Chapter 6 — Presentation and Disclosure

6.1 Overview

The presentation of equity method investments is often referred to as a “one-line consolidation.” While this principle is relatively straightforward, there are several nuances financial statement preparers must consider when determining the appropriate presentation of equity method investments. ASC 323 outlines additional disclosure requirements that must be evaluated. Further, SEC registrants must take into account several reporting requirements specific to equity method investments. This chapter discusses these matters.

6.2 Presentation

6.2.1 Balance Sheet

ASC 323-10

45-1 Under the equity method, an investment in common stock shall be shown in the balance sheet of an investor as a single amount. . . .

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-02, Balance Sheets

The purpose of this rule is to indicate the various line items and certain additional disclosures which, if applicable, and except as otherwise permitted by the Commission, should appear on the face of the balance sheets or related notes filed for the persons to whom this article pertains (see § 210.4-01(a)).

Regulation S-X, Rule 5-02(12)

Other investments. The accounting and disclosure requirements for non-current marketable equity securities are specified by generally accepted accounting principles. With respect to other security investments and any other investment, state, parenthetically or otherwise, the basis of determining the aggregate amounts shown in the balance sheet, along with the alternate of the aggregate cost or aggregate market value at the balance sheet date.

An entity should classify equity method investments as a single amount on its balance sheet, including the impact of any basis differences and equity investee impairments recorded by the investor, unless an investment qualifies for proportionate consolidation (see Section 2.4.3). While multiple equity method investments should be aggregated into a single line item, it is generally not appropriate for an entity to combine its equity method investments with other interests (e.g., such as loans or investments in debt securities) in the same equity method investee for balance sheet presentation purposes.

In circumstances in which an investor has committed to fund an equity method investee’s losses, the application of the equity method of accounting may result in a negative investment balance. In such instances, the entity would recognize the liability as a single amount in a manner consistent with the recognition of equity method investment assets. However, the entity should not offset an investment in an asset position with an investment in a liability position given that separate investments would not meet the offset criteria outlined in ASC 210-20.

6.2.1.1 SEC Registrants

Regulation S-X, Rule 5-02(12), indicates that the investor should disclose a separate line item for “[o]ther investments.” Regulation S-X, Rule 4-02, provides that “[i]f the amount which would otherwise be required to be shown with respect to any item is not material, it need not be separately set forth. The combination of insignificant amounts is permitted.” Therefore, SEC registrants would generally present equity method investments within a separate investment line item. If this line item includes other investments that do not reflect the equity method of accounting (because equity method investments are not material), disclosure of the composition of the line item in the footnotes may be necessary. Further, the investment balance may be included in another line item such as “Other Assets” subject to the materiality consideration outlined in Regulation S-X, Rule 4-02.

6.2.1.2 Other Entities

Entities other than SEC registrants may consider the guidance in Regulation S-X, Rule 5-02(12), by analogy.

6.2.2 Income Statement

ASC 323-10

45-1 Under the equity method, an investment in common stock shall be shown in the balance sheet of an investor as a single amount. Likewise, an investor’s share of earnings or losses from its investment shall be shown in its income statement as a single amount.

45-2 The investor’s share of accounting changes reported in the financial statements of the investee shall be classified separately.

SEC Rules, Regulations, and Interpretations

Regulation S-X, Rule 5-03, Statements of Comprehensive Income

(a) The purpose of this rule is to indicate the various line items which, if applicable, and except as otherwise permitted by the Commission, should appear on the face of the statements of comprehensive income filed for the persons to whom this article pertains (see § 210.4-01(a)).

Unless an investment qualifies for proportionate consolidation, as discussed in Section 2.4.3, an entity should classify equity method investment income or loss as a single amount in its income statement, including the impact of any basis differences. In addition, any investor-level impairment would generally be included in the same line item as equity method income or loss. Multiple investments may be aggregated into a single line item. However, when income or loss from multiple investments is aggregated into one line item, it may be necessary to provide additional disclosures for material investments included in the aggregated total, as further discussed in Sections 6.3 and 6.4. While this presentation is relatively simple, the location of this line item in the income statement may vary depending on facts and circumstances.

