Chapter 11 — Presentation and Disclosures

11.1 Presentation

ASC 810-10

45-25 A reporting entity shall present each of the following separately on the face of the statement of financial position:

Assets of a consolidated variable interest entity (VIE) that can be used only to settle obligations of the consolidated VIE
Liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary.

While ASC 810 contains certain presentation requirements for VIEs and noncontrolling interests, entities should generally apply other GAAP on the presentation of assets and liabilities. Presentation requirements specific to VIEs are discussed below. In addition, see Deloitte’s Roadmap Noncontrolling Interests.

11.1.1 Separate VIE Presentation Requirements

Under the variable interest model, a reporting entity is required to present certain qualifying assets and liabilities of a VIE separately on the face of the balance sheet. This information must be presented on a gross basis for each major class of assets and liabilities. That is, a VIE’s liabilities cannot be offset against its assets, unless permitted by other GAAP, and a VIE’s assets should not be combined as a single asset line item and its liabilities should not be combined as a single liability line item, unless this is permitted by other GAAP.

Paragraph A81 in the Basis for Conclusions of Statement 167 notes that the Board rejected a linked presentation approach that would have allowed liabilities of a VIE to be reflected as a deduction from the related assets of the VIE. Therefore, a presentation of the assets and liabilities separately but on one side of the statement of financial position would also not be appropriate. In addition, the “Board considered, but rejected, a single line-item display of those assets and liabilities” that meet the separate presentation criteria. Accordingly, the assets of the VIE (which may include, for example, cash, receivables, investments, or fixed assets) should not be combined on the face of the statement of financial position as a single line item unless they are the same category of asset (the same principle applies to liabilities of the VIE).

The VIE model does not provide additional guidance on how assets and liabilities that meet the separate presentation criteria should be presented in the statement of financial position. A reporting entity has presentation alternatives as long as the assets and liabilities that meet the separate presentation criteria appear separately on the face of the statement of financial position. For example, among other acceptable alternatives, a reporting entity may be able to present assets and liabilities:

As one line item and then parenthetically state the amount of positions (i.e., assets and liabilities) that are in a VIE and that meet the separate presentation criteria.
As one line item on the face of the balance sheet and then include a table following the consolidated balance sheet to present the assets and liabilities of the consolidated VIEs that have been included in the preceding balance sheet.
In two separate line items (e.g., one line item for receivables that are in a VIE and meet the separate presentation criteria and another line item for all other receivables). However, in a manner consistent with its comment letters, the SEC staff has challenged this presentation in certain instances and required one of the other two alternatives above in accordance with SEC Regulation S-X, Rule 5-02. Therefore, SEC registrants should be aware that such presentation may be challenged; however, we understand that this challenge has not consistently been applied.

In addition, although all assets and liabilities of consolidated VIEs that meet the separate presentation criteria must be separately presented on the balance sheet, this presentation requirement does not necessarily apply to every VIE. Presenting separate line items on a reporting entity’s balance sheet for each VIE may be impractical for certain companies that consolidate numerous VIEs that meet the criteria under ASC 810-10-45-25. We believe that a reporting entity may consider the aggregation principles for disclosure in ASC 810-10-50-9 (see Section 11.2.5.1) when applying the separate presentation requirements.

Finally, we believe that in applying the aggregation principles, the reporting entity should document and disclose its accounting policy on how it considers aggregation for similar legal entities.

Further, a reporting entity is permitted, but not required, to separately present noncontrolling interests in consolidated VIEs in the equity section. However, such an election is an accounting policy choice that must be applied to all consolidated VIEs.

ASC 810-10-45-25 does not require that the changes in the assets and liabilities be separately reflected in the statement of cash flows or in the statement of operations unless this is required by other GAAP. However, a reporting entity is permitted to reflect this information separately, and such an election is an accounting policy choice that must be applied to all consolidated VIEs. In addition, the separate presentation criteria for assets are not the same as those for liabilities. Therefore, it is possible that only the assets or only the liabilities would have to be separately presented for certain entities.

11.1.1.1 Separate Presentation Requirements — Intercompany Eliminations

In complying with ASC 810-10-45-25, a reporting entity should first apply ASC 810-10-45-1, which states that “[i]n the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated. This includes intra-entity open account balances, security holdings, sales and purchases, interest, dividends, and so forth.” After the appropriate eliminations and consolidation of account balances, the reporting entity should apply the presentation requirements of ASC 810-10-45-25 to the consolidated balance sheets of the reporting entity. When identifying the assets and liabilities to be presented in accordance with that guidance, the reporting entity should consider only those assets and liabilities that continue to be presented and included in the consolidated balance sheets of a reporting entity after the principles of consolidated financial statements have been applied. A reporting entity should not gross up the assets and liabilities of a consolidated VIE to apply ASC 810-10-45-25.

