Chapter 2 — Guaranteed Debt Securities Registered or Being Registered

2.3 Alternative Disclosure Requirements

If a registrant or one of its consolidated subsidiaries has issued registered guaranteed debt securities, it is presumed that an investor in those securities relies on the registrant‘s consolidated financial statements as the primary source of information when making investment decisions. Therefore, under Rule 13-01, a registrant is permitted to provide alternative disclosures in lieu of separate financial statements for any subsidiary issuers and subsidiary guarantors of the registered guaranteed debt securities. Such alternative disclosures, which include both financial and nonfinancial disclosures about the issuer(s) and guarantor(s) (discussed below), to the extent material, may be provided in the registrant’s periodic filings (e.g., Forms 10-K and 10-Q) or registration statements if the eligibility conditions discussed in Section 2.2 have been met. In conjunction with the registrant’s consolidated financial statements, these alternative disclosures are intended to give investors material information to evaluate the sufficiency of the guarantees.

If a registrant or one of its consolidated subsidiaries has issued multiple debt securities that have different issuers and guarantors, the registrant should consider whether the alternative disclosures of the obligor group would be the same, in all material respects, for each guaranteed debt security. If not, the registrant may need to provide several different sets of alternative disclosures to reflect the composition of the obligor group of each guaranteed debt security.

2.3.1 Alternative Nonfinancial Disclosures

A registrant that presents the alternative disclosures permitted by Rule 13-01 (see discussion in Section 2.3.2) must provide alternative nonfinancial disclosures, to the extent material, to make the accompanying alternative financial disclosures easier to interpret. Such nonfinancial disclosures must include a description of:

The issuer(s) and guarantor(s) of the guaranteed security.
The terms and conditions of the guarantee(s) as well as how payments to holders of the guaranteed debt security may be affected by the composition of and the relationships among the issuer(s), guarantor(s), and subsidiaries of the parent company that are not issuers or guarantors of the guaranteed debt security. For example, when there is a guarantee, investors have a claim on the assets of the guarantor subsidiaries in the event of a default by the issuer(s). It is important for the investors to understand the factors that affect structural subordination (i.e., the priority on claims to the entity's cash flows) so that they can assess whether any individual subsidiary guarantor can make payment under the guarantee. Therefore, the registrant should disclose whether the guarantee is structurally subordinate to other liabilities of the guarantors. In addition, a subsidiary guarantee may include customary release provisions (e.g., a subsidiary may be released from a guarantee if it is sold or sells all of its assets or is declared “unrestricted” for covenant purposes). Such customary release provisions may warrant narrative disclosure.
Other factors that may affect payments to holders of the guaranteed debt security, such as contractual or statutory restrictions on dividends, guarantee enforceability, and the rights of noncontrolling interest holders. For example, a guarantee may be limited by certain laws such as those pertaining to bankruptcy, insolvency, fraudulent conveyance and transfer, reorganization, and moratorium.

Beyond the requirements outlined above, registrants must disclose the specific facts and circumstances related to each issuer and guarantor if such information would be material to investors and would help them understand the sufficiency of the guarantee. Registrants must provide additional information to ensure that their disclosures are not misleading.

An alternative nonfinancial disclosure may sometimes apply to one or more, but not all, issuers and guarantors (e.g., if one subsidiary guarantor has limitations or restrictions on the extent of its guarantee, but others do not). In such cases, the registrant is required to provide separate alternative financial disclosures (as discussed in Section 2.3.2) regarding the issuers and guarantors to which the unique alternative nonfinancial disclosure applies. However, in limited circumstances in which the separate financial information related to those issuers or guarantors, or both, can be easily understood, narrative disclosure may be provided in lieu of separate summarized financial information (see Example 2-13).

Example 2-9

Registrant A issues $100 million in registered debt securities that are guaranteed by three subsidiaries. Subsidiary B’s guarantee is limited to $10 million, whereas Subsidiary C’s and Subsidiary D’s guarantees are full and unconditional. In this scenario, A may be required to disclose the limitations on B’s guarantee and present (1) separate alternative financial disclosures for B and (2) combined alternative financial disclosures for A, C, and D.

