5.4 Change From Equity Method to Consolidation
We believe that if a registrant’s increase in ownership of a
significant equity method investee results in consolidation, the investee’s
financial statements would only be required for the period in which the registrant
used the equity method to account for the investment. Our view is by analogy to the
SEC staff’s view on applying Rule 3-09 in the year
that a formerly consolidated subsidiary becomes an equity method investee, as
expressed at the June 2005 AICPA SEC Regulations Committee
joint meeting with the SEC staff. See Section
5.2 for further discussion of changing from consolidation to the
equity method.
If an increase in ownership of an equity method investee results in
consolidation, it should be accounted for prospectively and not by retrospectively
restating prior periods. Because (1) the prior periods are not restated and (2) the
investee was presented under the equity method before consolidation, the registrant
must provide Rule 3-09 financial statements for those periods in which the equity
method investee was significant.
Example 5-3
Registrant A owns 49 percent of Company B
and uses the equity method to account for its investment.
Both A and B have calendar year-ends. On November 1, 20X2, A
acquires an additional interest in, and begins to
consolidate, B. Company B was greater than 20 percent
significant to A when tested in 20X1 and 20X0 and for the
period from January 1, 20X2, through October 31, 20X2.
In its Form 10-K for the fiscal year ended
December 31, 20X2, A should file the audited financial
statements of B (1) as of October 31, 20X2, and December 31,
20X1, and (2) for the 10-month period ended October 31,
20X2, and the years ended December 31, 20X1 and 20X0.