6.3 Disclosures

6.3.1 Equity Method Investment Disclosures

ASC 323-10

50-1 Paragraph 323-10-15-3 explains that references in this Subtopic to common stock refer to both common stock and in-substance common stock that give the investor the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50 percent or less of the common stock or in-substance common stock (or both common stock and in-substance common stock).

50-2 The significance of an investment to the investor’s financial position and results of operations shall be considered in evaluating the extent of disclosures of the financial position and results of operations of an investee. If the investor has more than one investment in common stock, disclosures wholly or partly on a combined basis may be appropriate.

50-3 All of the following disclosures generally shall apply to the equity method of accounting for investments in common stock:

Financial statements of an investor shall disclose all of the following parenthetically, in notes to financial statements, or in separate statements or schedules:
1. The name of each investee and percentage of ownership of common stock.
2. The accounting policies of the investor with respect to investments in common stock. Disclosure shall include the names of any significant investee entities in which the investor holds 20 percent or more of the voting stock, but the common stock is not accounted for on the equity method, together with the reasons why the equity method is not considered appropriate, and the names of any significant investee corporations in which the investor holds less than 20 percent of the voting stock and the common stock is accounted for on the equity method, together with the reasons why the equity method is considered appropriate.
3. The difference, if any, between the amount at which an investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference.
For those investments in common stock for which a quoted market price is available, the aggregate value of each identified investment based on the quoted market price usually shall be disclosed. This disclosure is not required for investments in common stock of subsidiaries.
If investments in common stock of corporate joint ventures or other investments accounted for under the equity method are, in the aggregate, material in relation to the financial position or results of operations of an investor, it may be necessary for summarized information as to assets, liabilities, and results of operations of the investees to be disclosed in the notes or in separate statements, either individually or in groups, as appropriate.
Conversion of outstanding convertible securities, exercise of outstanding options and warrants, and other contingent issuances of an investee may have a significant effect on an investor’s share of reported earnings or losses. Accordingly, material effects of possible conversions, exercises, or contingent issuances shall be disclosed in notes to financial statements of an investor.

ASC 825-10

50-28 As of each date for which a statement of financial position is presented, entities shall disclose all of the following: . . .

f. For investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required by paragraph 323-10-50-3 (excluding the disclosures in paragraph 323-10-50-3(a)(3); (b); and (d)).

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-03(b)(12)

Equity in earnings of unconsolidated subsidiaries and 50 percent or less owned persons. State, parenthetically or in a note, the amount of dividends received from such persons. If justified by the circumstances, this item may be presented in a different position and a different manner (see § 210.4-01(a)).

Investors in equity method investments are subject to specific disclosure requirements. As with most elements of disclosure, investors should consider the materiality of the investment(s) when determining the level of disclosure. Further, investors may also be required to provide disclosures under other areas of GAAP in addition to those required under ASC 323.

When an investor has multiple equity method investments, it may be appropriate for the investor to combine some, or all, of the disclosures depending on the similarity of the investments, similarity of the operations, or materiality of the individual investments. In summary, the disclosure requirements can be classified as those relating to the investor’s accounting for its investment and those relating to the investee’s financial activity:

Disclosures related to the investor’s accounting for its investment — The investor should disclose the investee’s name and the investor’s percentage ownership of the investee’s common stock. As discussed in Section 3.2, there is a presumption under U.S. GAAP that an ownership interest of 20 percent or more (or 3 percent to 5 percent for investments in limited partnerships, LLCs, trusts, and similar entities) provides the investor with significant influence and, conversely, that an ownership interest of less than 20 percent (or 3 percent to 5 percent for investments in limited partnerships, LLCs, trusts, and similar entities) does not provide the investor with significant influence. Accordingly, the investor should disclose:
- Why the equity method of accounting is not applied when the investor has an interest that would presumptively indicate significant influence does exist.
- Why the equity method of accounting is applied when the investor has an interest that would presumptively indicate significant influence does not exist.
The investor should also disclose any differences that exist between the investment balance and the investor’s share in the investee’s underlying earnings and how the investor is accounting for such differences. This may include basis differences (see Section 4.5). For example, if a basis difference related to tangible assets (e.g., PP&E whose fair value exceeded the investee’s carrying value), the investor would need to disclose that the basis difference is being amortized over the remaining useful life of such assets. Differences could also arise from the suspension of the equity method of investment (see Section 5.2), the disproportionate allocation of earnings (see Section 5.1.2), or a bargain purchase (see Section 4.5.1). As a result, investors should consider providing appropriate disclosure to describe these differences and the related accounting policy in a manner consistent with how basis differences would be described.

Further, when the quoted market price of the investee’s common stock is available, the investor should also disclose that investment’s fair value on the basis of the quoted market price.
Disclosures related to the investee’s financial activity — If the investor’s equity method investments are material to the investor, for either an individual investee or all investees in the aggregate, the investor should consider disclosure of summarized information regarding the assets, liabilities, and results of operations of the investees, either in the notes to the financial statements or in separate statements. This information may be presented individually (i.e., on an investee-by-investee basis) or in groups as appropriate for the circumstances depending on the similarity of the investments, similarity of the operations, or materiality of the individual investments. While ASC 323 does not specify thresholds for when this information should be provided or any format for these disclosures, SEC registrants must adhere to specific requirements (see Section 6.4). Other entities may find the SEC guidance useful as well in evaluating when it would be appropriate to provide these disclosures and determining their format. This information is intended to provide the users of the financial statements with further insight into the investee’s operations that could not otherwise be inferred from the amounts recorded in the investor’s financial statements.