Example 11-1

Entity A contributes $40 in cash in exchange for a $10 equity investment and a $30 loan to Entity B, a VIE. Entity B contributes $40 in cash for an investment in Entity C, also a VIE. Once capitalized, C borrows $160 from a third-party bank and uses the $40 contributed by B and the $160 borrowed from the bank to purchase $200 of investment-grade debt securities from third parties. The $160 borrowed from the bank is recourse only to these securities (i.e., the bank does not have recourse to the assets of A or B [B is the parent of C, and A is the parent of B]). The $200 of investment-grade debt securities may only be used to service the borrowing from the bank and, upon liquidation of C, to distribute the net assets of C to B. In addition, B and C are both VIEs, B is the primary beneficiary of C, and A is the primary beneficiary of B.

Entity A must first apply ASC 810-10-45-1 and eliminate its investment in and loan to B and then eliminate B’s investment asset in VIE C. As a result of these eliminations, no assets or liabilities of consolidated VIE B exist in the consolidated statement of financial position; therefore, no separate balance sheet presentation for these items is required under ASC 810-10-45-25. Entity A would separately identify the $200 of investment-grade debt securities and $160 of bank borrowings in its consolidated financial statements, since these items meet the conditions in ASC 810-10-45-25. The diagram below illustrates this scenario.

11.1.1.2 Separate Presentation Requirements — Optional Presentation

A reporting entity may elect to separately present assets and liabilities of VIEs even if they do not meet the requirements for separate presentation in ASC 810-10-45-25. However, if a reporting entity elects to separately present assets and liabilities of a consolidated VIE that do not meet the separate presentation requirements, the face of the financial statements should clearly indicate which assets and liabilities meet the separate presentation criteria and which do not. In addition, the reporting entity should ensure that its presentation is compliant with the requirements discussed above in Section 11.1.1. Electing such a presentation is an accounting policy choice that must be applied to all consolidated VIEs.

11.1.2 Presentation of Beneficial Interest in a CFE on the Consolidated Balance Sheet

The beneficial interests in a CFE should be classified as liabilities on the balance sheet of the consolidated entity. On the basis of informal discussions with the SEC staff, we understand that the staff would object to the classification of such beneficial interests within noncontrolling equity interest on the consolidated entity’s balance sheet.

The beneficial interests in a CFE are often issued in the legal form of debt, in which case they must be classified as a liability. In certain situations, the residual interests in a CFE may be issued in the form of a share. However, the SEC staff believes that when an asset-backed financing subsidiary that is not considered a business was created simply to issue beneficial interests in financial assets, those beneficial interests should be classified as liabilities in the consolidated financial statements of the parent entity. The SEC staff discussed this issue at the 2009 AICPA Conference on Current SEC and PCAOB Developments. An SEC staff member, Professional Accounting Fellow Brian Fields, stated the following:

To say it again in another way, when a subsidiary is created simply to issue beneficial interests backed by financial assets rather than to engage in substantive business activities, we’ve concluded that sales of interests in the subsidiary should be viewed as transfers of interests in the financial assets themselves. The objective of an asset-backed financing is to provide the beneficial interest holders with rights to a portion of financial asset cash flows and the guiding literature is contained in Codification Topic 860 on transfers of financial assets. That literature requires a transfer to be reflected either as a sale or collateralized borrowing, depending on its specific characteristics — presentation as an equity interest in the reporting entity is not a possible outcome. [Emphasis added and footnote omitted]

11.1.3 Parent and Subsidiary With Different Fiscal-Year-End Dates

ASC 810-10

45-12 It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.

45-13 A parent or an investor should report a change to (or the elimination of) a previously existing difference between the parent’s reporting period and the reporting period of a consolidated entity or between the reporting period of an investor and the reporting period of an equity method investee in the parent’s or investor’s consolidated financial statements as a change in accounting principle in accordance with the provisions of Topic 250. While that Topic generally requires voluntary changes in accounting principles to be reported retrospectively, retrospective application is not required if it is impracticable to apply the effects of the change pursuant to paragraphs 250-10-45-9 through 45-10. The change or elimination of a lag period represents a change in accounting principle as defined in Topic 250. The scope of this paragraph applies to all entities that change (or eliminate) a previously existing difference between the reporting periods of a parent and a consolidated entity or an investor and an equity method investee. That change may include a change in or the elimination of the previously existing difference (lag period) due to the parent’s or investor’s ability to obtain financial results from a reporting period that is more consistent with, or the same as, that of the parent or investor. This paragraph does not apply in situations in which a parent entity or an investor changes its fiscal year-end.

If, on the basis of the primary beneficiary requirements discussed in Chapter 7, it is determined that a variable interest holder is the primary beneficiary of a VIE, the VIE will be considered a new subsidiary of the company and should be consolidated in accordance with the guidance in Chapter 10. In some situations, a VIE’s fiscal-year-end date will not be the same as the parent company’s.