In addition, the identity of the issuer(s) and guarantor(s) must also be listed in an exhibit to the registration statement, Form 10-K, or Form 10-Q. If the entities that are required to be disclosed are the same as those disclosed in the previous period, the registrant can add a hyperlink to the exhibit in an earlier filing rather than filing the exhibit again.

Example 2-10

Company A, a domestic registrant, may provide an exhibit such as the following:

Exhibit 22

List of Issuers and Guarantors

The following consolidated subsidiaries of Company A are issuers or guarantors of registered debentures that bear interest at 5 percent and mature in 20X4:

Entity	Role
Company A	Guarantor
Subsidiary B	Issuer
Subsidiary C	Guarantor
Subsidiary D	Guarantor
Subsidiary E	Guarantor
Subsidiary F	Guarantor

2.3.2 Alternative Financial Disclosures

The alternative disclosures required by Rule 13-01 include alternative financial disclosures about the issuer(s) and guarantor(s) that will help investors in registered offerings make informed investment decisions about registered guaranteed debt securities. However, as discussed in Section 2.3.3, in certain circumstances, alternative financial disclosures may be omitted.

2.3.2.1 Level of Detail

If a registrant qualifies for the alternative disclosures, it must include certain financial disclosures in its filing about each issuer and guarantor of the debt security. Such disclosures should focus on the financial information that is most likely to be material to an investment decision. Rule 13-01(a)(4) requires the registrant to disclose the summarized financial information specified in Regulation S-X, Rule 1-02(bb)(1), and provide an accompanying note that briefly describes the basis of presentation (see Section 2.3.2.2). At a minimum, the summarized financial information must include the following items, subject to appropriate variation to conform to the nature of the registrant’s business:

Current and noncurrent assets.1
Current and noncurrent liabilities.2
Redeemable preferred stock (if applicable).
Noncontrolling interests (if applicable).
Net sales or gross revenues.3
Gross profit (or costs and expenses related to net sales or gross revenues).4
Income (loss) from continuing operations.
Net income (loss).
Net income (loss) attributable to the entity.

Rule 13-01(a)(4) also requires registrants to present separate line items for “amounts due from, amounts due to, and transactions with [nonissuer and nonguarantor subsidiaries].” Similarly, balances and transactions with other related parties (i.e., related party transactions reported in the registrant’s consolidated financial statements) should also be presented separately from balances and transactions with (1) third parties and (2) nonissuer and nonguarantor subsidiaries. Registrants are not required to disclose supplemental cash flow information about subsidiary issuers or guarantors.

Further, to comply with Rule 13-01(a)(6), registrants must present additional line items to disclose any other financial information about a guarantor that “would be material for investors to evaluate the sufficiency of the guarantee.” Moreover, in accordance with Rule 13-01(a)(7), registrants should provide any additional disclosures necessary to ensure that the alternative financial disclosures presented are not misleading.

Example 2-11

Registrant A issues a registered debt security that is guaranteed by Subsidiary B. Substantially all of the noncurrent assets of A (the issuer) and B (the guarantor) consist of goodwill. Registrant A will need to present goodwill separately from other noncurrent assets if such disclosure would be material to the investors’ evaluation of the sufficiency of the guarantees (e.g., if current assets would not be sufficient to satisfy the guarantee).

2.3.2.2 Basis of Presentation

The alternative financial disclosures of issuers and guarantors, which should exclude the financial information of nonissuer and nonguarantor subsidiaries, may be presented in a registrant’s periodic filings or registration statement (see the previous section) on a combined basis, with balances and transactions between the issuer(s) and guarantor(s) (hereafter referred to as the “obligor group”) eliminated in combination. Thus, the registrant does not need to provide the information in separate columns for each issuer and guarantor or to show associated eliminations; it only needs to disclose the combined amounts for the obligor group as a whole. While presentation on a combined basis is permitted, there could be circumstances in which separate financial disclosures about certain issuers and guarantors are required. For example, if factors that may affect payment to investors in the guaranteed debt securities are different for certain issuers or guarantors, registrants may need to present alternative financial disclosures for those issuers and guarantors separately. This may also be the case if some guarantees are not full and unconditional but others are.

