Appendix F — Deconsolidation/Derecognition

F.4 Parent’s Disclosures and SEC Reporting Considerations Upon Deconsolidation of a Subsidiary or Derecognition of a Group of Assets

ASC 810-10-50-1B provides the following disclosure requirements for a parent that deconsolidates a subsidiary or derecognizes a group of assets:

ASC 810-10

50-1B In the period that either a subsidiary is deconsolidated or a group of assets is derecognized in accordance with paragraph 810-10-40-3A, the parent shall disclose all of the following:

The amount of any gain or loss recognized in accordance with paragraph 810-10-40-5
The portion of any gain or loss related to the remeasurement of any retained investment in the former subsidiary or group of assets to its fair value
The caption in the income statement in which the gain or loss is recognized unless separately presented on the face of the income statement
A description of the valuation technique(s) used to measure the fair value of any direct or indirect retained investment in the former subsidiary or group of assets
Information that enables users of the parent’s financial statements to assess the inputs used to develop the fair value in item (d)
The nature of continuing involvement with the subsidiary or entity acquiring the group of assets after it has been deconsolidated or derecognized
Whether the transaction that resulted in the deconsolidation or derecognition was with a related party
Whether the former subsidiary or entity acquiring a group of assets will be a related party after deconsolidation.

Pending Content (Transition Guidance: ASC 220-40-65-1)

50-1B In the period that either a subsidiary is deconsolidated or a group of assets is derecognized in accordance with paragraph 810-10-40-3A, the parent shall disclose all of the following:

The amount of any gain or loss recognized in accordance with paragraph 810-10-40-5
The portion of any gain or loss related to the remeasurement of any retained investment in the former subsidiary or group of assets to its fair value
The caption in the income statement in which the gain or loss is recognized unless separately presented on the face of the income statement
A description of the valuation technique(s) used to measure the fair value of any direct or indirect retained investment in the former subsidiary or group of assets
Information that enables users of the parent’s financial statements to assess the inputs used to develop the fair value in item (d)
The nature of continuing involvement with the subsidiary or entity acquiring the group of assets after it has been deconsolidated or derecognized
Whether the transaction that resulted in the deconsolidation or derecognition was with a related party
Whether the former subsidiary or entity acquiring a group of assets will be a related party after deconsolidation.

See paragraphs 220-40-50-21 through 50-25 for additional disclosure requirements.

Connecting the Dots

In addition to the disclosure requirements in ASC 810-10-50-1B, an entity that applies the SEC’s temporary equity guidance must, in accordance with ASC 480-10-S99-3A(24), disclose the amount credited to equity of the parent upon deconsolidation of a subsidiary with a redeemable noncontrolling interest. For more information, see Section 9.7.5 as well as Section 9.8.2 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.

F.4.1 SEC Reporting Requirements Upon Deconsolidation of a Subsidiary or Upon Derecognition of a Group of Assets

When either a subsidiary is deconsolidated or a group of assets is derecognized, SEC registrants may be required to report such deconsolidation or derecognition on a Form 8-K. The flowchart below outlines considerations related to the reporting obligations a registrant could have under Form 8-K, Item 2.01.

The definition of a business for SEC purposes is outlined in SEC Regulation S-X, Rule 11-01(d). This definition can differ from the definition in accounting literature, including that in ASC 805-10. For more information about determining whether a consolidated entity is a business for SEC reporting purposes, see Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

Under Rule 11-01(b), a disposed-of business is significant if the business to be disposed of meets the definition of a significant subsidiary under Regulation S-X, Rule 1-02(w); however, a registrant substitutes 20 percent for 10 percent when performing the required significance tests.

Instruction 4 of Item 2.01 indicates that if either of the following exceeds 10 percent of the registrant’s consolidated assets, the disposition of assets would be considered significant: (1) the equity in the net book value of the assets or (2) the amount received for the assets upon disposition.

SEC registrants may also be required to report a deconsolidation or derecognition in registration statements and other nonpublic filings. See Section 8.3 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

F.4.2 Form 8-K Reporting Obligations

SEC registrants must file current reports on Form 8-K to inform investors of certain events. For example, Item 2.01 of Form 8-K requires a registrant to file a Form 8-K after a consummated4 disposition of (1) a significant amount of assets or (2) a business that is significant. Item 2.01, Instruction 2, defines a disposition as follows:

The term disposition includes every sale, disposition by lease, exchange merger, consolidation, mortgage, assignment or hypothecation of assets, whether for the benefit of creditors or otherwise, abandonment, destruction, or other disposition.