A reporting entity should consider all facts and circumstances when assessing the appropriateness of reporting a subsidiary’s financial results on a time lag. It is ordinarily feasible to align a subsidiary’s reporting period with the parent’s; however, the guidance acknowledges that as long as the fiscal-year-end dates of the parent and subsidiary are not more than three months apart, it generally would be acceptable to use the subsidiary’s financial statements for its fiscal period.

While ASC 810-10 does not specify when different fiscal-year-end dates would be appropriate, a parent should nevertheless be able to support its conclusion. For example, the parent may be able to support a different fiscal-year-end date for a subsidiary that operates in a seasonal industry in which most industry participants use a specific fiscal year. The advantages of a subsidiary’s reporting date being comparable to other dates in the industry may outweigh the disadvantages of a subsidiary’s fiscal-year-end date being different from the parent’s. In addition, the parent may be able to support a similar conclusion for a subsidiary that cannot produce timely and reliable financial results even though it has the same closing date as the parent. For example, a calendar-year parent may have its subsidiary use a November 30 year-end simply to ensure that the subsidiary’s financial information is fully compiled, reliable, and available to include in the parent’s (i.e., consolidated) annual financial statements.

If the parent and the subsidiary have different fiscal-year-end dates, the parent should consider using the best available data from the subsidiary when preparing its consolidated financial statements. The most recent information is generally preferred. Therefore, for consolidation it may be better for the parent to use the subsidiary’s financial information as of its interim date that coincides with the parent’s balance sheet date. However, sometimes year-end financial information is better than interim financial information (e.g., when the subsidiary’s system for producing interim financial information is not sufficiently reliable). If the parent concludes that the subsidiary’s year-end financial information is preferable, the financial information for the subsidiary’s 12 months should be combined with that of the parent as though they had the same year-end.

The parent should evaluate material events occurring during any reporting time lag (i.e., the period between the subsidiary’s year-end reporting date and the parent’s balance sheet date) to determine whether the effects of such events should be disclosed or recorded in the parent’s financial statements under ASC 810-10-45-12, which states that “recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the [parent’s] financial position or results of operations.”

A reporting entity may elect a policy of either disclosing all material intervening events, or both disclosing and recognizing them. Either policy is acceptable and should be consistently applied to all material intervening events that meet the recognition requirements of GAAP. When a reporting entity chooses to recognize material intervening events, either in accordance with its elected policy or because the events are so significant that disclosure alone would not be sufficient (as discussed below), it should take care to reflect only the impact of such events. It would generally not be appropriate to present more than 12 months of operations for the subsidiary in the consolidated financial statements (in addition to the effects of the recognized event or another change in the parent’s accounting for the subsidiary).

If the reporting entity’s policy is only to disclose material intervening events, the reporting entity may, in certain situations, be required to record some of these events in the consolidated financial statements of the parent. Examples of those situations include when the intervening event is considered (1) a recognized subsequent event in accordance with ASC 855-10-25-1 or (2) a significant intervening event (as defined in the next paragraph). A material intervening event would be considered a recognized subsequent event if it (1) occurs after the subsidiary’s period-end but before the year-end of the parent’s consolidated financial statements and (2) would meet the criteria for recognition under ASC 855 if the subsidiary was issuing separate stand-alone financial statements under GAAP.

Significant intervening events are unusual and are defined as events that are so significant, they must be recognized to prevent the parent’s consolidated financial statements from being misleading (e.g., the magnitude of the effect on the parent’s consolidated financial statements is substantial and permanent in nature). A reporting entity should recognize such events by recording their effects in the parent’s consolidated financial statements even if the reporting entity’s elected policy is only to disclose material intervening events. Disclosures alone of these events would not provide financial statement users with sufficient information regarding the extent of the effect on the parent’s consolidated operations. One example of a situation in which a reporting entity may be required to record the effects in the consolidated statements is when the business assets of a subsidiary, representing 50 percent of the consolidated revenue, assets, or net income, are destroyed by a natural disaster. In recognizing a significant intervening event, a reporting entity must use judgment and should consider consulting with professional accounting advisers.

This guidance applies to material (or significant) intervening events that would affect the subsidiary’s financial results rather than transactions or events of the parent. For instance, if a parent sold the subsidiary during the reporting lag, the sale is a transaction of the parent. Therefore, in such circumstances, the disposal of the subsidiary should be recognized in the period in which the disposition occurs, regardless of whether a reporting lag exists. It would be inappropriate to defer recognition of the transaction at the consolidated-parent-company level because the transaction falls into a different interim or annual period for the subsidiary.

