2.3 Summarized Financial Information
Rule 4-08(g) requires a registrant
to provide summarized financial information for all periods presented in its Form 10-K,
registration statement, or proxy statement if the results of any of the three significance
tests exceed 10 percent for equity method investees individually or in the aggregate.
The significant subsidiary test under Rule 4-08(g) for the presentation of
summarized financial information for equity method investees is based on the three
significant subsidiary tests specified in Rule 1-02(w), whereas the requirement to provide separate financial statements
for equity method investees in accordance with Rule 3-09 is based on the investment and income tests
only. Although Rule 3-09 was revised to delete the asset test requirement, it was retained
for Rule 4-08(g) to ensure a minimum level of financial information about equity method
investees, particularly in situations in which the investment test was not significant but
the registrant’s proportionate interest in the investee’s assets was material (which might
be the case with a highly leveraged equity method investee, for example). See note 2 to paragraph 2420.3 of the FRM for more
details.
When preparing annual financial statements, registrants should also
consider ASC 323-10-50-3(c) to determine whether equity method investees are material in
relation to the registrants’ financial position or results of operations (and thus should
disclose summarized information about the investees’ assets, liabilities, and results of
operations even if the thresholds applicable to Rule 4-08(g) are not met).
If the significance test is met in any year, the summarized financial
information should be as of and for the same periods as the registrant’s financial
statements (i.e., two years of balance sheet information and three years of statement of
operations information), even if the significance level is not met in all periods, as noted
in paragraph 2420.4
of the FRM and as discussed at the July 2007 AICPA SEC Regulations Committee joint meeting with the SEC
staff (the “July 2007 joint meeting”).
The following is a summary of the example
discussed during the July 2007 joint meeting:
Example 2-12
Company A owns 30 percent of
Investee I’s common stock and 40 percent of Investee J’s common stock. Company A
accounts for both investees under the equity method. For the year ended December
31, 20X2, A has determined that the highest significance level of I and J
individually and in the aggregate is as follows:
There are no qualitative factors suggesting that the
information for 20X0 and 20X1 would be material to an investor.
The SEC staff indicated that A would be required to present
summarized information for both investees in its 20X2 Form 10-K for all periods
presented (i.e., balance sheet information as of 20X1 and 20X2 and income
statement information for 20X0, 20X1, and 20X2), even though the investees only
exceeded the significance threshold (in the aggregate) in one year, 20X2.
As illustrated in other examples during the July 2007 joint meeting, the
requirement would be the same regardless of the year in which the investees individually or
in the aggregate exceeded the 10 percent significance threshold.
2.3.1 Presentation of Summarized Financial Information
Summarized financial information must be presented in the notes to the
annual financial statements and should be presented in accordance with U.S. GAAP. In
accordance with paragraph
2420.4 of the FRM, the summarized financial information should not be
labeled “unaudited.”
Under Rule
1-02(bb), the following financial statement line items are required in the
summarized financial information:
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“Current assets.”
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“[N]oncurrent assets.”
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“[C]urrent liabilities.”
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”[N]oncurrent liabilities.”
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“[R]edeemable preferred stocks.”
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“[N]oncontrolling interests.”
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“Net sales or gross revenues.”
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“Gross profit (or, alternatively, costs and expenses applicable to net sales or gross revenues).”
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“[I]ncome (loss) from continuing operations.”
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“[N]et income or loss.”
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“[N]et income or loss attributable to the entity.”
See Section
2.3.2 for guidance on how equity method investees in specialized industries
should present summarized financial information.
The summarized financial information may be presented (1) for each
equity method investee individually or (2) on a combined basis with the information of
other equity method investees. As discussed at the March 2001 AICPA SEC Regulations Committee joint
meeting with the SEC staff, the SEC staff believes that Rule
4-08(g) permits aggregation in most circumstances. However, aggregation can
sometimes be misleading or result in the suppression of important information. The SEC
staff may, for example, request that investees in different businesses be aggregated
separately or request separate presentation for individual investees that are
quantitatively or qualitatively very significant.
Paragraph 2420.4 of the FRM, SAB Topic 6.K.4(b), and SEC ASR 302 (FRC Section
213.03.b) note that summarized financial information should be complete and should cover
all equity method investees (not just the investee or investees that are significant).
Registrants' requests to exclude summarized financial information will not routinely be
granted. The SEC staff acknowledges that in some circumstances, such as when the
information to be excluded is de minimis and it is impracticable to accumulate such
information, it may be permissible to exclude summarized information for a specific
investee.
2.3.2 Specialized Industries
Rule
1-02(bb) and SEC ASR 302 (FRC Section 213.03.c) provide guidance on how
equity method investees in specialized industries should present summarized financial
information. For example, if these entities do not present classified balance sheets, they
should provide other information about the nature and amount of the major components of
assets and liabilities (however, long-term liabilities and redeemable preferred stock
should be disclosed regardless of the type of balance sheet presented). If necessary,
equity method investees in specialized industries may also substitute other information
for sales and related costs and expenses for a more meaningful presentation. ASR 302 (FRC
Section 213.03.c) provides the following examples:
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“A bank . . . could present total interest income, total interest expense, provision for loan losses, and security gains or losses in lieu of sales and related costs and expenses.”
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“[A]n insurance company could present information as to net premiums earned, net investment income, underwriting costs and expenses, and realized gains or losses or investments.”
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“A finance company . . . should disclose the portion of its total assets represented by net loan receivables when that item represents one of that company’s largest assets.”
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“Long-term liabilities and redeemable preferred stock should be disclosed regardless of the type of balance sheet presented.”