SEC registrants — Regulation S-X, Rule 5-03(b)(12),1 indicates that the investor’s equity in earnings of an unconsolidated subsidiary or “50 percent or less owned [persons]” (i.e., an equity method investee) should be shown after the investor’s income tax provision and before income or loss from continuing operations. However, Rule 5-03(b)(12) also states that “[i]f justified by the circumstances, this item may be presented in a different position and a different manner.” As a result, questions often arise over the appropriate presentation of equity method earnings.
- Classification within revenues — The SEC staff has publicly stated that it is never appropriate to classify earnings of an equity method investee within any revenue amount or revenue caption of the investor.
- Classification as a component of income from operations — The staff does not object to classification of equity in earnings of an equity method investee as a component of income from operations (i.e., before nonoperating income and expenses) if the equity method investee’s operations are “integral” to the investor’s business. In this context, the staff’s definition of integral indicates more than the fact that the investor and investee operate in the same line of business (see the highlights of the March 2003 AICPA SEC Regulations Committee joint meeting with the SEC staff). The registrant should consider the following questions when determining whether the investee is integral to the investor’s business:
  - Are intercompany transactions between the investor and the investee significant?
  - Is the investee a vital part of the investor’s procurement, production, or distribution functions?
  - Is the registrant’s management of the investee (e.g., through a management contract that does not provide control) similar to its management of its consolidated subsidiaries?
  - Are the investee’s operations an extension of the investor’s operations, providing additional capacity or critical functions?
  If an equity method investee’s earnings are classified within income from operations, such amounts, if material, should be shown as a separate line item within operations and should be clearly disclosed as the investor’s share of equity earnings.
- Classification as a component of nonoperating income or a similar pretax item — The SEC staff has not provided guidance on the appropriate justification for classification of equity method earnings as other pretax income. Therefore, the staff may challenge registrants that have classified equity method earnings as a component of other income or a similar pretax item. These registrants may be able to use the Regulation S-X, Rule 5-03(b)(12), exception or materiality to justify their classification.
  
  Some registrants have proposed that equity method earnings from pass-through entities such as LLCs and partnerships, when material, may be shown as a separate line item in nonoperating income (pretax) through use of the Regulation S-X, Rule 5-03(b)(12), exception. They argue that classification of these amounts after income tax expense distorts the investor’s effective income tax rate since income taxes on the investor’s share of the equity method investee’s earnings must appear in the investor’s income tax provision and must not be shown net of equity method earnings. However, the SEC staff has neither accepted nor objected to classification of equity method earnings as a nonoperating (pretax) item solely on the basis of this potential distortion. Therefore, registrants classifying equity method earnings on this basis should be prepared to provide additional support for their position and consider further consultation with their advisers.
Other entities — Entities other than SEC registrants may consider the guidance in Regulation S-X, Rule 5-03(b)(12), by analogy but would not be required to do so.

6.2.2.1 Tax Effects

An investee’s income tax expense (benefit) is included as part of an investor’s share of equity method earnings. However, the tax consequences of the investor’s equity in earnings and basis differences attributable to its investment in the investee should be recognized within the investor’s income tax provision and not as part of the investor’s equity in the investee’s earnings. In the event that equity in earnings of the investee is presented below the income tax expense, presentation of the tax effects can be reflected within this amount.

In a manner similar to business combinations, basis differences may give rise to deferred tax effects (additional inside basis differences — see Section 4.5). To accurately account for its equity method investment, an investor would consider these inside basis differences in addition to any outside basis difference in its investment. Since equity method investments are presented as a single consolidated amount, tax effects attributable to the investor basis differences become a component of this single consolidated amount and are not presented separately in the investor’s financial statements as individual current assets and liabilities or DTAs and DTLs. In addition, to accurately measure those tax assets and liabilities, the investor should use ASC 740 to analyze the investee’s uncertain tax positions. The investor’s share of investee income or loss may ultimately need to be adjusted for investor basis differences, including those for income taxes.

For further information on income taxes, see Deloitte’s Roadmap Income Taxes.

6.2.2.2 Disposal Transactions

ASC 205-20

45-1B A disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs:

The component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale.
The component of an entity or group of components of an entity is disposed of by sale.
The component of an entity or group of components of an entity is disposed of other than by sale in accordance with paragraph 360-10-45-15 (for example, by abandonment or in a distribution to owners in a spinoff).