11.1.3.1 Parent and Subsidiary With Different Fiscal-Year-End Dates — Initial Quarter After Acquisition

In the initial quarter after a parent acquires a subsidiary whose fiscal-year-end date is different from its own, the parent can use different methods, two of which are illustrated in the example below, to apply the guidance in ASC 810-10-45-12. A reporting entity must use judgment in determining which method is appropriate and should consider consulting with professional accounting advisers.

Example 11-2

On June 1, a calendar-year-end parent entity acquires a subsidiary with a fiscal year ending July 31. The parent intends to record the subsidiary’s earnings on a one-quarter lag. The parent’s most recent quarter-end was June 30, and the subsidiary’s most recent quarter-end was April 30.

Method 1

The parent would not record any subsidiary earnings in its results for the quarter ended June 30 because the parent had no rights to the subsidiary’s results for the quarter ended April 30. In the quarter ended September 30, the parent records the subsidiary’s results for the quarter ended July 31.

Method 2

The parent would record the subsidiary’s earnings in the quarter ended June 30 on the basis of the subsidiary’s results for the period from acquisition to June 30. In the quarter ended September 30, the parent would record the subsidiary’s earnings on the basis of the results for the quarter ended July 31. However, the subsidiary’s results for the period from acquisition to June 30 would be reversed from retained earnings (with an offset to investment in subsidiary) to properly state the parent’s effects of earnings on its equity.

Assume that a subsidiary with a September 30 year-end was acquired on April 1, and the parent reports on a calendar-year-end basis. The parent would record the amount of subsidiary income for the quarters ending June 30 and September 30 (on the basis of the subsidiary’s quarter ending June 30). However, for the period ended September 30, the subsidiary’s results for the period from acquisition to June 30 should be reversed from retained earnings (with an offset to investment in subsidiary) to properly state the effects of the parent’s earnings on its equity.

Under Method 2, it is assumed that the subsidiary can close its accounts and record accurately for the initial period and that the amounts used would present fairly the results of operations even though the subsidiary’s financial data subsequently will be reported on a lag.

11.1.3.2 Classification of a Subsidiary’s Loan Payable When the Fiscal-Year-End Dates of the Parent and Subsidiary Differ

A subsidiary’s fiscal year may end before the parent’s, and the subsidiary may have debt that is classified as long-term since it matures more than 12 months after the subsidiary’s fiscal year-end. However, in certain circumstances, the debt matures less than 12 months after the parent’s fiscal year-end. Because the loan payable matures less than 12 months after the parent’s year-end, the parent should classify the loan payable as a current liability in its consolidated balance sheet. Classification as current or noncurrent is governed by the parent’s fiscal year-end. As noted in ASC 470-10-S99-4, this interpretation is consistent with comments made at meetings to discuss EITF 88-15, at which the SEC observer indicated that the SEC staff would expect registrants to present such debt as current.

11.1.3.3 Elimination of a Reporting Lag Between Parent and Subsidiary

As noted in ASC 810-10-45-13, the change to or elimination of a previously existing reporting lag between a parent and a consolidated entity is a change in accounting principle under ASC 250.

ASC 250 permits a reporting entity to change an accounting principle if the reporting entity demonstrates that the newly adopted accounting principle is not only acceptable but also preferable. Although a reporting lag of up to 93 days may be acceptable, it is preferable for the fiscal period of a consolidated subsidiary’s or an equity method investment’s financial statements to correspond to that of its parent or investor.

A reporting entity should evaluate whether a change in accounting principle is preferable on the basis of existing authoritative literature, changes in the structure and economics of principal transactions, industry practice, business judgment, and business planning, among other sources. However, industry practice itself may not always justify the preferability of an alternative principle. Ultimately, the determination is based on the facts and circumstances related to changing or eliminating a previously existing reporting lag, and the burden of justifying a change ultimately rests with the reporting entity making the change. Reduction or elimination of a lag would generally be preferable because the change would typically:

Provide more timely and relevant financial information to users of the consolidated financial statements.
Reflect the results of the parent’s and the subsidiary’s results of operations during the same 12-month period.
Reflect comparable seasonal data throughout all of the parent entity’s operating divisions.

If a reporting entity is able to justify the preferability of a change in or elimination of a previously existing reporting lag, the reporting entity must report the change by retrospectively applying it in accordance with ASC 250-10-45-5, which states:

An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires all of the following:

The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.

A reporting entity may be able to demonstrate that determining the cumulative effect of such change on any prior period is impracticable. If so, the change is applied as if it were made prospectively as of the earliest date practicable. However, the impracticability threshold is high, and an entity, in determining whether it has crossed this threshold, would have to assess whether it has satisfied the requirements in ASC 250-10-45-9, which states:

It shall be deemed impracticable to apply the effects of a change in accounting principle retrospectively only if any of the following conditions exist:

After making every reasonable effort to do so, the entity is unable to apply the requirement.
Retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated.
Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both:
1. Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application.
2. Would have been available when the financial statements for that prior period were issued.

