11.4 SEC Reporting Requirements Upon the Consolidation of a Subsidiary
When an SEC registrant initially consolidates a legal entity (including a VIE or
a voting interest entity), the registrant may be required to report the
consolidation on Form 8-K, Item 2.01.1 This is because Item 2.01, Instruction 2, defines an acquisition as follows:
The term acquisition includes every purchase, acquisition by lease,
exchange merger, consolidation, succession or other acquisition
except that the term does not include the construction or development of
property by or for the registrant or its subsidiaries or the acquisition of
materials for such purpose. [Emphasis added]
Thus, the reporting requirements related to an acquisition apply to the consolidation
of a legal entity. Throughout this section, references to the consolidation of a
legal entity are discussed in the context of an acquisition under Item 2.01,
Instruction 2.
The nature of the registrant’s Item 2.01 disclosures will depend on
whether the consolidated entity (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
perform a separate evaluation under Rule 11-01(d) to determine its SEC reporting
requirements. Also, the tests of significance for the consolidation of a legal
entity that meets the definition of a business for SEC reporting purposes differs
from the tests of significance for a legal entity that does not meet that
definition. If the consolidated entity is both (1) a business for SEC reporting
purposes and (2) significant, a registrant is generally required to file separate
preacquisition historical financial statements for the consolidated entity as well
as pro forma financial information for the registrant that gives effect to the
consolidation. In addition, the registrant may need to consider internal controls
over financial reporting for the consolidated entity (see Section 11.4.3).
11.4.1 Form 8-K Reporting Obligations
A registrant is required to periodically file current reports on Form 8-K to
inform investors of certain events. Under Form 8-K, Item 2.01, the registrant
must file a Form 8-K within four business days after a consummated acquisition
of (1) a significant amount of assets or (2) a business that is significant. For
the definition of an acquisition under Item 2.01, Instruction 2, see Section 11.4. The
consolidation of a legal entity, even in circumstances in which the registrant
issued no consideration, would therefore be considered an acquisition. Thus, if
consolidation of a legal entity occurs when the registrant obtains control
either (1) upon becoming initially involved with the legal entity or (2) in a
reporting period after it initially became involved with the legal entity (e.g.,
a VIE reconsideration event as described in Chapter 9), the registrant must consider the
requirements of Item 2.01. See the highlights of the June 2009 and March 2015 CAQ SEC Regulations Committee
joint meetings with the SEC staff for discussions of VIE consolidation.
As noted above, a registrant’s Form 8-K filing requirements vary on the basis of
whether the consolidated entity (1) represents a business for SEC reporting
purposes and (2) is significant. See Section 11.4.1.1 for a discussion of the
definition of a business for SEC reporting purposes.
Item 2.01, Instruction 4, discusses significance and 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)).
A registrant is required to file its initial Form 8-K within four business days
after the completion of an acquisition. For a VIE reconsideration event that
results in consolidation, the registrant is generally required to file the
initial Form 8-K within four business days after the event’s occurrence. See the
highlights of the June
2009 and September 2009 CAQ SEC Regulations Committee joint meetings with
the SEC staff for additional information. Since a registrant may only identify a
VIE reconsideration event during the interim or annual financial reporting
closing process, it should consult with its SEC legal counsel if (1) such an
event results in consolidation and (2) the registrant believes that it can use,
as an alternative, the date on which it files financial statements reflecting
the consolidation (rather than the date of the VIE reconsideration event
itself).
For discussions of the Form 8-K reporting requirements related to Item 2.01, see
Section 11.4.1.2,
which addresses the consolidation of legal entities that, for SEC reporting
purposes, are not a business, and Section 11.4.1.3, which addresses the
consolidation of legal entities that, for SEC reporting purposes, are a
business.
Note also that SEC registrants may be required to report the deconsolidation or
derecognition of a business or group of assets on a Form 8-K and provide pro forma
financial information that gives effect to such deconsolidation or derecognition.
For more information, see Section F.4.
11.4.1.1 Definition of a Business for SEC Reporting Purposes
The definition of a business in Regulation S-X, Rule 11-01(d), for SEC reporting
purposes is not the same as that in ASC 805-10. A registrant must carefully
evaluate the requirements in Rule 11-01(d) to determine whether a
consolidated entity is a business for SEC reporting purposes (see also
paragraph
2010.1 of the FRM). 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.
11.4.1.2 Consolidated Entity Is Not a Business for SEC Reporting Purposes
If the consolidated entity does not meet the definition of a business for SEC
reporting purposes, the consolidation should be regarded as an asset
acquisition and reported in accordance with Form 8-K, Item 2.01, if it
exceeds the 10 percent threshold specified in Instruction 4(i).
Since Regulation S-X, Rule 3-05, does not apply, no historical financial
statements need to be filed for this type of acquisition. However, the
disclosures in Item 2.01 should clearly (1) describe the assets acquired,
(2) describe the anticipated effects on the registrant’s financial
condition, and (3) indicate that the acquisition did not constitute the
consolidation of a business. A registrant may also consider disclosing
limited pro forma balance sheet information reflecting the effects of the
asset acquisition (or, for example, a narrative discussion if adjustments
are easily understood) if such information would be material to investors.
