3.2 When to Reassess Significance
Under ASC 250, retrospective application may be required in the
event of certain changes, such as the reporting of a discontinued operation under
ASC 205-20 or a change in accounting principle (including accounting changes
resulting from the adoption of a newly issued standard). As indicated in
Topic 13
of the FRM, in some circumstances (e.g., when filing a new registration or proxy
statement), a registrant may be required to file updated financial statements that
reflect the retrospective adjustment for periods before adoption of the change. Such
updated financial statements may be filed in a Form 8-K or included in the
registration statement.
Registrants need to consider whether any retrospective changes
reflected in their financial statements included in a particular filing (such as a
Form 8-K as noted above or in the subsequent Form 10-K) may affect the significance
calculations under Rules 3-09 and 4-08(g). Under certain circumstances, a registrant
may be required to remeasure the significance of an equity method investee in
conjunction with such a filing, depending on the type of filing and the nature of
the retrospective change.
3.2.1 New or Amended Registration Statement
Under Rules 3-09 and 4-08(g), the significance tests are performed
annually in connection with the filing of a Form 10-K (i.e., at the end of the
registrant’s fiscal year). Therefore, as discussed in paragraph 2410.8 of
the FRM, significance is not remeasured when updated financial statements that
reflect retrospective adjustments are filed in a Form 8-K (or are included in
the registration statement).
3.2.2 Annual Report
When a registrant files an annual report reflecting a
retrospective change, it must consider whether it should update its prior
significance calculations by using its retrospectively adjusted financial
statements. As a result of a retrospective change, a previously insignificant
equity method investee may become significant, and a registrant may be required
to file the investee’s financial statements, disclose the investee’s summarized
information, or both in the annual report. Paragraph 2410.8 of the FRM indicates
that the requirements differ depending on whether the retrospective change is a
result of a change in accounting principle or a discontinued operation.
3.2.2.1 Change in Accounting Principle
If a retrospective change is the result of a change in
accounting principle, the registrant is not required to recalculate the
significance of an equity method investee under Rules
3-09 and 4-08(g) for
periods earlier than the one during which the change in accounting principle
occurred. Therefore, for periods before the date of initial adoption of a
new accounting principle, registrants are allowed to continue to measure
significance of their equity method investees by using results from their
preadoption financial statements.
3.2.2.2 Discontinued Operation
When a retrospective change is the result of a discontinued
operation and the registrant reports the discontinued operation as required
in its next annual report, it should be mindful that significance under
Rules 3-09 and 4-08(g) should be measured for each annual period presented
in the financial statements on the basis of amounts that were
retrospectively adjusted for the discontinued operation.
3.2.2.3 Error Correction
When a registrant files a Form 10-K/A for the correction of an error, it
should remeasure the significance under Rules 3-09 and 4-08(g) by using the
corrected information in the Form 10-K/A.
Example 3-18
Registrant A is preparing to file
its Form 10-K for the fiscal year ended December 31,
20X2, and owns a 30 percent equity method investment
in Company C. The financial statements of A will be
retrospectively adjusted for all periods presented
as a result of a material event that occurred during
20X2. Historically, A has not been required to
provide separate financial statements for C because
C has not met the significance thresholds. The
impact on prior-period evaluations of significance
will depend on whether the material event was a
discontinued operation or a retrospective change in
accounting policy.
Discontinued
Operation
Registrant A disposed of Component B
on November 30, 20X2. While preparing its Form 10-K
for the year ended December 31, 20X2, which
retrospectively reflects B as a discontinued
operation for all periods presented, A determines
that C is now significant to each of the three years
ended December 31, 20X2, as a result of the
retrospective presentation of discontinued
operations. Registrant A must file C’s audited
financial statements as of December 31 of 20X2 and
20X1 and for the three years ended December 31,
20X2.
Retrospective
Change in Accounting Policy
Registrant A adopts a new accounting
principle on a retrospective basis. It is not
required to remeasure significance for the fiscal
years ended December 31 of 20X1 and 20X0 on the
basis of the retrospectively adjusted financial
statements.