Example 2-12

Registrant A issues $100 million in registered debt securities that are guaranteed by three consolidated subsidiaries. Subsidiary B’s guarantee is limited to $10 million, whereas Subsidiary C’s and Subsidiary D’s guarantees are full and unconditional. In this scenario, Registrant A may be required to disclose the limitations on B’s guarantee and provide (1) separate alternative financial disclosures for B and (2) combined alternative financial disclosures for A, C, and D.

Rule 13-01 allows registrants to provide narrative disclosures rather than the alternative financial disclosures of the issuer(s) and guarantor(s) that have unique fact patterns (e.g., Subsidiary B in the example above) when the narrative disclosures about such entities “can be easily explained and understood.” For example, if the entities with unique fact patterns represent a similar percentage of each line item, narrative disclosure may be appropriate. However, if such entities constitute varying proportions of each line item, narrative disclosure is unlikely to be sufficient.

Example 2-13

Registrant A has contractual (or statutory) restrictions that apply to Subsidiary B, one of its subsidiary guarantors. Subsidiary B represents roughly the same percentage of every line item in the combined alternative financial disclosures of the obligor group. In this situation, instead of presenting separate alternative financial disclosures for B, A may describe the restrictions that apply to B and disclose that B represents approximately 5 percent of each line item presented in the combined alternative financial disclosures.

As mentioned above, when presenting the alternative financial disclosures, a registrant should exclude the financial information of nonissuer and nonguarantor subsidiaries because (1) such subsidiaries are not obligated to make payments related to guaranteed debt securities and (2) the obligor group’s equity investment in nonissuer and nonguarantor subsidiaries may be subordinate to other obligations of those subsidiaries. Thus, the alternative financial disclosures of the obligor group should exclude investments in nonissuer and nonguarantor subsidiaries (i.e., investments in subsidiaries and equity in the earnings of subsidiaries and related tax effects). However, as discussed in Section 2.3.2.1, the registrant would separately disclose the obligor group’s transactions and balances with the nonissuer and nonguarantor subsidiaries if such transactions are unrelated to the group’s investment in the nonissuer and nonguarantor subsidiaries, as shown in the example below.

In addition, as shown above, dividends that are declared and receivable from a nonissuer or nonguarantor subsidiary should be included in the alternative financial disclosure as outlined in paragraph 2520.1 of the FRM. The financial information should reflect an obligor group’s investment in nonconsolidated entities, such as investments accounted for at fair value or in accordance with the equity method.

In certain instances, a registrant may choose or be required to present itself and other obligors in separate columns rather than on a combined basis (e.g., if the extent of guarantees for certain obligors is limited). In these circumstances, the registrant would present in each column the payable and receivable balances between the entities. However, the financial information should exclude the equity investment and equity in earnings from interests in entities presented in other columns (see paragraph 2520.2 of the FRM).

Example 2-13A

Registrant X, which is eligible to present alternative financial information, issues a registered debt security that is guaranteed by two subsidiaries. If X uses three columns to present its financial information (one for itself and one for each of the guarantors) rather than presenting it on a combined basis (i.e., in a single column), the columns for X and the two subsidiary guarantors would reflect payables and receivables with one another. However, X’s column would exclude its equity investment in the guarantors as well as its equity in earnings of the guarantors.

As previously mentioned, registrants that qualify for alternative disclosures must include a brief description of the basis of presentation associated with each of the required financial disclosures. Such a description should include the form and content of the disclosures and enhance the understandability of the financial information provided. Among other items, the description of the basis of presentation should disclose that:

The alternative financial disclosures include information about the issuer(s) and guarantor(s).
The alternative financial disclosures are presented on a combined basis, with balances and transactions between the issuer(s) and guarantor(s) eliminated.
The information related to the equity investments of the issuer(s) and guarantor(s) in nonissuer and nonguarantor subsidiaries has been excluded.
The balances and transactions with nonissuer and nonguarantor subsidiaries have been separately presented.
The balances and transactions with other related parties have been separately presented.

