registrants to present unaudited financial statements for periods in which the significance level was not greater than 20 percent. If the equity method investee was significant in the previous years but becomes insignificant (at or below the 20 percent level) during the current year, the registrant would still need to present the aforementioned statements; however, the current-year financial statements may be unaudited.

While periods for which the investment is not significant need not be audited, if such periods were previously audited, AICPA standards2 require an auditor to address those periods in the audit report. If such periods were not previously audited, AICPA standards require an auditor to state that in the report and to indicate that the auditor therefore assumes no responsibility for them.3

Example 2-3

Registrant C has a nonpublic equity method investee, Company D. In 20X0, 20X1, and 20X2, D was significant at the 15 percent, 18 percent, and 30 percent levels, respectively. Registrant C and Company D both have December 31 year-ends.

Registrant C is required to present (1) audited financial statements for D as of and for the year ended December 31, 20X2, and (2) either audited or unaudited financial statements as of December 31, 20X1, and for the years ended December 31 of 20X1 and 20X0.

Example 2-4

Registrant E has a nonpublic equity method investee, Company F. In 20X0, 20X1, and 20X2, F was significant at the 25 percent, 27 percent, and 15 percent levels, respectively. Registrant E and Company F both have December 31 year-ends.

Registrant E is required to present the following:

	20X0	20X1	20X2
Significance level	25%	27%	15%
Statement of operations Statement of comprehensive income Statement of stockholders’ equity Cash flow statements	Yes, audited	Yes, audited	Yes, may be marked unaudited if investee never issued audited financial statements
Balance sheet	Not required because only two balance sheets would have been required	Yes, audited	Yes, may be marked unaudited if investee never issued audited financial statements

The audit requirement for equity method investees may differ depending on whether the equity method investee is an issuer4 or a nonpublic equity method investee. Audits of nonissuers are under the jurisdiction of the AICPA, meaning that auditors are required by AICPA AU-C 700.31 to state that the audit was conducted in accordance with GAAS. Therefore, audits of the financial statements of nonissuer equity method investees under Rule 3-09 must be performed in accordance with U.S. GAAS regardless of whether the investee is a domestic or foreign entity. If the equity method investee is audited by a non-U.S. audit firm (e.g., a foreign equity method investee) that is not under the jurisdiction of the AICPA, the audit may be performed in accordance with U.S. GAAS or PCAOB standards. However, the SEC staff will not accept audit reports indicating that the audit was performed in accordance with local GAAS or International Standards on Auditing (ISA).

There may, however, be situations in which an audit of a nonissuer is required to refer to PCAOB standards, in which case the audit report will refer to both sets of standards as indicated in paragraph 4110.5 of the FRM. For example, if the principal auditor’s report refers to another auditor’s report on the financial statements of a nonissuer equity method investee, the other auditor’s report must refer to PCAOB standards (in addition to GAAS if the auditor is under the jurisdiction of the AICPA).

Further, as indicated in paragraph 4110.5 of the FRM, in certain circumstances, an independent public accounting firm that issues an audit report on the financial statements of a nonpublic equity method investee under Rule 3-09 may need to be registered with the PCAOB. Footnote 3 of paragraph 4110.5 of the FRM states, in part, that the “auditor of the financial statements of the non-issuer entity must be registered if, in performing the audit, the auditor played a ‘substantial role’ in the audit of the issuer, as that term is defined in PCAOB Rule 1001(p)(ii). If the ‘substantial role’ test is not met, the firm is not required to be registered.”

In addition, auditors of financial statements filed in accordance with Rule 3-09 must comply with the SEC’s independence requirements regardless of whether the audit is conducted in accordance with GAAS, PCAOB standards, or both.5

2.2.4 Due Dates

A registrant must consider the requirements in Rule 3-09 to determine the due date for filing the financial statements of an equity method investment.

2.2.4.1 Annual Reports

As discussed in paragraph 2405.7 of the FRM, to determine the due date for filing the financial statements of an equity method investee in an annual report, a registrant must consider the following factors:

The filing status of the registrant and the equity method investee in accordance with Rule 12b-2 of the Securities Exchange Act of 1934 (e.g., large accelerated filer, accelerated filer, domestic or foreign private issuer). An equity method investee that is not an SEC registrant should apply the considerations in the table in Section 2.2.4.1.1 as if it were a nonaccelerated filer.
Whether the equity method investee is a foreign business (as defined in Regulation S-X, Rule 1-02(l)).
Whether the registrant and the equity method investee have different fiscal year-ends.