45-1C Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity (see paragraphs 205-20-55-83 through 55-101 for Examples).

If an equity method investee reports discontinued operations, the amounts are nonetheless included in the line item in which the investor reports equity method investment earnings, even though this line item may be included in income from continuing operations. The investor should not report the equity method investee’s discontinued operations as such unless the entire equity method investment earnings amount is presented in discontinued operations as discussed below.

ASU 2014-08 modified the scope of ASC 205-20 to explicitly include the disposal of equity method investments (for further information on discontinued operations reporting, see Section 1.3 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations). However, the ASU did not expand the scope of ASC 360-10; therefore, an equity method investment that does not qualify as a discontinued operation under ASC 205-20 cannot be reported, and accounted for, as held for sale. Because the measurement guidance in ASC 360-10 (i.e., on impairment considerations) does not pertain to equity method investments, an entity would continue to apply the measurement guidance in ASC 323. See Section 5.5 for a discussion of OTTIs.

If an equity method investment qualifies for discontinued operations reporting, an entity must reclassify the equity method income or loss to income from discontinued operations for all periods presented. Further, the entity must present the equity method investment as assets held for sale on the balance sheet for all periods presented and must disclose the information required by ASC 205-20-50.

For disposal transactions that do not qualify for discontinued operations reporting, a gain or loss on disposal would generally be classified either (1) in the same line item as equity method earnings or (2) as a separate line item in nonoperating income, gross of tax, before the income tax provision. This classification would be applicable when an entity disposes of its interest in an equity method investment or when an investor’s ownership interest in an investee is diluted (i.e., an investee issues additional equity interests and the investor does not maintain its proportionate ownership interest in the investee). An investor should disclose its presentation policy.

6.2.3 Other Comprehensive Income

ASC 323-10

45-3 An investor may combine its proportionate share of investee other comprehensive income amounts with its own other comprehensive income components and present the aggregate of those amounts in the statement in which other comprehensive income is presented.

An investor must report its proportionate share of an equity method investee’s OCI, which may include, among other things, foreign currency translation adjustments, actuarial gains or losses, and gains and losses on AFS securities. The investor has the option to present a separate section within its statement of OCI to separately report its own comprehensive income line items and those of its equity method investee. This option further requires that the investor include additional disclosure of amounts recognized before reclassifications and amounts reclassified to earnings in a manner consistent with ASC 220, as depicted below.

Alternatively, the investor has the option to combine its share of the investee’s OCI with its own, which results in a presentation that does not separately identify amounts related to OCI for either the investor or the investee, as shown below.

6.2.4 Cash Flows

An equity method investor will reflect equity method investment activity only if it results in cash transfers, such as incremental investments, receipt of dividends, or other similar transactions. Capital transactions, such as an initial investment or incremental investment, would generally be recognized as investing activities. However, the classification in the statement of cash flows for cash received from equity method investees depends on the company’s policy for recording such receipts.

An entity must make an accounting policy election to classify distributions received from equity method investees under either of the following methods:

Cumulative-earnings approach — Under this approach, distributions are presumed to be returns on investment and classified as operating cash inflows. However, if the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed the entity’s cumulative equity in earnings, such excess is a return of capital and should be classified as cash inflows from investing activities.
Nature of the distribution approach — Under this approach, each distribution is evaluated on the basis of the source of the payment and classified as either operating cash inflows or investing cash inflows. If an entity that generally applies this approach does not have enough information to determine the appropriate classification (i.e., the source of the distribution), the entity must apply the cumulative-earnings approach and report a change in accounting principle on a retrospective basis. The entity is required to disclose that a change in accounting principle has occurred as a result of the lack of available information as well as the information required under ASC 250-10-50-1 and 50-2, as applicable.

See Section 6.1.2 of Deloitte’s Roadmap Statement of Cash Flows for further discussion about the cash flow considerations related to equity method investments.

6.2.5 Earnings per Share

ASC 323-10

60-1 For guidance on the computation of consolidated earnings per share (EPS) if equity method investees or corporate joint ventures have issued options, warrants, and convertible securities, see paragraph 260-10-55-20.