For periodic filings, a registrant must assess the issuer and guarantor structure as of each reporting date (i.e., annual and interim periods) to determine whether any changes in the structures (e.g., the addition or removal of guarantor subsidiaries) affect the alternative financial disclosures presented (see Section 2.3.2.4 for further information). The SEC staff has informally indicated that for an initial registration statement (e.g., an IPO filed on Form S-1) or a registration statement filed by an existing SEC reporting entity that was not previously required to present alternative financial disclosures (e.g., an entity registering debt securities on Form S-4 or S-3), the registrant should evaluate the issuer and guarantor structure as of the initial filing date of the registration statement to determine the requirements. See Section 2.3.2.3.3 for further discussion of information to be included in a registration statement.

2.3.2.3 Periods to Present

A registrant is only required to present alternative financial disclosures for the most recent annual period and the most recent year-to-date interim period, as applicable, included in the registrant's consolidated financial statements. In no circumstance would a registrant be required to provide comparative prior-year income statement information or quarter-to-date income statement information (i.e., to match the income statement presentation in Form 10-Q for the second or third quarter).

2.3.2.3.1 Annual Reports

Alternative financial disclosures must be presented in annual reports on Form 10-K as follows:

Balance sheet information — As of the most recent year-end.
Income statement information — For the most recent year.

For example, a registrant with a December 31 fiscal year-end is required to include balance sheet information as of December 31, 20X1, and income statement information for the year ended December 31, 20X1, in its December 31, 20X1, Form 10-K. Comparative prior-year periods are not required.

2.3.2.3.2 Quarterly Reports

Alternative financial disclosures must be presented in quarterly reports on Form 10-Q as follows:

Balance sheet information — As of the most recent interim period and the prior year-end, which is consistent with the periods presented in the parent company’s consolidated balance sheet.
Income statement information — For the current year-to-date interim period. Comparative prior-year and quarter-to-date interim periods are not required.

For example, a registrant with a December 31 fiscal year-end is required to include balance sheet information as of June 30, 20X1, and December 31, 20X0, and income statement information for the six months ended June 30, 20X1, in its June 30, 20X1, Form 10-Q.

2.3.2.3.3 Registration Statements

Alternative financial disclosures must be presented in an entity’s registration statement for the issuance of guaranteed debt securities as follows:

Balance sheet information — As of the end of the most recently completed fiscal year-end and interim period included in the registration statement.
Income statement information — For the most recently completed year and the current year-to-date interim period included in the filing. Comparative prior-year annual and interim periods are not required.

For example, if a registrant with a December 31 fiscal year-end files a registration statement after the June 30, 20X1, Form 10-Q has been filed, it is required to include (1) balance sheet information as of June 30, 20X1, and December 31, 20X0, and (2) income statement information for the six months ended June 30, 20X1, and the year ended December 31, 20X0.

2.3.2.4 Changes to the Obligor Group’s Alternative Financial Disclosures

The alternative financial disclosures of the obligor group may need to be adjusted for retrospective changes that affect the registrant’s financial statements (e.g., the adoption of new accounting standards or the reporting of discontinued operations) or changes in the guarantor structure. The need for retrospective adjustment depends on the periods presented:

Annual reports — Since annual reports only include disclosure of the most recent year, prior periods are not presented and thus do not need to be retrospectively adjusted.
Quarterly reports — Since quarterly reports only include disclosure of income statement information for the most recent year-to-date interim period, prior periods do not have to be retrospectively adjusted. However, since quarterly reports require disclosure of balance sheet information as of the most recent interim period-end and the most recent year-end, a registrant may need to retrospectively adjust the most recent year-end balances.
Registration statements for guaranteed debt securities — Since registration statements require the disclosure of (1) balance sheet information as of the end of the most recently completed fiscal year-end and interim period and (2) income statement information for the most recently completed year and the current year-to-date interim period, the year-end balance sheet information and annual income statement information may need to be retrospectively adjusted.