2.2.4.1.1 The Filing Status of the Registrant and the Equity Method Investee in Accordance With Exchange Act Rule 12b-2

A registrant is required to file the financial statements of a significant equity method investee in its annual report. However, Rule 3-09(b)(1) provides an accommodation for a registrant that owns an interest in a significant equity method investee whose financial statements are due after the registrant’s annual report due date. The accommodation, referred to herein as the “grace period,” allows such a registrant to file the financial statements of the equity method investee after the due date of the registrant’s annual report.

At the April 2006 AICPA SEC Regulations Committee joint meeting with the SEC staff (the “April 2006 joint meeting”), the staff clarified that Rule 3-09(b)(1) also applies to large accelerated filers. The minutes of the April 2006 joint meeting include a table (summarized below) highlighting the due dates for filing financial statements of equity method investees. It applies to cases in which (1) the equity method investee is not a foreign business and (2) the registrant and the equity method investee have the same fiscal year-end.

Equity Method Investee	Registrant
	Large Accelerated	Accelerated	Nonaccelerated
Large accelerated	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.
Accelerated	File the equity method investee’s financial statements within 75 days of the registrant’s and equity method investee’s year-end.	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.
Nonaccelerated	File the equity method investee’s financial statements within 90 days of the registrant’s and equity method investee’s year-end.	File the equity method investee’s financial statements within 90 days of the registrant’s and equity method investee’s year-end.	No accommodation necessary — file the equity method investee’s financial statements by the due date of the registrant’s Form 10-K.

If the registrant does not file the equity method investee’s financial statements in its annual report, it should file them by the appropriate due date noted above in an amendment to the annual report (see also paragraphs 2405.8 and 2405.9 of the FRM). As indicated in note 2 to paragraph 2405.11 of the FRM, this accommodation applies only to annual reports.

Exchange Act Rule 12b-25 provides that a registrant may obtain a 15-day extension for the filing of its Form 10-K; however, this extension is not available for the financial statements of an equity method investee filed in an amendment to Form 10-K. See the note to paragraph 2405.8 of the FRM.

Example 2-5

Registrant A and equity method investee B both have a December 31 fiscal year-end. Registrant A is a large accelerated filer; Company B is an accelerated filer and does not meet the definition of a foreign business.

Because B is not a foreign business and A and B have the same fiscal year-end, A considers both entities’ filing status when determining the due date for A to file B’s financial statements in its Form 10-K. Since B is an accelerated filer, A must file B’s financial statements within 75 days of A’s and B’s year-end.

2.2.4.1.2 The Equity Method Investee Is a Foreign Business

Rule 3-09(b)(1) permits a registrant to file the financial statements of an equity method investee that is a foreign business (as defined in Rule 1-02(l)) within six months of the investee’s fiscal year-end. As also noted in paragraph 2405.10 of the FRM, if the separate financial statements of a foreign equity method investee are due after the registrant’s annual report is due, the financial statements should be filed in an amendment to the registrant’s annual report.

If the foreign investee does not meet the definition of a foreign business, the registrant should refer to the table in Section 2.2.4.1.1 since the considerations related to determining due dates are the same as those for a domestic investee.

Example 2-6

Registrant A owns 30 percent of Company B and uses the equity method to account for its investment.

Company B meets the definition of a foreign business and is greater than 20 percent significant to A. Both companies have December 31 fiscal year-ends.

Registrant A must file B’s financial statements by June 30. This can be accomplished by filing an amendment to A’s Form 10-K, regardless of A’s filing status.

2.2.4.1.3 The Registrant and the Equity Method Investee Have Different Fiscal Year-Ends

Rule 3-09(b)(2) states, in part, the following regarding circumstances in which the registrant and equity method investee have different fiscal year-ends:

If the fiscal year of any 50 percent or less owned person ends within the registrant’s number of filing days before the date of the filing, or if the fiscal year ends after the date of the filing, the required financial statements may be filed as an amendment to the report within the subsidiary’s number of filing days, or within six months if the 50 percent or less owned person is a foreign business. [Emphasis added]

The term number of filing days is further defined by Rule 3-09(b)(3) as the number of days the entity has after its year-end to file its Form 10-K on the basis of its filing status (e.g., 90 days if the registrant is a nonaccelerated filer).