As noted in Section
11.4.1, an initial Form 8-K must be filed within four business days after an acquisition or, for a
VIE reconsideration event that results in consolidation of a VIE, within four business days after its occurrence. The
71-calendar-day extension under Form 8-K, Item 9.01, that is available for a
consolidated entity that is a business (see Section 11.4.1.3) is not available to
a consolidated entity that is not a business.
11.4.1.3 Consolidated Entity Is a Business for SEC Reporting Purposes
If the consolidated entity meets the definition of a business for SEC reporting
purposes, the registrant should use Form 8-K, Item 2.01, to report the
consolidation if it is significant. As noted in Instruction 4(ii) of Item
2.01, a business is significant if any of the results of the three
significance tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset,
income, and investment tests), exceed 20 percent.
To comply with Item 2.01, the registrant must apply SEC Regulation S-X, Rule
3-05, which generally requires the filing of separate preacquisition historical
audited financial statements for the significant consolidated entity. The
financial statement periods required to be filed will be based on the highest
significance level determined after performance of any of the three tests in
Rule 1-02(w). Unaudited historical financial statements as of and for the
appropriate interim periods preceding the consolidation may also be required. In
addition, the registrant must provide pro forma financial information in
accordance with Article 11 to reflect the consolidation (see Section 11.4.1.4). For
guidance on Rule 3-05 and Article 11 pro forma financial information, see
Deloitte’s Roadmap SEC
Reporting Considerations for Business Acquisitions.
As noted in Section
11.4.1, an initial Form 8-K must be filed within four business
days after an acquisition or, for a reconsideration event that results in the
consolidation of a VIE, within four business days after its occurrence. If
available, the historical and pro forma financial statements may be filed along
with the initial Form 8-K. Otherwise, the registrant has an additional 71
calendar days to file an amended Form 8-K that includes both of these historical
and pro forma financial statements.
11.4.1.4 Pro Forma Financial Information Under Article 11
Article 11 lists several circumstances in which a registrant may be required to
provide pro forma financial information, including when an acquisition of a
significant business has occurred or is probable. Since the consolidation of
a legal entity that meets the definition of a business for SEC reporting
purposes would be considered an acquisition, a registrant may need to
provide pro forma financial information upon obtaining control (1) when it
initially becomes involved with the legal entity or (2) in a reporting
period after initially becoming involved with the legal entity (e.g., upon a
reconsideration event, as described in Chapter 9). Pro forma financial
information for the appropriate periods may be required in a registration
statement, proxy statement, or Form 8-K. For information about the
appropriate periods in which to present pro forma financial information as
well as additional SEC interpretive guidance on Article 11, see Deloitte’s
Roadmap SEC Reporting
Considerations for Business Acquisitions.
See Section
11.4.1.2 for a discussion of the pro forma financial
information requirements for a registrant that consolidates an entity that
does not meet the definition of a business for SEC reporting purposes.
11.4.2 Rule 3-13 Waivers
The SEC staff permits registrants to request modifications to their financial
reporting requirements under Regulation S-X, Rule 3-13, particularly when the
requirements are burdensome but may not be material to the total mix of
information available to investors. One example of such a modification is the
omission of one or more years of historical financial statements required under
Rule 3-05 upon the consolidation of a business.
Note that a registrant that is granted relief from providing Rule 3-05 financial
statements and complying with related pro forma financial information
requirements must still file Form 8-K, Item 2.01. A waiver under Rule 3-13
applies only to historical and pro forma financial statement requirements and
does not provide relief from filing Item 2.01. See Section 11.4.1 for more information. For
additional guidance on Rule 3-13 waivers, see Section
B.2.1 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including
Industry Insights.
11.4.3 ICFR Considerations for a Consolidated Entity in the Year of Initial Consolidation
In the year in which a registrant consolidates a legal entity, it may be
appropriate for management to exclude that entity from consideration when it
performs its assessment of internal control over financial reporting (ICFR).
While Question 3 in the SEC staff’s
Management’s Report on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports — Frequently
Asked Questions applies to a material acquisition of a business, the
highlights of
the March 2015 CAQ SEC Regulations Committee joint meeting with the SEC staff
note the SEC staff’s view that registrants may “analogize to this FAQ under
appropriate facts and circumstances.” In the determination of whether to exclude
a legal entity from the ICFR assessment, one factor that registrants should
consider is the period between the consolidation date and the date of
management’s assessment. Registrants are also encouraged to discuss their
specific facts and circumstances with the SEC staff.
Footnotes
1
It is assumed that registrants have a general understanding
of the reporting requirements in SEC Regulation S-X, Rule 3-05 (under which
separate preacquisition historical financial statements of the acquired
business must be filed when the acquisition of a significant business has
occurred or is probable), and Regulation S-X, Article 11 (which establishes
the requirements for pro forma financial information). Registrants should
also consider the guidance in Deloitte’s Roadmap SEC Reporting Considerations for Business
Acquisitions. Registrants may consult with their
legal advisers and independent accountants regarding these requirements.