2.3.2.4.1 Retrospective Changes Affecting the Registrant’s Financial Statements

A registrant may retrospectively adjust its consolidated financial statements for a variety of reasons, including, but not limited to, the adoption of new accounting standards or the reporting of discontinued operations. When such an adjustment occurs, the registrant must consider the effect of such changes on the alternative financial disclosures of the obligor group. If the retrospective adjustment affects the obligor group’s balances, the registrant should reflect the retrospective changes in the alternative financial disclosures at the same time that it reflects such changes in the consolidated financial statements.

Example 2-14

Company A, an Exchange Act reporting company with a calendar year-end, guarantees the registered debt security of Subsidiary Issuer B. The issuer and guarantor structure qualifies for alternative disclosures in lieu of B’s full financial statements (see Section 2.2). In A’s Form 10-Q for the quarter ended March 31, 20X8, A provides alternative financial disclosures for itself and B on a combined basis (the obligor group) as of and for the quarter ended March 31, 20X8, and as of December 31, 20X7. During the quarter ended March 31, 20X8, A adopts a new accounting standard retrospectively, which results in adjustments to net income, total assets, and equity for the current and prior periods. The alternative financial disclosures of the obligor group included in Form 10-Q should reflect the adoption of the new accounting standard as of and for the quarter ended March 31, 20X8. In addition, the summarized balance sheet information as of December 31, 20X7, which was previously reported in A’s Form 10-K for the year ended December 31, 20X7, should be retrospectively revised for the impact of the new accounting standard. Further, if A files a new or amended registration statement after filing the Form 10-Q for the quarter ended March 31, 20X8, but before filing its Form 10-K for the year ended December 31, 20X8, it would also present the alternative financial disclosures for the year ended December 31, 20X7, retrospectively adjusted for the adoption of the new accounting standard.

2.3.2.4.2 Change in Issuer and Guarantor Structure

When a change in the issuer and guarantor structure occurs (e.g., a guarantor subsidiary is released from its obligation and becomes a nonguarantor), a registrant must determine whether and how that change affects its disclosures. We believe that changes made before the most recent balance sheet date should be reflected in the alternative financial disclosures of the obligor group for all periods for which such disclosures are presented. Although the alternative financial disclosures are not required to reflect changes that occur after the most recent balance sheet date, a registrant should consider disclosing such changes. In addition, the changes to the guarantor structure must be reflected in subsequent periodic filings that include financial information for the period in which the change occurred.

Example 2-15

Registrant A, an Exchange Act reporting company with a calendar year-end, guarantees the registered debt security of Subsidiary Issuer B as of December 31, 20X7. No other subsidiaries guarantee B’s debt security as of that date, and the issuer and guarantor structure qualifies for alternative disclosures in lieu of B’s full financial statements (see Section 2.2). Subsidiary C, a preexisting subsidiary owned and consolidated for all periods presented, is added to the guarantor structure as a subsidiary guarantor on July 21, 20X8. The new guarantor structure also meets the conditions for providing alternative disclosures (and thus A may omit the full financial statements of B and C). In its alternative financial disclosures in Form 10-Q for the quarter ended June 30, 20X8, A would reflect its own information with that of B on a combined basis; it would not include C’s information since C became a guarantor after the balance sheet date. However, Registrant A should consider disclosing the addition of C as a guarantor. Registrant A’s subsequent periodic reports and other applicable filings should retrospectively present the alternative financial disclosures (and alternative nonfinancial disclosures) in accordance with the new guarantor structure. Therefore, A would reflect in its alternative financial disclosure in its Form 10-Q for the quarter ended September 30, 20X8, its own information combined with that of B and C for all periods presented, including the balance sheet information as of December 31, 20X7.