Paragraph 2405.8 of the FRM clarifies that if the number of filing days after the equity method investee’s fiscal year-end is before the date by which the registrant is required to file its annual report, the financial statements of the equity method investee do not have to be filed before the due date of the registrant’s Form 10-K. In such cases, the equity method investee’s financial statements would be filed with the registrant’s Form 10-K and not by amendment.

As discussed at the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff, if the registrant’s and equity method investee’s fiscal year-ends differ by six months, the registrant may file the investee’s financial statements for the fiscal year ending either (1) before the registrant’s year-end or (2) after the registrant’s year-end. The registrant’s selected approach should be applied consistently on an investee-by-investee basis and contemplate the registrant’s specific facts and circumstances, including the information that is most useful to investors. The acceptability of the two approaches would not depend on whether the registrant recognizes its equity in the investee’s earnings on a lag basis.

Example 2-7

Registrant A is a large accelerated filer and has a December 31 fiscal year-end. Equity method investee B is an accelerated filer, does not meet the definition of a foreign business, and has a September 30 fiscal year-end. As a large accelerated filer, A must file its Form 10-K within 60 days of its fiscal year-end.

Because A and B have different fiscal year-ends, A must consider the guidance in Rule 3-09(b)(2), as well as both entities’ filing status, in determining the due date for A to file B’s financial statements in its Form 10-K. Since A is a large accelerated filer, A’s Form 10-K is due within 60 days of its fiscal year-end. On the basis of B’s filing status, its Form 10-K is due within 75 days of its fiscal year-end. Although the number of filing days after B’s fiscal year-end is before the date A is required to file its annual report, A is not required to file B’s financial statements in accordance with Rule 3-09 before the due date of A’s Form 10-K. Therefore, A would be required to file B’s financial statements for the year ended September 30 in its Form 10-K within 60 days of its fiscal year-end.

Example 2-8

Registrant A is a large accelerated filer and has a December 31 fiscal year-end. Equity method investee B is a nonaccelerated filer, does not meet the definition of a foreign business, and has a January 31 fiscal year-end.

Because A and B have different fiscal year-ends, A must consider the guidance in Rule 3-09(b)(2), as well as both entities’ filing status, in determining the due date for A to file B’s financial statements in its Form 10-K. Since A is a large accelerated filer, A’s number of filing days is 60 (i.e., its Form 10-K is due within 60 days of its fiscal year-end). On the basis of B’s filling status, its Form 10-K is due within 90 days of its fiscal year-end. Because B’s fiscal year-end ends within A’s number of filing days, B’s financial statements may be filed as an amendment to A’s Form 10-K within B’s number of filing days. Therefore, A may file B’s financial statements as an amendment to its Form 10-K within 90 days after B’s year-end.

Example 2-9

Registrant A is a large accelerated filer and has a December 31 fiscal year-end. Equity method investee B is a foreign business with a September 30 fiscal year-end.

Because A and B have different fiscal year-ends and B is a foreign business, A must consider the guidance in Rules 3-09(b)(1) and 3-09(b)(2) in determining the due date for A to file B’s financial statements in its Form 10-K. As a large accelerated filer, A must file its Form 10-K within 60 days of its fiscal year-end. Because B is a foreign business, A may file B’s financial statements in an amendment to its Form 10-K within six months of B’s fiscal year-end.

Example 2-10

Registrant A is an accelerated filer and has a December 31 fiscal year-end. Equity method investee B is a nonaccelerated filer, does not meet the definition of a foreign business, and has a June 30 fiscal year-end.

Because A and B have different fiscal year-ends, A must consider the guidance in Rule 3-09(b)(2), as well as both entities’ filing status, in determining the due date for A to file B’s financial statements in its Form 10-K. Since A is an accelerated filer, A’s number of filing days is 75 (i.e., its Form 10-K is due within 75 days of its fiscal year-end). Since B’s fiscal year-end differs by six months, A may file B’s financial statements for either (1) the fiscal year ending June 30 of the year before A’s year-end in its Form 10-K due within 75 days of its fiscal year-end or (2) the fiscal year ending June 30 after A’s year-end as an amendment to its Form 10-K within 90 days after B’s year-end.

2.2.4.2 Registration Statements or Proxy Statements

A registrant may need to update the separate financial statements of an equity method investee before it amends its annual report (and therefore before the filing due dates discussed above) if the registrant files a registration statement or proxy statement during the grace period (see Section 2.2.4.1.1). Paragraph 2405.11 of the FRM and the related notes indicate that if the investee is not a foreign business and the registrant is filing a registration statement or proxy statement, it should apply Rule 3-09(b), which states that “[i]nsofar as practicable, the separate financial statements required by this section shall be as of the same dates and for the same periods as the audited consolidated financial statements required by [Rules] 3-01 and 3-02.”

