4.1 Significant Business Acquisitions
Regulation S-X, Rule 3-05, may require a registrant to provide
separate financial statements of a significant acquired business, which may itself
have significant equity method investees. Although there is no specific guidance on
whether an acquiree’s financial statements must comply with Rule 3-09, paragraph 2005.5 of the
FRM, which provides the SEC staff’s view regarding the applicability of Rule 3-05 to
an acquiree, is generally applied by analogy in such situations. Paragraph 2005.5
states, in part:
Financial statements of recently acquired
businesses of the acquiree or equity method investees of the acquiree need not
be filed unless their omission would render the acquiree’s financial statements
misleading or substantially incomplete.
The determination of when the omission of an equity method
investee’s financial statements would render the acquiree’s financial statements
misleading or substantially incomplete does not necessarily involve the same 20
percent threshold as the determination of significance under Rule 3-09. Registrants
should consider consulting with their auditors and SEC legal counsel when assessing
whether an equity method investee’s financial statements may be required.
Example 4-1
Registrant A acquires a 100 percent interest in Company B,
which is significant at 51 percent; therefore, A must
provide separate financial statements of B in accordance
with Rule 3-05. Company B owns a 40 percent equity method
investment in Company X.
If the omission of X’s financial statements would render B’s
financial statements misleading or substantially incomplete,
A may be required to provide X’s financial statements in
accordance with Rule 3-09.