One notable exception to the retrospective treatment discussed above involves the disposal of a guarantor subsidiary that is released from its guarantee upon disposal. The highlights of the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff state that a registrant can apply either of the following two presentation alternatives when changes to the group of subsidiary guarantors occur as a result of a disposal:

The alternative financial disclosures of the obligor group reflect the guarantor structure as of the most recent balance sheet date included in the filing — “[A]ny subsidiary already disposed of and no longer designated as a guarantor at the most recent balance sheet date should be retrospectively [excluded from the alternative financial disclosures of the obligor group]. A guarantor subsidiary not disposed of but that qualifies for discontinued operations treatment and that is still designated as a guarantor at the balance sheet date should remain in the [alternative financial disclosures of the obligor group] until the date of disposal . . . at which point the subsidiary would be retrospectively” excluded from the obligor group’s alternative financial disclosures.
The disposed subsidiary remains in the alternative financial disclosures of the obligor group through the date of disposal — The loss of guarantor status is not retrospectively applied “in order to portray the operational history of the guarantor(s).”

The meeting highlights further indicate that the “staff will accept either approach [but] [r]egistrants should carefully consider which presentation is most appropriate in their facts and circumstances.” These presentation alternatives apply solely to the disposition of a guarantor and should not be applied to other changes in guarantor structure. We believe that the guidance, which precedes the issuance of Rule 13-01, is still applicable since Rule 13-01 did not specifically address the disposal of a guarantor subsidiary.

2.3.3 Omission of Alternative Financial Disclosures

Alternative disclosures are required to include the alternative financial disclosures to the extent material, which is highly dependent on the applicable facts and circumstances and not defined by any numerical thresholds. For example, a registrant can omit the alternative financial disclosures of the obligor group if such financial disclosures do not differ in any material respects from the consolidated financial statements of the parent company.

Rule 13-01(a)(4)(vi) outlines four scenarios; a registrant may omit summarized financial information if any one of those scenarios are “true and disclosed.” The four scenarios are as follows:

The alternative financial disclosures are not materially different from the consolidated financial statements of the registrant (i.e., nonissuers and nonguarantors are insignificant).
The amounts presented in the alternative financial disclosures (which excludes investments in nonissuers and nonguarantors) are not material (i.e., the issuer(s) and guarantor(s) do not have material assets, liabilities, or operations).

Connecting the Dots

Since the obligor group would report, at a minimum, the registered guaranteed debt security and related interest expense, registrants may not be able to assert that the obligor group has no material assets, liabilities, or operations. We believe that, alternatively, a registrant could narratively disclose the amount of the registered guaranteed debt security and related interest expense along with a statement that the obligor group has no other material assets, liabilities, or operations. In addition, as outlined in paragraph 2520.3 of the FRM, this disclosure should indicate the amounts of the debt security that are current or noncurrent.
A finance subsidiary5 issues a debt security that is fully and unconditionally guaranteed by the parent company, and the debt security is not guaranteed by any other subsidiaries.
A finance subsidiary co-issues a debt security with the parent company on a joint and several basis, and the debt security is not guaranteed by any other subsidiaries.

However, registrants that do not meet any of the criteria in these four nonexclusive scenarios may nonetheless conclude, on the basis of their specific facts and circumstances, that disclosure of part or all of the alternative financial disclosures is not material. We encourage registrants that intend to omit part or all of the alternative financial disclosures on the basis of materiality, rather than the four nonexclusive scenarios above, to consult with their legal and accounting advisers.

A registrant that omits such alternative financial disclosures must evaluate the appropriateness of this determination as of each reporting date. If circumstances change, the registrant may be required to provide the obligor group’s alternative financial disclosures. For example, if a registrant relies on the fact that nonissuers and nonguarantor subsidiaries are insignificant as its basis for omitting the alternative financial disclosures and it subsequently acquires a material nonguarantor subsidiary, the registrant must reassess its conclusion, and it may need to begin providing alternative financial disclosures about the obligor group.