ASC 260-10

55-20 The effect on consolidated EPS of options, warrants, and convertible securities issued by a subsidiary depends on whether the securities issued by the subsidiary enable their holders to obtain common stock of the subsidiary or common stock of the parent entity. The following general guidelines shall be used for computing consolidated diluted EPS by entities with subsidiaries that have issued common stock or potential common shares to parties other than the parent entity

Securities issued by a subsidiary that enable their holders to obtain the subsidiary’s common stock shall be included in computing the subsidiary’s EPS data. Those per-share earnings of the subsidiary shall then be included in the consolidated EPS computations based on the consolidated group’s holding of the subsidiary’s securities. Example 7 (see paragraph 260-10-55-64) illustrates that provision.
Securities of a subsidiary that are convertible into its parent entity’s common stock shall be considered among the potential common shares of the parent entity for the purpose of computing consolidated diluted EPS. Likewise, a subsidiary’s options or warrants to purchase common stock of the parent entity shall be considered among the potential common shares of the parent entity in computing consolidated diluted EPS. Example 7 (see paragraph 260-10-55-64) illustrates that provision.

55-21 The preceding provisions also apply to investments in common stock of corporate joint ventures and investee companies accounted for under the equity method.

55-22 The if-converted method shall be used in determining the EPS impact of securities issued by a parent entity that are convertible into common stock of a subsidiary or an investee entity accounted for under the equity method. That is, the securities shall be assumed to be converted and the numerator (income available to common stockholders) adjusted as necessary in accordance with the provisions in paragraph 260-10-45-40(a) through (b). In addition to those adjustments, the numerator shall be adjusted appropriately for any change in the income recorded by the parent (such as dividend income or equity method income) due to the increase in the number of common shares of the subsidiary or equity method investee outstanding as a result of the assumed conversion. The denominator of the diluted EPS computation would not be affected because the number of shares of parent entity common stock outstanding would not change upon assumed conversion.

While the guidance above refers to a “subsidiary,” it is equally applicable to equity method investments. Therefore, an equity method investor must evaluate the terms of any securities issued by its equity method investees to determine whether the securities are convertible into shares of either the investee or the investor.

Although the guidance generally does not affect basic EPS, it may affect diluted EPS. If the securities issued are convertible into common stock of the equity method investor, they would be treated as securities of the equity method investor, and the treasury stock or if-converted method would be used to calculate the dilutive impact. If the securities issued are convertible into common stock of the equity method investee, they would be considered in the determination of the equity method investee’s diluted EPS as illustrated in the example below.

Example 6-1

Entity A holds a 40 percent interest in the common stock of Entity B that it accounts for under the equity method. Entity A reported net income of $100,000 (before consideration of its equity in the earnings of B) and has outstanding common stock of 5,000 shares. Entity A has not issued any other securities. Entity B has issued 1,000 shares of common stock and warrants exercisable to purchase up to 50 shares of its common stock at $5 each. Entity B reported net income of $3,000. The average market price for B’s common stock was $10. Earnings are allocated pro rata on the basis of ownership.

Entity B’s basic EPS would be $3 ($3,000 net income ÷ 1,000 shares). Entity B’s diluted EPS would be $2.93 ($3,000 net income ÷ 1,025 shares).2

Entity A would then determine its diluted EPS of the investee by adding its earnings from the 40 percent interest in B of $1,1723 to its net income of $100,000, yielding a numerator of $101,172 and diluted EPS of $20.23 ($101,172 ÷ A’s 5,000 common shares).

Since the warrants are exercisable into B’s shares, the denominator for B must be adjusted. However, since there were no instruments that would affect A’s common shares, the denominator for A’s diluted EPS calculation does not require adjustment.

Footnotes

Regulation S-X, Article 5, applies to financial statements filed for all entities except (1) registered investment companies; (2) employee stock purchase, savings, and similar plans; (3) insurance companies; (4) bank holding companies and banks; and (5) brokers and dealers when filing Form X-17A-5.

Calculated as 1,000 Entity B common shares + {[($10 average share price − $5 warrant conversion price) ÷ $10 average share price] × 50 common shares acquired upon conversion of warrant}.

Calculated as Entity B’s diluted EPS of $2.93 × Entity A’s 400-share interest in B.

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 related to the investor’s accounting for its investment and those related 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 provided.

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.

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.