Thus, the deconsolidation of a subsidiary or derecognition of a group of assets would be considered a disposition. Consequently, when deconsolidation or derecognition occurs (e.g., a VIE reconsideration event as described in Chapter 9), the registrant must consider the requirements in Form 8-K, Item 2.01. See Section III.B in the highlights of the March 2015 CAQ SEC Regulations Committee joint meeting with the SEC staff.

The nature of the registrant’s disclosures depends on whether the deconsolidated subsidiary or derecognized group of assets (1) represents a business for SEC reporting purposes and (2) is significant. The definition of a business in Regulation S-X, Rule 11-01(d), for SEC reporting purposes differs from the definition of a business in ASC 805-10 for U.S. GAAP accounting purposes. Accordingly, the registrant must first perform an evaluation under Rule 11-01(d) to determine its SEC reporting requirements. See Section 2.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

Item 2.01, Instruction 4, further 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)).

If the deconsolidated subsidiary or derecognized group of assets does not meet the definition of a business for SEC reporting purposes, the registrant should regard the deconsolidation or derecognition as an asset disposition. Further, as specified in Instruction 4(i), the registrant should report the asset disposition in accordance with Form 8-K, Item 2.01, if the registrant’s and its other subsidiaries’ equity in the net book value of such asset, or the amount received for the asset upon such disposition, exceeds 10 percent of the total assets of the registrant and its consolidated subsidiaries.

If the deconsolidated subsidiary or derecognized group of assets meets the definition of a business for SEC reporting purposes, the deconsolidation or derecognition should be regarded as a business disposition.

Under condition (ii) mentioned above, the disposition of a business is significant if any of the results of the three significance tests in Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test), exceed 20 percent. Note, however, that registrants are not required to provide the historical financial statements of the disposed-of business in the Form 8-K.5 For additional guidance on the disposition of a business, see Section 2100 of the FRM.

In addition, Form 8-K, Item 9.01(b), requires registrants to provide, in accordance with Regulation S-X, Article 11, pro forma financial information for any transaction required to be described under Form 8-K, Item 2.01 (see Section F.4.3 for guidance on pro forma financial information requirements). The Form 8-K, including the pro forma financial information, must be filed within four business days after the consummation6 of the disposition. The 71-day extension under Item 9.01 that is available for acquisitions is not available for dispositions (see Question 129.01 of the SEC staff’s Corporation Finance Interpretations of Form 8-K and paragraph 2120.1 of the FRM).

For a deconsolidation or derecognition, a registrant generally needs to file Item 2.01 within four business days after the reconsideration event’s occurrence. See Section VI.B in the highlights of the June 2009 CAQ SEC Regulations Committee joint meeting with the SEC staff and Section VII.C in the highlights of the September 2009 meeting for discussions of reconsideration events and the deconsolidation of a VIE. Since a registrant may identify a reconsideration event only during the interim or annual financial reporting process, if such an event results in the deconsolidation of a VIE, the registrant should consult with legal counsel if it believes that it can use, as an alternative, the date on which it files its financial statements reflecting the deconsolidation (rather than the date of the reconsideration event itself).

F.4.3 Pro Forma Financial Information Under Regulation S-X, Article 11

The objective of providing pro forma financial information is to enable investors to understand and evaluate the impact of a transaction (such as a disposition) by showing how the accounting for that specific transaction (or group of transactions) might have affected the registrant’s historical financial position and results of operations had the accounting for the transaction been recorded on an earlier date. Regulation S-X, Article 11-01(a), which establishes the requirements for pro forma financial information, lists several circumstances in which a registrant may be required to provide pro forma financial information, including when there is a disposition of a significant portion of a business or when there are other events that have occurred for which pro forma financial information would be material to investors. Pro forma financial information for a significant disposition may be required in a registration statement, proxy statement, or Form 8-K. For additional SEC interpretive guidance on Article 11, see Chapter 4 of Deloitte's Roadmap SEC Reporting Considerations for Business Acquisitions.