For example, retrospective application of a change in or elimination of a reporting lag may be deemed impracticable if it is not feasible for the reporting entity to objectively determine assumptions related to estimates (e.g., fair value measurements, various impairment analyses) that would have been used as of the period-end date of the prior reporting periods without the benefit of hindsight. However, a reporting entity would need to use judgment and consider its specific facts and circumstances before making a determination about the practicability of retrospective application.

11.1.4 Other Considerations Related to Parent and Subsidiary Presentation

11.1.4.1 Combined Financial Statements

ASC 810-10

45-10 If combined financial statements are prepared for a group of related entities, such as a group of commonly controlled entities, intra-entity transactions and profits or losses shall be eliminated, and noncontrolling interests, foreign operations, different fiscal periods, or income taxes shall be treated in the same manner as in consolidated financial statements.

Consolidated financial statements must be presented when a parent holds a controlling financial interest in its subsidiaries. However, sometimes companies are economically linked because they are under common management or common control (e.g., subsidiaries of a common parent) even though there is no controlling financial interest between the entities under common control. In these circumstances, it may be more appropriate to present combined financial statements for all periods if such statements would be more meaningful to investors than the separate financial statements of the individual entities (e.g., in situations in which companies under common control combine just before or contemporaneously with an initial public offering).

The accounting policies for preparing combined financial statements should be the same as those for preparing consolidated financial statements. For example, in the combined financial statements, any intercompany investment is offset against the related equity. If there is no intercompany investment, the individual company equities are combined. Intercompany transactions and profits and losses also should be eliminated.

11.1.4.2 Disclosure of Condensed Financial Information of Registrant

SEC Regulation S-X, Rules 5-04, 7-05, and 9-06, require registrants to disclose the condensed financial information described in SEC Regulation S-X, Rule 12-04 (also known as Schedule I or parent-only financial statements), as a separate schedule (except for bank holding companies, which must disclose it in a financial statement footnote). The disclosures must be provided when the restricted net assets of consolidated subsidiaries exceed 25 percent of the registrant’s consolidated net assets as of the end of the most recently completed fiscal year. SEC Regulation S-X, Rule 1-02(dd), defines restricted net assets as “that amount of the registrant's proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).”

In accordance with Regulation S-X, Rule 12-04, the condensed financial information (1) consists of the “financial position, cash flows and results of operations of the registrant as of the same dates and for the same periods for which audited consolidated financial statements are required”; (2) “need not be presented in greater detail than is required for condensed statements” under SEC Regulation S-X, Article 10; and (3) may omit certain detailed footnote disclosures that “would normally be included with complete financial statements.” In addition, paragraph 2810.1 of the FRM states that “the condensed financial information presented should include a total for comprehensive income presented in either a single continuous statement or in two separate but consecutive statements.” See Section 2810 of the FRM for additional information about parent-only financial statements.

11.1.4.3 Stand-Alone Parent-Company Financial Statements

Parent-company financial statements issued on a stand-alone basis do not comply with GAAP. ASC 810-10 states that consolidated financial statements, rather than parent-company financial statements, are the general-purpose financial statements. However, it may be acceptable to issue the parent-company financial statements in accordance with Regulation S-X, Rules 5-04, 7-05, and 9-06 (see discussion in the previous section), together with the consolidated financial statements if each set of statements clearly indicates that the primary (general purpose) financial statements are the consolidated financial statements.

11.1.4.4 Presentation of a Parent Company’s Interest in a VIE When the VIE and Primary Beneficiary of the VIE Are Under Common Control

ASC 810-10

30-1 If the primary beneficiary of a variable interest entity (VIE) and the VIE are under common control, the primary beneficiary shall initially measure the assets, liabilities, and noncontrolling interests of the VIE at amounts at which they are carried in the accounts of the reporting entity that controls the VIE (or would be carried if the reporting entity issued financial statements prepared in conformity with generally accepted accounting principles [GAAP]).

In circumstances in which the primary beneficiary of a VIE and the VIE are under common control, the reporting entity should initially measure the assets, liabilities, and noncontrolling interests of the VIE at the amounts at which they are carried in the financial statements of the common parent (i.e., the common parent’s carrying amounts).

For considerations related to reporting a parent’s or affiliate’s interest in the reporting entity’s consolidated subsidiary (i.e., reporting the parent’s or affiliate’s interest in the VIE by the primary-beneficiary subsidiary), see Section 3.2.1 of Deloitte’s Roadmap Noncontrolling Interests.

11.1.5 Parent and Subsidiary Accounting Policies

Financial statements are more transparent and relevant if the policies used to account for similar assets, liabilities, operations, and transactions are the same. Therefore, in the absence of justification for differences between them, the accounting policies of a parent and its subsidiaries should be conformed in the parent’s consolidated financial statements.

