6.4 Reporting Considerations for Domestic SEC Registrants

6.4.1 Requirements Under Regulation S-X

6.4.1.1 Overview

To ensure that investors receive relevant financial information about a company’s significant activities, Regulation S-X requires registrants that have significant equity method investees (i.e.,“50 percent or less owned persons”) to provide financial information about the investees in their filings with the SEC. The SEC has indicated that the term “50 percent or less owned persons” refers to all investments accounted for under the equity method,5 even if the voting ownership exceeds this percentage. Regulation S-X, Rules 3-09, 4-08(g), 8-03 (related to smaller reporting companies), and 10-01(b)(1) primarily contain the applicable SEC disclosure requirements.

An SEC registrant that has an equity method investee must consider whether financial information about the investee should be provided in any reports filed with the SEC that include the registrant’s financial statements. If an equity method investee is considered significant to a registrant, the registrant may be required to provide (1) separate financial statements of the investee in certain filings with the SEC, (2) summarized financial information of the investee in the footnotes to its financial statements, or (3) both. Such filings may include annual reports on Forms 10-K and 20-F, or quarterly reports on Form 10-Q, or both; registration statements; and proxy statements.

The amount of information a registrant must present depends on the level of significance of the equity method investee, which a registrant determines by performing the following significant subsidiary tests in Regulation S-X, Rule 1-02(w), as applicable:

Investment test — The registrant’s and its other subsidiaries’ investments in and advances to the tested equity method investment are compared with the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.
Asset test — The registrant compares its share of the investee’s assets with the registrant’s consolidated total assets. Such amounts are generally as of the most recently completed fiscal year for both the investee and the registrant.
Income test — The test has two components:
- Income component — The absolute value of the registrant’s proportionate share of the investee’s pretax income or loss from continuing operations is compared with the absolute value of the registrant’s own pretax income or loss from continuing operations.
- Revenue component — If both the registrant and the investee have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the registrant’s proportionate share of the investee’s revenue with the registrant’s revenue.

An investee will be considered significant under the income test only if both the income component and the revenue component (if applicable) exceed the significance threshold. When both components exceed the significance threshold, the lower of the income or revenue component is used to determine significance in accordance with the income test.

6.4.1.2 Separate Financial Statements

To determine whether separate financial statements are required under Rule 3-09, a registrant must apply both the investment test and the income test to each equity method investee. The test that results in the highest significance level is used to determine the financial statement reporting requirements.

If, on the basis of the highest test result, the significance of an individual equity method investee is greater than 20 percent, the registrant must provide, in its Form 10-K or Form 20-F or related amendment, such investee’s financial statements for the periods in which the registrant used the equity method to account for the investee. These financial statements are not required for interim periods.

6.4.1.3 Summarized Financial Information

In the determination of whether summarized financial information is required in the footnotes to the annual financial statements under Rule 4-08(g), a registrant must apply all three significance tests. The test that results in the highest significance level will be used to establish the financial reporting requirements.

Under SEC rules, on the basis of the highest test result, if the significance of an equity method investee, individually or as part of an aggregated group, is 10 percent or less for all years presented, summarized financial information is not required.

If the significance of an equity method investee, individually or as part of an aggregated group, is greater than 10 percent, the registrant’s annual financial statements must include summarized financial information for all equity method investees. Such information should not be labeled “unaudited.”

6.4.1.4 Summarized Income Statement Information

To determine whether summarized income statement information is required under Rule 10-01(b)(1), a registrant must apply both the investment test and the income test to each equity method investee. The test that results in the highest significance level is used to determine the financial statement reporting requirements. If, on the basis of the highest test result, the significance of an individual equity method investee is greater than 20 percent, the registrant must provide summarized income statement information in its quarterly report.

The table below compares the annual requirements for separate financial statements, the annual requirements for summarized financial information, and the interim requirements for summarized income statement information under Rules 3-09, 4-08(g), and 10-01(b)(1), respectively.

6.4.1.5 Additional Guidance

For additional information and interpretive guidance on SEC reporting requirements for equity method investees of SEC registrants under Regulation S-X, see Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees.

6.4.2 Considerations for Acquisitions and Dispositions

SEC registrants are required to periodically file current reports on Form 8-K to inform investors of certain events. When a registrant acquires or disposes of an interest in an equity method investee, it must assess the significance of the acquisition or disposition and should consider whether a Form 8-K should be filed. Form 8-K, Item 2.01, requires a registrant to file a Form 8-K if either a business or asset acquisition or disposition is significant. Item 2.01, Instruction 4, states, in part:

An acquisition or disposition will be deemed to involve a significant amount of assets:

(i) if the registrant’s and its other subsidiaries’ equity in the net book value of such assets or the amount paid or received for the assets upon such acquisition or disposition exceeded 10 percent of the total assets of the registrant and its consolidated subsidiaries;

(ii) if it involved a business (see 17 CFR 210.11-01(d)) that is significant (see 17 CFR 210.11-01(b)).

Registrants should consider the Form 8-K reporting requirements for acquisitions (see Section 2.4.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions) and dispositions (see Section 8.4 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations). Registrants also may want to consult with their legal advisers and independent accountants regarding these requirements.

6.4.2.1 Acquisition of an Equity Method Investee

According to Rule 3-05(a)(2)(ii), a business acquisition for SEC reporting purposes includes the acquisition of an investment accounted for under the equity method. Therefore, when a registrant acquires an interest in an equity method investee, it must assess the acquisition’s significance and determine whether separate historical preacquisition financial statements of the investee6 and pro forma financial information7 must be filed.

The registrant’s Form 8-K must be filed within four business days of the acquisition’s completion. The registrant must describe the acquisition and provide the required historical financial statements and pro forma financial information in accordance with Regulation S-X, Article 11, giving effect to the acquisition. If the historical financial statements and pro forma financial information are not available at the time of the initial filing, the registrant has 71 days from the filing of the initial Form 8-K to amend it with the required information.

For further information and considerations related to the SEC reporting requirements for the acquisition of an equity method investee business, see Section 2.3.5.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

6.4.2.2 Disposition of an Equity Method Investee

A registrant may be required to file a Form 8-K for the disposition of an equity method investee. For additional guidance, see Chapter 8 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

6.4.2.3 Contribution of a Business or Assets to an Equity Method Investee

A registrant may contribute a business or other assets to an equity method investee either at formation or during the investee’s operation in an exchange transaction. These transactions may represent (1) the disposal of assets or a business and (2) the acquisition of an interest in the equity method investee. For additional information about the SEC reporting requirements for the formation of a joint venture that is accounted for under the equity method, see Section 2.10 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

Footnotes

The SEC disclosure requirements discussed in this Roadmap do not apply to an entity that is accounted for at fair value or under the practicability exception to fair value in ASC 321-10-35-2 after the adoption of ASU 2016-01. They do apply, however, to an investment that is eligible for the equity method of accounting but for which a registrant elects the fair value option.

For further information about assessing the significance of an investee, see Section 2.3.5.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

For further discussion of pro forma information, see Chapter 4 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

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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.