F.4.3.1 Periods to Be Presented in Pro Forma Financial Information

In general, a pro forma balance sheet should be presented for only the most recent balance sheet required by Regulation S-X, Rule 3-01 (i.e., one pro forma balance sheet as of the end of the fiscal year or the subsequent interim period, whichever is later) for a disposition of a significant business. Pro forma income statements generally should be presented for only the most recent fiscal year and subsequent interim period. However, paragraph 3230.2 of the FRM states that “[p]ro forma presentation of all periods is required . . . [f]or discontinued operations (ASC 205-20) that are not yet reflected in the annual historical statements” (emphasis added). Accordingly, if a disposition meets the discontinued-operations criteria in ASC 205-20, three years of pro forma income statements must be presented. In addition, the appropriate subsequent interim periods must be presented in both scenarios. For additional information about SEC reporting considerations related to discontinued operations, see Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

In the period in which a disposition of a component (which may be a subsidiary or a group of assets) meets the criteria in ASC 205-20 for presentation as a discontinued operation, a registrant must present the component as a discontinued operation retrospectively for all prior periods presented. Accordingly, SEC registrants must consider the impact of the retrospective change on the historical financial statements included (or incorporated by reference) in their Exchange Act reports (e.g., Forms 10-K and 10-Q) and in registration statements under the Securities Act (e.g., registration statements on Form S-3) and other nonpublic offerings. For example, for businesses acquired after the date on which the retrospectively adjusted financial statements are filed, registrants must use those retrospectively revised financial statements when performing the significance tests. See Chapter 8 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

In addition, when an asset disposition (that does not represent a business for SEC reporting purposes) is significant and would therefore be material to investors, the registrant may consider including pro forma financial information reflecting the effects of the accounting for the disposition (or, for example, a narrative discussion if adjustments are easily understood).

F.4.4 Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)(1) — Financial Statements and Summarized Financial Information for Equity Method Investments

Under Regulation S-X, Rules 3-09 and 4-08(g), SEC registrants are required to evaluate the significance of an equity method investee in accordance with the tests in Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, and income tests), to determine whether they must provide, in any reports filed with the SEC that include the registrant’s annual financial statements, the investee’s (1) financial statements, (2) summarized financial information, or (3) both. Also, under Rule 10-01(b)(1), registrants must provide summarized interim statements of comprehensive income information for significant equity method investees. Significance is determined by using the investment and income tests under Rule 1-02(w) — the asset test does not apply. Accordingly, if a registrant deconsolidates a subsidiary and subsequently applies the equity method of accounting, the registrant would need to evaluate the significance of its investee and comply with the requirements of Rules 3-09, 4-08(g), and 10-01(b)(1). The registrant would also need to comply with the disclosure requirements in these rules as well as those in ASC 323 for investees. For additional information about reporting for equity method investments, see Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees.

In addition, when a disposition occurs that the registrant reports as a discontinued operation retrospectively in the financial statements included in its next annual report, the registrant should be mindful that in accordance with the requirements related to significance under Rules 3-09 and 4-08(g), the disposition should be measured in each annual period presented in the financial statements on the basis of amounts that were retrospectively adjusted for the discontinued operation. Consequently, as a result of such retrospective adjustments, a previously insignificant equity method investee may become significant and therefore be required to file the investee’s financial statements (or summarized information under Rule 4-08(g)) in the registrant’s next Form 10-K even if the registrant did not have to provide these items in a prior Form 10-K. Accordingly, if a disposition meets the criteria in ASC 205-20 for a discontinued operation, a registrant should consider the guidance in Section 8.6.2 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations as well as in Section 3.2 of Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees.

Footnotes

A Form 8-K may also be required under Item 1.01 when a registrant has entered into a material definitive agreement for a disposition (e.g., when it executes a contract to dispose of the assets or business). An Item 1.01 Form 8-K is generally filed earlier than an Item 2.01 Form 8-K, which is not required until the disposition is consummated. Since Item 2.01 triggers a requirement to provide financial information in accordance with Item 9.01, such financial information is not required in the Item 1.01 Form 8-K. Registrants may wish to consult with their legal advisers regarding these requirements.

If a registrant is soliciting authorization for a disposal of a significant business in a proxy statement, unaudited financial statements of the business to be disposed of for each of the two most recent fiscal years (audited if available) and the appropriate unaudited interim periods should be provided. See paragraphs 1140.6 and 2120.2 of the FRM.

See footnote 4.

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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.