5.2 Change From Consolidation to Equity Method
Although Rule
3-09(b) requires a registrant to file financial statements of
significant equity method investees for the same periods as the registrant’s audited
financial statements, paragraph 2405.4 of the FRM notes that “the investee’s separate
annual financial statements should only depict the period of the fiscal year in
which it was accounted for by the equity method.” Therefore, in cases in which a
formerly consolidated subsidiary no longer meets the criteria for consolidation and
the registrant changes to the equity method of accounting, the registrant is not
required to provide the investee’s financial statements for the prior periods in
which it was consolidated. This is because the financial statements of the equity
method investee and registrant were consolidated before the change to the equity
method of accounting.
A change from consolidation to the equity method of accounting during a fiscal year
may result in a requirement to present the investee’s financial statements for a
partial year. See Section 5.1 regarding the
presentation of financial statements for a partial year.
Example 5-1
Registrant A owns 100 percent of Company B;
both A and B have calendar year-ends. On July 1, 20X0, A
sold 51 percent of B’s shares. On that date, A will
deconsolidate B and use the equity method to account for its
remaining investment in B. Company B is greater than 20
percent significant to A when tested on December 31,
20X0.
Registrant A is required to file B’s audited
financial statements for the period from July 1, 20X0,
through December 31, 20X0.