F.4 Parent’s Disclosures and SEC Reporting Considerations Upon Deconsolidation of a Subsidiary
ASC 810-10-50-1B provides the following disclosure requirements for a parent
that deconsolidates a subsidiary:
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.
F.4.1 SEC Reporting Requirements Upon Deconsolidation of a Subsidiary
When either a subsidiary is deconsolidated or a group of assets is derecognized,
SEC registrants may be required to report a deconsolidation or derecognition on
a Form 8-K and provide pro forma financial information that gives effect to the
deconsolidation or derecognition. Upon the deconsolidation of a subsidiary, or
when a significant disposition has occurred or its occurrence is probable,
registrants may be required to provide pro forma financial information in a
registration statement, proxy statement, or Form 8-K if the historical financial
statements do not yet reflect the transaction.
The flowchart below outlines considerations related to the
reporting obligations a registrant could have under Form 8-K, Item 2.01, when it
completes a disposition. In the flowchart, it is assumed that the registrant is
required to file a Form 8-K to report the disposition. If the requirements for
filing under Item 2.01, are met, the registrant must file pro forma financial
information prepared in accordance with Form 8-K, Item 9.01(b), within four
business days of the consummation of the disposition.
1
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.
2
Under Rule 11-01(b), a disposed-of business is
significant if the business to be disposed of meets the
conditions for a significant subsidiary in Regulation S-X, Rule
1-02(w), in accordance with any of the significance tests.
3
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 paid that is received for the
assets upon disposition.
F.4.2 Form 8-K Reporting Obligations
SEC registrants are required to periodically 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 within four business days 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.
The deconsolidation of a subsidiary or derecognition of a group of assets would
therefore be considered a disposition. Consequently, if deconsolidation or
derecognition occurs as a result of a loss of control (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 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
entity or derecognized assets (1) represents a business for SEC reporting
purposes or (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 Deloitte’s Roadmap SEC Reporting Considerations for Business
Acquisitions.
Item 2.01, Instruction 4, further states, in part:
An
acquisition or disposition shall 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% of the
total assets of the registrant and its consolidated subsidiaries;
or
(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 entity or derecognized assets do 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 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 assets, or the amount received for the assets upon
such disposition, exceeds 10 percent of the total assets of the registrant and
its consolidated subsidiaries.
If the deconsolidated entity or derecognized assets meet the definition of a business for SEC reporting purposes, the deconsolidation or derecognition should be regarded as a business disposition, if significant.
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, income, or investment test), exceed 20
percent. 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, 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 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 in Item 9.01 that is available
for acquisitions is not available for dispositions (see Question 129.01 of the SEC staff’s
Compliance and Disclosure Interpretations of Form 8-K).
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 the highlights of the June 2009 and September 2009 CAQ SEC Regulations
Committee joint meetings with the SEC staff for discussions of the
deconsolidation of a VIE. A registrant should consult with legal counsel if it
believes that it can use, as an alternative, the date on which it files
financial statements reflecting the deconsolidation of a VIE.
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 by showing how
that specific transaction (or group of transactions) might have affected the
registrant’s historical financial position and results of operations had the
transaction occurred at an earlier date. Regulation S-X, Article 11, 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 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. In lieu of the pro forma balance sheet, the registrant may also
consider including a narrative discussion that reflects the effects of the
disposition (e.g., in cases in which the pro forma adjustments are easily
understood). Pro forma income statements generally should be presented for
only the most recent fiscal year and 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 deconsolidation meets the discontinued-operations
criteria in ASC 205-20, three years of pro forma income statements must be
presented. However, if the deconsolidation does not meet these criteria,
only one year of a pro forma income statement is required. The appropriate
subsequent interim periods must be presented in both scenarios. For
additional information about discontinued operations, see Deloitte’s
Chapter 8
of Roadmap Impairments
and Disposals of Long-Lived Assets and Discontinued
Operations.
In the period in which a disposition of a component 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 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. See Chapter 8 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets
and Discontinued Operations.
When derecognition of an asset 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 disposition (or, e.g., a narrative
discussion if adjustments are easily understood).
As noted in Section F.4.2,
registrants must provide pro forma financial information for a significant
deconsolidation or derecognition in the Form 8-K that must generally be
filed four business days after occurrence of the reconsideration event. They
should also be aware that the automatic 71-day extension in Form 8-K, Item
9.01 that is available for acquisitions, is not available for a significant
disposition.
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, income, and investment
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.
Similarly, under Regulation S-X, Rule 10-01(b)(1), a registrant performs the
investment and income tests to determine whether summarized income statement
information is needed for interim periods. If a registrant must deconsolidate a
legal entity and subsequently apply 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.
Because the calculation for the income test is based on a measure of income from
continuing operations, the reporting of a discontinued operation could affect
the results of the significance test for a registrant’s investees. Accordingly,
registrants should consider the guidance in Section 8.5.2 of Deloitte’s Roadmap
Impairments and
Disposals of Long-Lived Assets and Discontinued
Operations if a deconsolidation meets the discontinued
operations criteria in ASC 205-20.
Footnotes
1
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.
2
Under Rule 11-01(b), a disposed-of business is
significant if the business to be disposed of meets the
conditions for a significant subsidiary in Regulation S-X, Rule
1-02(w), in accordance with any of the significance tests.
3
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 paid that is received for the
assets upon disposition.
4
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
statements in accordance with Item 9.01 (typically pro forma financial
statements), such financial statements are not required in the Item 1.01
Form 8-K. Registrants may wish to consult with their legal advisers
regarding these requirements.
5
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.
6
See footnote 4.