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, different tests are used for determining the significance of (1)
a legal entity that meets the definition of a business for SEC reporting purposes
and (2) a legal entity that does not meet that definition. If the consolidated
entity is both a business for SEC reporting purposes and 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 depicts the accounting for 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 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 Section
VI.B of the highlights of the June 2009 CAQ SEC Regulations Committee
joint meeting with the SEC staff as well as Section
III.B of the highlights of the March 2015 meeting 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. For
more information, see Section VI.B of the highlights of the June 2009 CAQ SEC
Regulations Committee joint meeting with the SEC staff as well as Section VII.C
of the highlights of the September 2009 meeting. 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. For more
information about determining whether a consolidated entity is a business
for SEC reporting purposes, see Section 2.1 of 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 consolidated entity did not meet the
definition of a business. A registrant may also consider disclosing limited
pro forma balance sheet information depicting the effects of the accounting
for 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. Under Form 8-K, Item 9.01, for a consolidated entity that is a
business (see the next section), a registrant can extend by 71 calendar days
its requirement to provide historical financial statements and pro forma
financial information. This extension is not available to a consolidated
entity that is not a business since no such historical financial statements
and pro forma financial information are required.
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 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 accounting for the consolidation (see
Section 11.4.1.4). For
guidance on Rule 3-05 and Article 11 pro forma financial information, see
Chapters 2 and
4 of 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 financial statements and pro forma financial
information 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 them.
Registrants may also be required to provide preacquisition
historical financial statements for significant consolidated entities in other
SEC filings, which may involve different or incremental disclosure rules.
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 Chapter 4 of 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
In accordance with Regulation S-X, Rule 3-13, registrants may seek an exemption
from certain financial statement requirements under Regulation S-X, particularly
when such requirements are burdensome but may not be material to the total mix
of information available to investors. For additional information, see Section 1.5 of Deloitte's
Roadmap SEC Reporting
Considerations for Business Acquisitions.
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 financial statements and pro forma financial
information requirements and does not provide relief from filing Item 2.01. See
Section 11.4.1
for more information. For a discussion of best practices related to working with
the SEC staff 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, in Section III.B, 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. Because of the complexity associated with
assessing these requirements, we recommend that entities consult with their
accounting and legal advisers. In addition, registrants are 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.