2.3.4 Where Disclosure Is Required

For periodic reporting on Forms 10-K and 10-Q, a registrant may provide the required alternative disclosures in either its MD&A or financial statements.

For registration statements (i.e., Form S-1, Form S-3, Form S-4, or Form S-11) for the sale or registration of guaranteed debt securities, the alternative disclosures may be presented in one of the following:

MD&A.
The financial statements.
The prospectus, placed immediately after “Risk Factors,” if not otherwise included in the financial statements or MD&A. If there are no risk factors disclosed, the information may be presented immediately after the pricing information.

If a registrant chooses to include the alternative disclosures in its financial statements, such disclosures would be subject to (1) audit (in the case of Form 10-K) or review (in the case of Form 10-Q), (2) ICFR (and an audit of ICFR in a Form 10-K if applicable), and (3) XBRL tagging. However, if the registrant elects to include the alternative disclosures outside its financial statements, the alternative disclosures would be subject to disclosure controls and procedures but would not require XBRL tagging. While alternative disclosures presented in MD&A or elsewhere in the registration statement would not be subject to audit or review, the auditors may be asked to perform certain procedures on these alternative disclosures in conjunction with providing comfort letters to underwriters and certain other requesting parties in a securities offering.

2.3.5 Recently Acquired Subsidiary Issuers or Guarantors

When filing a new registration statement in conjunction with the offer and sale of new guaranteed debt securities, a registrant needs to consider whether any information related to recently acquired businesses must be included in the registration statement in addition to the alternative financial and nonfinancial disclosures discussed in Sections 2.3.1 and 2.3.2.

If a registrant acquires a significant business6 after the most recent balance sheet date included in its consolidated financial statements and such an acquired business, or one or more of the acquired business’s subsidiaries, either issues or guarantees the debt securities to be issued, the registrant must provide the preacquisition alternative financial disclosures for the recently acquired subsidiaries in the registration statement. A registrant is required to provide the preacquisition alternative financial disclosures of the recently acquired issuer or guarantor subsidiary as of and for the most recent annual and interim periods only, even if preacquisition financial statements are required in accordance with Regulation S-X, Rule 3-05, for more than one year. However, once the business acquisition has been reflected in the registrant’s balance sheet, the requirement for the preacquisition alternative financial disclosures of a recently acquired issuer or guarantor subsidiary in a registration statement no longer applies. Preacquisition alternative financial disclosures for recently acquired subsidiary issuers or guarantors are not required in Form 10-K or Form 10-Q.

Example 2-16

On July 1, 20X1, Registrant A completes the acquisition of a significant business that has a December 31 fiscal year and plans to file a new registration statement on Form S-3 on September 25, 20X1. The acquired business will guarantee the newly registered debt. The registration statement includes (or incorporates by reference) the preacquisition financial statements of the acquired business under Rule 3-05. Furthermore, to comply with Rule 13-01, the registration statement must include preacquisition alternative financial disclosures of the newly acquired subsidiary (1) as of June 30, 20X1, and December 31, 20X0, (2) for the six months ended June 30, 20X1, and (3) for the year ended December 31, 20X0.

When a registrant is required to provide the preacquisition alternative financial disclosures of a recently acquired subsidiary issuer or guarantor, such disclosures must be consistent with the alternative financial disclosures presented for existing issuers and guarantors (see Section 2.3.2) and should reflect only the information of subsidiaries of the recently acquired business that issue or guarantee the debt security. That is, while a registrant determines the significance of a recently acquired business on the basis of the financial information of the recently acquired business as a whole, the alternative financial disclosures will only reflect those subsidiaries that issue or guarantee the new debt security.