Only in limited circumstances is it acceptable for the accounting policies of a parent and one or more of its subsidiaries to differ in the parent’s consolidated financial statements. For example, entities may have different accounting policies for inventory, or they may use one method (e.g., LIFO) to measure some inventories and another method (e.g., FIFO or average cost) to measure others. In addition, policies that are transaction-specific could result in the use of different accounting policies for similar items in the consolidated financial statements. For example, the fair value option under ASC 825-10 can generally be elected on an instrument-by-instrument basis.

Entities may, in some cases, be required to apply different accounting policies to comply with industry-specific guidance. ASC 810-10-25-15 states that “[f]or the purposes of consolidating a subsidiary subject to guidance in an industry-specific Topic, an entity shall retain the industry-specific guidance applied by that subsidiary.” This guidance is not intended to result in more than one accounting policy but rather to retain the industry-specific guidance applied by the subsidiary in the consolidated financial statements even if the parent itself or any of its other subsidiaries are not subject to the industry-specific guidance.

When a business is acquired, a parent may wish to change one or more of its accounting policies to conform to the acquiree’s policies. Such a change would represent a voluntary change in accounting principle under ASC 250-10 and would be permitted only if the parent could justify a conclusion that the acquiree’s accounting principle is preferable.

Moreover, the facts and circumstances may support a conclusion that a subsidiary’s accounting policies should be different from its parent’s in the subsidiary’s stand-alone financial statements. For example, a subsidiary may be acquired in a business combination in which pushdown accounting is not applied. The subsidiary would continue to apply the policies it had applied before the acquisition in its stand-alone financial statements, which may differ from the parent’s accounting policies. If the subsidiary wanted to adopt the parent’s policies in its stand-alone financial statements, such a change would represent a voluntary change in accounting principle under ASC 250-10 and would be permitted only if the subsidiary could justify a conclusion that the parent’s accounting principle is preferable.

In addition, a subsidiary may adopt, in its separate financial statements, a new standard in a period other than the period in which the parent adopts it or may use a different transition method for its adoption. In such cases, even though the subsidiary may use different accounting policies in its stand-alone financial statements, the subsidiary’s policies must be conformed to those of the parent in the parent’s consolidated financial statements.

If an adjustment is made to conform the accounting policies of a subsidiary to those of the consolidated group, the entire adjustment should be allocated among the majority and noncontrolling interests. This view is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single business unit.

11.1.6 Parent-Company Issuance of Stock Compensation to Subsidiary Employees

When a parent company issues stock compensation to a subsidiary’s employees, the subsidiary should record the compensation expense in its separate financial statements. ASC 718-10-15-4 requires the subsidiary to account for the transaction as if it granted the award unless the transfer is “clearly for a purpose other than compensation for services to the reporting entity.” In addition, SAB Topic 1.B (see ASC 220-10-S99-3) requires a subsidiary to recognize in its financial statements expenses incurred by the parent on behalf of the subsidiary.

11.1.7 Allocation of Expenses From a Parent to a Subsidiary — Private Versus Public Subsidiaries

The Codification does not address the allocation of indirect costs incurred by a parent company to a subsidiary in the subsidiary’s stand-alone financial statements. For public companies, SAB Topic 1.B (see in ASC 220-10-S99-3) discusses the allocation of certain direct and indirect costs in financial statements of a subsidiary that are included in a registration statement prepared for the issuance of shares of the subsidiary to the public. In its response to Question 1 of SAB Topic 1.B, the SEC staff states that a registrant (subsidiary) is required to reflect in its historical income statements all costs of doing business, including those incurred by the parent on the subsidiary’s behalf.

Under SAB Topic 1.B, the stand-alone financial statements of a public subsidiary must reflect that subsidiary’s costs incurred by the parent on the subsidiary’s behalf. However, there is no requirement under GAAP for a company with a private subsidiary to allocate to the subsidiary certain indirect expenses incurred by the parent on the subsidiary’s behalf. Nevertheless, the company must consider the disclosure requirements of ASC 850-10-50.

Direct expenses of both public and private subsidiaries that are incurred by the subsidiaries’ parent generally should be reflected in the subsidiaries’ financial statements. For example, if a parent provides inventory to its subsidiary at no charge or directly compensates the subsidiary’s employees, the related costs should generally be reflected in the subsidiary’s financial statements (i.e., be “pushed down” to the subsidiary). Without the push down of these expenses, the subsidiary’s financial statements would be less meaningful because they would not reflect all of the direct costs related to the revenues generated at, and reported by, the subsidiary. Reporting entities will often be required to exercise judgment in determining how to reflect direct expenses and in providing the appropriate disclosures.