If the investee has issued securities that may materially affect the investor’s share of the investee’s reported earnings or losses (e.g., convertible debt, options, warrants, or other securities with similar features), the investor must disclose the effect of the possible conversion, exercise, or issuance of such securities on the investor’s share of the investee’s earnings or losses. For example, if an investor holds a 25 percent interest in an equity method investee and that investee has issued warrants that, if exercised, could double the number of investee common shares outstanding, the investor should disclose the existence of such instruments and the potential effect, if exercised.

The example below illustrates disclosures by an investor with two individually material investments and numerous immaterial investments.

Example 6-2

Note X: Company G’s Equity Method Investments

Summarized Financial Information

6.3.1.1 Other Disclosure Considerations

While the guidance above outlines the requirements of ASC 323, equity method investments may necessitate disclosure under other areas of the Codification, including those that address the following circumstances:

Disclosures for investments accounted for under the fair value option — Investors that apply the fair value option to an investment that would otherwise be accounted for under the equity method of accounting must provide the disclosures outlined in ASC 323 with certain exceptions. Investors need not disclose:
- Information regarding basis differences (since none would exist under the fair value option).
- The aggregate value of the investments based on quoted market price (since the amount recorded in the financial statements would presumably be based on this amount and subject to fair value disclosures in accordance with ASC 820).
- Information regarding the investee’s convertible or contingent securities that may materially affect the share of earnings or losses recorded by the investor (since the amount recorded by the investor is based on the fair value of the interests rather than the earnings or losses reported by the investee).
Disclosures for investments in VIEs accounted for under the equity method — Investors may use the equity method to account for investees that are VIEs as defined in ASC 810 but whose primary beneficiaries are not the investors. In such cases, investors must comply with the disclosure requirements of ASC 323 (as outlined above) and of ASC 810. These requirements are discussed further in Section 11.2 of Deloitte’s Consolidation Roadmap.
Disclosures for changes in reporting lag — As described in Section 5.1.4, an investor may report the results of its investments on a lag. If the investor changes the period of the lag, that would generally be considered a change in accounting principle and require disclosures in accordance with ASC 250. These disclosures include the nature of and reason for the change, the method of applying the change, and any indirect effects of the change.
Disclosures related to guarantees — Investors may guarantee investees’ obligations. Such guarantees would usually require disclosure in accordance with ASC 460, including, but not limited to, the nature of the guarantee, the circumstances that would require performance, the guarantee’s term and status, and the maximum potential payable under the guarantee.
Disclosures related to income taxes — SEC registrants must provide specific tax disclosures, including a rate reconciliation as well as a discussion of tax holidays. These disclosure requirements are also relevant to equity method investments if the tax effects are material to the registrant.
Disclosures related to a change in accounting principle — See Section 5.1.3.4 for discussion related to the adoption of a new accounting standard. In addition, any relevant disclosures required by ASC 250 should be disclosed.

6.3.2 Related-Party Disclosure Requirements

ASC 850-10

50-1 Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include:

The nature of the relationship(s) involved
A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements
The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period
Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
The information required by paragraph 740-10-50-17.

Related parties include “[e]ntities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity.”4 Therefore, an investor must provide appropriate disclosure for material transactions with an equity method investee. These disclosures include a description of the transaction, the amounts reflected in the financial statements for each period presented, and the impact of any change in the method of establishing the terms of the transactions. An investor must also disclose the amount due to or from an equity method investee as of each balance sheet date.

6.3.3 Nonmonetary Transaction Disclosure Requirements

ASC 845-10

50-1 An entity that engages in one or more nonmonetary transactions during a period shall disclose in financial statements for the period all of the following:

The nature of the transactions
The basis of accounting for the assets transferred
Gains or losses recognized on transfers.

Nonmonetary transactions may include situations in which, for example, an investor contributes assets to an equity method investee in exchange for initial or additional interests. Therefore, an investor must consider the relevant nonmonetary transaction disclosure requirements, including the basis of accounting applied to the assets transferred, in addition to disclosures required under ASC 323 and other relevant guidance.

6.3.4 Discontinued Operation Disclosure Requirements

ASC 205-20

50-1 The following shall be disclosed in the notes to financial statements that cover the period in which a discontinued operation either has been disposed of or is classified as held for sale under the requirements of paragraph 205-20-45-1E:

A description of both of the following:
1. The facts and circumstances leading to the disposal or expected disposal
2. The expected manner and timing of that disposal.
If not separately presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) as part of discontinued operations (see paragraph 205-20-45-3B), the gain or loss recognized in accordance with paragraph 205-20-45-3C.
Subparagraph superseded by Accounting Standards Update No. 2014-08.
If applicable, the segment(s) in which the discontinued operation is reported under Topic 280 on segment reporting.

An equity method investment accounted for as a discontinued operation continues to remain subject to the equity method investment disclosures of ASC 323-10-50-3(c) (see Section 6.3.1).

Footnotes

See ASC 850-10-20.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it 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.