In certain circumstances, a registrant may be required to provide alternative financial disclosures of the recently acquired issuer or guarantor subsidiaries in accordance with Rule 13-01 before providing the historical financial statements of the recently acquired business in accordance with Rule 3-05. For example, paragraph 2530.4 of the FRM states that under Rule 3-05, “pre-acquisition financial statements of an acquired business [may] be omitted from a registration statement if significance does not exceed 50% and the registration statement is declared effective no more than 74 calendar days after consummation of the acquisition.” Because Rule 13-01 does not include a similar provision for recent acquisitions, any registration statement filed after the consummation of an acquisition of a significant business but before the acquisition is reflected in the registrant’s financial statements must include the alternative financial disclosures of the recently acquired issuer or guarantor subsidiaries.

Paragraph 2530.4 also indicates that in other circumstances, an FPI may be required to provide preacquisition summarized financial information in accordance with Rule 13-01 but would not be required to provide preacquisition financial statements of the acquired business under Rule 3-05. For example, a parent company that is an FPI that acquires a significant business after the date of the most recent balance sheet presented is required to provide the preacquisition summarized financial information of a recently acquired issuer or guarantor under Rule 13-01(a)(5). However, in accordance with Rule 3-05(b)(4), the FPI would not be required to present the preacquisition financial statements of the acquired business if (1) the registration statement is filed or declared effective within 75 days after the consummation of the acquisition and (2) the acquired business is greater than 20 percent but less than 50 percent significant. Further, if the registrant did not file additional registration statements requiring the preacquisition financial statements of the acquired business, it may never be required to provide such disclosures because FPIs do not have a Form 8-K reporting obligation for significant acquisitions. See Section 2.4.1 for the applicability of Rule 13-01 to FPIs.

2.3.6 Ongoing Reporting Obligation

“Subsidiary issuers and guarantors that are permitted by [Rule] 3-10 to omit separate financial statements are exempt from the periodic reporting requirements of Sections 13(a) and 15(d) of the Exchange Act [Exchange Act Rule 12h-5],” as stated in paragraph 2540.1 of the FRM.

To remain eligible to omit the separate financial statements of any subsidiary issuers or guarantors, or both, a registrant must continue to provide the alternative disclosures for as long as the subsidiary issuers or guarantors have a reporting obligation with respect to the guarantee or guaranteed debt security. A registrant may cease providing the alternative disclosures if such subsidiary issuers or guarantors no longer have a reporting obligation or the obligation has been suspended. For example, Rule 12h-3 of the Exchange Act allows for the automatic suspension of a company’s reporting obligation if, as of the beginning of the fiscal year, the securities are “held of record by [f]ewer than 300 persons, or in the case of a bank; a savings and loan holding company . . . ; or a bank holding company . . . 1,200 persons; or [f]ewer than 500 persons, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years.”

Note that if an issuer or guarantor of a guaranteed security has a different class of securities that are registered under Section 12 of the Exchange Act, the issuer cannot rely on the reporting relief provided by Rule 12h-5 of the Exchange Act until it deregisters the other class of securities (see paragraph 2540.1 of the FRM and Interpretation 254.01 of the SEC’s Compliance and Disclosure Interpretations on the Exchange Act Rules).

Footnotes

Rule 1-02(bb) indicates that “[f]or specialized industries in which classified balance sheets are normally not presented, information shall be provided as to the nature and amount of the majority components of assets and liabilities.”

See footnote 1.

Rule 1-02(bb) indicates that “[f]or specialized industries, other information may be substituted for sales and related costs and expenses if necessary for a more meaningful presentation.”

See footnote 3.

Rule 13-01(a)(4)(vi) states, in part, that a “finance subsidiary” is a subsidiary that “has no assets or operations other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.”

A registrant determines whether a “business” has been acquired in accordance with the guidance in Regulation S-X, Rule 11-01(d), and whether the acquisition of a “related” business is treated as a single business acquisition in a manner consistent with Regulation S-X, Rule 3-05(a)(3). An acquired business is deemed significant on the basis of the same significance tests and thresholds used to determine whether preacquisition financial statements are required for an acquired business under Rule 3-05; in such a determination, 20 percent is substituted for 10 percent any place it appears in Regulation S-X Rule 1-02(w). See Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions for further details on determining whether an acquisition is a significant business.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.