5.3 Loss of Control of Previously Consolidated Subsidiary
If a registrant loses control of a majority-owned subsidiary that
was previously consolidated (e.g., as a result of the subsidiary’s bankruptcy), the
registrant must evaluate the appropriate accounting treatment for the investment. If
the registrant retains significant influence over the investment and therefore
applies the equity method of accounting under ASC 323, the guidance in Section 5.2 would be
applicable. However, if significant influence is not retained and ASC 321
applies, the registrant must evaluate the appropriate accounting treatment for the
investment. For additional discussion of a change in control over an equity method
investment, see Section 5.6 of Deloitte’s
Roadmap Equity Method Investments and Joint
Ventures.
On the basis of informal discussions with the SEC staff, we believe
that Rules 3-09 and
4-08(g)
do not apply to a majority-owned subsidiary accounted for at
fair value in accordance with ASC 321 (including the practicability exception to
fair value under ASC 321-10-35-2). Although these rules do
apply to subsidiaries that are not consolidated, a majority-owned subsidiary that
the registrant does not control would not meet the Rule 1-02(w) definition of a significant
subsidiary.
Rule 3-09(a) states, in
part:
If any of the conditions set forth in § 210.1-02(w),
substituting 20 percent for 10 percent in the tests used therein to
determine a significant subsidiary, are met for a majority-owned subsidiary
not consolidated by the registrant or by a subsidiary of the registrant,
separate financial statements of such subsidiary must be filed.
Rule 4-08(g) states, in part:
The summarized information as to assets, liabilities and results of
operations as detailed in § 210.1-02(bb) shall be presented in notes to the
financial statements on an individual or group basis for:
(i) Subsidiaries not consolidated; or
(ii) For 50 percent or less owned persons accounted for by the
equity method by the registrant or by a subsidiary of the
registrant, if the criteria in § 210.1-02(w) for a significant
subsidiary are met.
However, the Regulation S-X, Rule 1-02(x), definition of subsidiary
states:
A subsidiary of a specified person is an affiliate controlled by such person directly, or indirectly
through one or more intermediaries. [Emphasis added]
If a registrant loses control of a majority-owned subsidiary, the
definition of subsidiary would not be met since such a subsidiary would not be
controlled by the registrant either directly or indirectly. As a result, Rules 3-09
and 4-08(g) would not apply in this circumstance.
Example 5-2
A registrant has a majority-owned subsidiary
that files for bankruptcy. Before the bankruptcy filing, the
registrant controls and consolidates the subsidiary. After
the bankruptcy filing, the registrant has neither control
nor significant influence over the subsidiary and changes to
the fair value method under ASC 321 (or the practicability
exception to fair value under ASC 321-10-35-2).
Because the registrant does not have control
or significant influence over the subsidiary and accounts
for it under the fair value method in accordance with ASC
321, the definition of subsidiary in Rule 1-02(x) is not
met. Therefore, the registrant would not be required to
provide the financial information required by Rules 3-09 and
4-08(g).
A registrant may elect the fair value option in accordance with ASC
825 for an investment that is eligible for the equity method of accounting under ASC
323. As discussed in Section
3.1.3.6, Rules 3-09 and 4-08(g) do apply to equity method investments
accounted for under ASC 323 for which the fair value option has been elected.