Further, as noted at the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff indicated that a registrant should apply the age of financial statement requirements under Regulation S-X, Rule 3-12, on the basis of “whether the registrant satisfies the conditions of Rule 3-01(c) of Regulation S-X to determine whether the investee’s financial statements . . . are required.” Rule 3-01(c) indicates that registration statements may be filed during the period between 45 days after a registrant’s year-end and the day before the due date (or filing) of the registrant’s Form 10-K (“extended period”) without including the financial statements for the most recent year-end only if the registrant meets all the following conditions:

It has filed annual, quarterly, and other reports required by Sections 13 or 15(d) of the Exchange Act.
It reasonably expects to report income attributable to the registrant, after taxes, for the most recent year for which audited financial statements have not been filed.
It has reported income attributable to the registrant, after taxes, for one of the two prior years.

Thus, if a registrant qualifies under Rule 3-01(c) to file a registration statement during this extended period, a similar accommodation would apply to the significant equity method investee. However, if a registrant does not qualify under Rule 3-01(c) (i.e., the registrant is not a timely filer or has not reported nor expects to report income), the financial statements of the significant equity method investee would be required in any registration statement filed more than 45 days after year-end because the grace period would not apply and, therefore, the filing requirements would be based on the Form 10-K due dates discussed above.

If the investee is a foreign business, the audited balance sheet of the equity method investee included in a registration statement or proxy statement cannot be more than 15 months old. Accordingly, if a registrant plans to file a registration or proxy statement more than 15 months after the equity method investee’s year-end, it must provide the equity method investee’s financial statements for the most recently completed fiscal year, even if they are not yet due to be filed on the basis of the Form 10-K due dates discussed above. For more information, see paragraph 2405.11 of the FRM.

2.2.5 Lower-Tier Equity Method Investments

When a registrant owns an equity method investment in an entity that, in turn, holds an equity method investment in another entity, the investment in the second entity is referred to as a lower-tier equity method investee. As indicated in paragraph 2405.6 of the FRM and SAB Topic 6.K.4(a), Rule 3-09 applies to all equity method investees that are significant to the registrant’s consolidated financial statements regardless of whether these entities are directly or indirectly owned by the registrant. Therefore, a registrant should test lower-tier equity method investees for significance on the basis of the materiality of the lower-tier equity method investee to the registrant on a consolidated basis and should provide separate financial statements when appropriate.

Interpretive Response 2 of SAB Topic 6.K.4(a) describes how the significance tests should be applied to lower-tier investees:

Since the disclosures provided by separate financial statements of an investee are considered necessary to evaluate the overall financial condition of the registrant, the significant subsidiary test is computed based on the materiality of the lower tier investee to the registrant consolidated.

The example below illustrates the significance calculation for the application of the income component to such a lower-tier investee situation.

Example 2-11

Registrant A owns 50 percent of Investee B and uses the equity method to account for its investment. Investee B owns 45 percent of Investee C and uses the equity method to account for its investment.

Registrant A had consolidated pretax income from continuing operations (including equity earnings of B) of $5 million.
Investee B had pretax income from continuing operations of $3.8 million.
Investee C had pretax income from continuing operations of $4.8 million.

Because A’s share of C’s pretax income, calculated as (50% × 45% × $4.8 million) ÷ $5 million = 22%, exceeds 20 percent, the income component has been met. The registrant would apply a similar approach to determining whether the revenue component also exceeds 20 percent.

Footnotes

In accordance with Section 2415 of the FRM, combined financial statements should be presented only for entities under common control or common management, and then only for those periods in which that condition existed.

See AICPA AU-C 700.47.

See AICPA AU-C 700.49 and 700.60.

Under Section 3 of the Securities Exchange Act of 1934, “the term ‘issuer’ means an issuer (as defined in section 3), the securities of which are registered under section 12, or that is required to file reports pursuant to section 15(d), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 . . . , and that it has not withdrawn.”

For more information, see Question 3 in Section O, “Other Independence,“ in the SEC’s Office of the Chief Accountant: Application of the Commission’s Rules on Auditor Independence — Frequently Asked Questions (updated as of June 27, 2019).

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.