11.2 Disclosures for VIEs

ASC 810-10

50-2AA The principal objectives of this Subsection’s required disclosures are to provide financial statement users with an understanding of all of the following:

The significant judgments and assumptions made by a reporting entity in determining whether it must do any of the following:
1. Consolidate a variable interest entity (VIE)
2. Disclose information about its involvement in a VIE.
The nature of restrictions on a consolidated VIE’s assets and on the settlement of its liabilities reported by a reporting entity in its statement of financial position, including the carrying amounts of such assets and liabilities.
The nature of, and changes in, the risks associated with a reporting entity’s involvement with the VIE.
How a reporting entity’s involvement with the VIE affects the reporting entity’s financial position, financial performance, and cash flows.

50-2AB A reporting entity shall consider the overall objectives in the preceding paragraph in providing the disclosures required by this Subsection. To achieve those objectives, a reporting entity may need to supplement the disclosures otherwise required by this Subsection, depending on the facts and circumstances surrounding the VIE and a reporting entity’s interest in that VIE.

50-2AC The disclosures required by this Subsection may be provided in more than one note to the financial statements, as long as the objectives in paragraph 810-10-50-2AA are met. If the disclosures are provided in more than one note to the financial statements, the reporting entity shall provide a cross reference to the other notes to the financial statements that provide the disclosures prescribed in this Subsection for similar entities.

All reporting entities that have a variable interest in a VIE are subject to the disclosure requirements of ASC 810-10. Reporting entities should consider the overall objectives of ASC 810-10-50-2AA and, depending upon the circumstances, may need to supplement their disclosures to meet these objectives. Meeting these disclosure requirements can sometimes be challenging because a reporting entity might not be privy to all the information about a VIE, especially if the reporting entity is not the primary beneficiary of the VIE but has a variable interest in the VIE and is subject to some of the VIE’s disclosure requirements.

The specific VIE disclosure requirements are discussed in the following sections:

Disclosure requirements for all variable interest holders, including the primary beneficiary — Section 11.2.1.
Disclosure requirements for only the primary beneficiary — Section 11.2.2.
Disclosure requirements for only variable interest holders other than the primary beneficiary — Section 11.2.3.
Disclosure requirements related to certain VIE scope exceptions — Section 11.2.4.
Other disclosure considerations — Section 11.2.5.

11.2.1 Disclosure Requirements for All Variable Interest Holders, Including the Primary Beneficiary

ASC 810-10

50-5A A reporting entity that is a primary beneficiary of a VIE or a reporting entity that holds a variable interest in a VIE but is not the entity’s primary beneficiary shall disclose all of the following:

Its methodology for determining whether the reporting entity is the primary beneficiary of a VIE, including, but not limited to, significant judgments and assumptions made. One way to meet this disclosure requirement would be to provide information about the types of involvements a reporting entity considers significant, supplemented with information about how the significant involvements were considered in determining whether the reporting entity is the primary beneficiary.
If facts and circumstances change such that the conclusion to consolidate a VIE has changed in the most recent financial statements (for example, the VIE was previously consolidated and is not currently consolidated), the primary factors that caused the change and the effect on the reporting entity’s financial statements.
Whether the reporting entity has provided financial or other support (explicitly or implicitly) during the periods presented to the VIE that it was not previously contractually required to provide or whether the reporting entity intends to provide that support, including both of the following:
1. The type and amount of support, including situations in which the reporting entity assisted the VIE in obtaining another type of support
2. The primary reasons for providing the support.
Qualitative and quantitative information about the reporting entity’s involvement (giving consideration to both explicit arrangements and implicit variable interests) with the VIE, including, but not limited to, the nature, purpose, size, and activities of the VIE, including how the VIE is financed. Paragraphs 810-10-25-49 through 25-54 provide guidance on how to determine whether a reporting entity has an implicit variable interest in a VIE.

50-5B A VIE may issue voting equity interests, and the entity that holds a majority voting interest also may be the primary beneficiary of the VIE. If so, and if the VIE meets the definition of a business and the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations, the disclosures in the preceding paragraph are not required.

All variable interest holders, including the primary beneficiary, must provide the above disclosures unless the reporting entity is the primary beneficiary of the VIE and the VIE has all of the following characteristics: (1) it meets the definition of a business (see Section 3.4.4.2), (2) it issues voting equity interests and the primary beneficiary holds a majority voting interest, and (3) its assets can be used other than for the settlement of the VIE’s obligations.

11.2.1.1 Applicability of the Majority Voting Interest Criterion to Limited Partnerships

For limited partnerships (and similar entities), we believe that in the assessment of the disclosure exemption criterion in ASC 810-10-50-5B, the general partner’s interest should be considered a “majority voting interest” if the general partner (1) holds an equity investment that is more than inconsequential (e.g., 1 percent or more) and (2) has the power to direct the activities of the VIE that most significantly affect the VIE’s economics through its equity interest, which would generally be the case when there are no substantive kick-out (or participating) rights held by limited partners. Effectively, when these conditions are met, the general partner holds 100 percent of the voting class of the limited partnership. If the general partner meets these conditions, it would be exempt from providing the disclosures in ASC 810-10-50-5A as long as all the other criteria in ASC 810-10-50-5B are met.

