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 issuers and 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), 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.
2.3.1 Alternative Nonfinancial Disclosures
In addition to providing certain alternative financial disclosures (see
discussion in Section 2.3.2), a registrant
that presents the alternative disclosures permitted by Rule 13-01 must provide
alternative nonfinancial disclosures. To the extent material, such disclosures
must include a description of:
- The issuer(s) and guarantor(s) of the guaranteed security.
- The terms and conditions of the guarantee(s), how the issuer(s) and guarantor(s) are structured, and other factors that may affect payments to holders of the guaranteed securities. 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 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 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. Such limitations should be disclosed to the extent they are material to investors.
Beyond the requirements outlined above, registrants must disclose the specific
facts and circumstances related to each 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 the extent
necessary, to ensure that their disclosures are not misleading. The alternative
nonfinancial disclosures provided should make the accompanying alternative
financial disclosures easier to interpret.
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, to the
extent material, 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
(i.e., provide separate alternative nonfinancial
disclosures specific to B) 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 or periodic filing.
If the entities that are required to be disclosed are the same as those
disclosed in the previous period, the parent company 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 issuers and guarantors 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 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.
- Noncontrolling interests.
- 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 may be presented in a registrant’s periodic filings or
registration statement (see the previous section) on a combined basis, with
transactions between the issuers and guarantors (hereafter referred to as
the “obligor group”) eliminated in combination. Thus, the registrant does
not need to provide 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
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, 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.
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, 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 a combined
single column, the columns for X and the guarantors
would reflect payables and receivables with each
other. 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 guarantor
structure as of each reporting date (i.e., annual and interim periods) to
determine whether any changes in the structure (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 public debt on Form S-4
or S-3), the registrant should evaluate the 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.
If a registrant or its subsidiaries have issued multiple
debt securities that have different issuers and guarantors, the registrant
or subsidiaries should consider whether the alternative financial
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 financial disclosures to
reflect the obligor group of each guaranteed debt security.
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. 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 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 disclosure 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 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
Registrant A, an Exchange Act
reporting company with a calendar year-end,
guarantees the registered debt of Subsidiary
Issuer B. The 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 new accounting
standard.
2.3.2.4.2 Change in Guarantor Structure
When a change in the 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 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
the 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 disclosure 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 disclosure of the obligor group] until the date of disposal . . . at which point the subsidiary would be retrospectively” excluded from the group’s alternative financial disclosure.
- 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 Financial Disclosure
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 its consolidated financial statements do not differ in any
material respects from those of the group. However, in all circumstances, the
alternative nonfinancial disclosures must be provided.
Rule 13-01(a)(4)(vi) outlines four scenarios in which financial information would
not be material. If any one of those criteria are “true and disclosed,” the
registrant may omit the financial disclosures. The four scenarios are as follows:
- The alternative financial disclosures would not be materially different from the consolidated financial statements of the registrant (i.e., nonguarantors are insignificant).
- The amounts presented in the alternative financial disclosures (which
excludes investments in nonguarantors) would not be material (i.e., the
issuers and guarantors do not have material independent assets,
liabilities, or operations).Connecting the DotsSince 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 independent 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 security that is fully and unconditionally guaranteed by the parent, and the security is not guaranteed by any other subsidiaries.
- A finance subsidiary co-issues a security with the parent, and the security is not guaranteed by any other subsidiaries.
However, registrants that do not meet any of the criteria in these scenarios may
nonetheless conclude, on the basis of their specific facts and circumstances,
that disclosure of part or all of the financial information 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 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 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 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 disclosures in either its MD&A or financial
statements.
For registrations statements (i.e., Form S-1, Form S-3, or Form
S-4) for the sale or registration of guaranteed securities, the 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 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 disclosures outside its financial statements,
the disclosures would be subject to disclosure controls and procedures but would
not require XBRL tagging. While disclosures in MD&A would not be subject to
audit or review, the auditors may be asked to perform certain procedures on
these disclosures in conjunction with providing comfort letters to underwriters
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.
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 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 an entity 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 (see Rule 12h-5 of
the Exchange Act and paragraph
2540.1 of the FRM).
To remain eligible to omit the 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.”
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 or guarantor cannot rely on the relief provided by Rule
3-10 until it deregisters the other class of securities (seethe SEC’s Compliance
and Disclosure Interpretation (C&DI) Question 254.01 and paragraph 2540.1 of
the FRM).
Footnotes
1
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.”
2
See footnote 1.
3
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.”
4
See footnote 3.
5
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.”
6
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.