Chapter 2 — Form and Content of Financial Information

2.5 SRCs With Significant Equity Method Investees

Regulation S-K, Item 10(f)(1), defines an SRC as an issuer — excluding an investment company, an asset-backed issuer, or a majority-owned subsidiary whose parent is not an SRC — that meets either of the following conditions:

It had less than $250 million of public float as of the last business day of its second fiscal quarter (i.e., it had less than $250 million of the amount that was disclosed on the cover page of Form 10-K that also was used to determine whether the issuer was an accelerated or large accelerated filer).
It had less than $100 million of revenue as of the most recently completed fiscal year for which audited financial statements were available and either of the following:
- No public float.
- Public float of less than $700 million as of the last day of its second fiscal quarter.

Under the scaled disclosure requirements in Regulation S-K and Regulation S-X, SRCs may provide two years, rather than three years, of audited financial statements and related MD&A in certain registration statements and periodic reports.

Similarly, an SRC has different reporting requirements related to significant equity method investments. As indicated in paragraph 5330.2 of the FRM, Rule 3-09 does not apply to SRC registrants. While the requirements in Regulations S-X, Article 8, are not equivalent to those in Rule 3-09 related to providing separate financial statements, a registrant’s filing should include financial statements of equity method investees when they would be material to investors.

Further, while Rule 4-08(g) also does not apply to SRC registrants, such registrants are required under Regulation S-X, Rule 8-03(b)(3), to provide summarized income statement information in their annual and interim financial statements.6 They should provide the summarized information, including the revenues, gross profit, income (loss) from continuing operations, and net income (loss), for all equity method investees that exceed 20 percent significance individually or in the aggregate. In a manner consistent with Rule 4-08(g), the summarized income statement information included in the annual financial statements may not be labeled “unaudited.”

While Rule 8-03(b)(3) indicates that significance should be measured on the basis of “a registrant’s consolidated assets, equity or income from continuing operations,” note 2 to paragraph 2420.9 of the FRM clarifies that, notwithstanding Rule 8-03(b)(3)’s reference to a registrant’s consolidated equity, an SRC registrant should compute significance according to the tests outlined in Rule 1-02(w). That is, an SRC registrant should use the investment, income, and asset tests discussed in Chapter 3 of this Roadmap. We understand that the SEC staff has stated that note 2 to 2420.9 of the FRM should be interpreted as encompassing the revenue component as well.

Footnotes

Rule 8-03 specifies the SRC requirements related to summarized financial information for interim financial statements; however, note 1 to paragraph 2420.9 of the FRM indicates that “the staff applies the S-X 8-03 requirement for summarized financial information to both annual and interim financial statements.”

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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.