11.2.2 Disclosure Requirements for Only the Primary Beneficiary

ASC 810-10

50-3 The primary beneficiary of a VIE that is a business shall provide the disclosures required by other guidance. The primary beneficiary of a VIE that is not a business shall disclose the amount of gain or loss recognized on the initial consolidation of the VIE. In addition to disclosures required elsewhere in this Topic, the primary beneficiary of a VIE shall disclose all of the following:

a. Subparagraph superseded by Accounting Standards Update No. 2009-17.

b. Subparagraph superseded by Accounting Standards Update No. 2009-17.

bb. The carrying amounts and classification of the VIE’s assets and liabilities in the statement of financial position that are consolidated in accordance with the Variable Interest Entities Subsections, including qualitative information about the relationship(s) between those assets and liabilities. For example, if the VIE’s assets can be used only to settle obligations of the VIE, the reporting entity shall disclose qualitative information about the nature of the restrictions on those assets.

c. Lack of recourse if creditors (or beneficial interest holders) of a consolidated VIE have no recourse to the general credit of the primary beneficiary

d. Terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests that could require the reporting entity to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to the VIE, including events or circumstances that could expose the reporting entity to a loss.

A VIE may issue voting equity interests, and the entity that holds a majority voting interest also may be the primary beneficiary of the VIE. If so, and if the VIE meets the definition of a business and the VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations, the disclosures in paragraph 810-10-50-3(bb) through (d) are not required.

A primary beneficiary must provide the above disclosures, in addition to those discussed in Section 11.2.1, unless the VIE has all of the following characteristics: (1) it meets the definition of a business, (2) it issues voting equity interests and the primary beneficiary holds a majority voting interest (see Section 11.2.1.1 for the applicability to limited partnerships), and (3) its assets can be used other than for the settlement of the VIE’s obligations.

Upon initial consolidation, if the VIE meets the definition of a business, the primary beneficiary also should disclose the information required by ASC 805 and any other applicable GAAP. If the VIE does not meet the definition of a business, the primary beneficiary should disclose the amount of gain or loss recognized upon the initial consolidation of the VIE and any other applicable GAAP. See Deloitte’s Roadmap Business Combinations for further discussion of this topic.

11.2.3 Disclosure Requirements for Only Variable Interest Holders Other Than the Primary Beneficiary

ASC 810-10

50-4 In addition to disclosures required by other guidance, a reporting entity that holds a variable interest in a VIE, but is not the VIE’s primary beneficiary, shall disclose:

The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position that relate to the reporting entity’s variable interest in the VIE.
The reporting entity’s maximum exposure to loss as a result of its involvement with the VIE, including how the maximum exposure is determined and the significant sources of the reporting entity’s exposure to the VIE. If the reporting entity’s maximum exposure to loss as a result of its involvement with the VIE cannot be quantified, that fact shall be disclosed.
A tabular comparison of the carrying amounts of the assets and liabilities, as required by (a) above, and the reporting entity’s maximum exposure to loss, as required by (b) above. A reporting entity shall provide qualitative and quantitative information to allow financial statement users to understand the differences between the two amounts. That discussion shall include, but is not limited to, the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, that could require the reporting entity to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to the VIE, including events or circumstances that could expose the reporting entity to a loss.
Information about any liquidity arrangements, guarantees, and/or other commitments by third parties that may affect the fair value or risk of the reporting entity’s variable interest in the VIE is encouraged.
If applicable, significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance is shared in accordance with the guidance in paragraph 810-10-25-38D.

In addition to the disclosures discussed in Section 11.2.1, a variable interest holder that is not the primary beneficiary of a VIE must provide the information described above.

11.2.3.1 Maximum Exposure to Loss

ASC 810-10-50-4 requires a reporting entity that has a variable interest in a VIE, but that is not the primary beneficiary of the VIE, to disclose its “maximum exposure to loss as a result of its involvement with the VIE.” A reporting entity’s maximum exposure to loss (both explicit arrangements and implicit variable interests should be considered) includes (1) the amount invested in, and advanced to, the VIE as of the reporting date plus (2) any legal or contractual obligation to provide financing in the future.

A reporting entity’s maximum exposure to loss should include unavoidable future advances of funds or other assets to the VIE, net of the fair value of any goods or services that are received in exchange (e.g., losses related to a firm commitment to purchase future goods from the VIE at above-market rates). This maximum potential loss must be disclosed regardless of the probability that such losses will actually be incurred.

11.2.4 Disclosure Requirements Related to Certain VIE Scope Exceptions

11.2.4.1 Disclosures About the Exhaustive-Efforts Scope Exception

ASC 810-10

50-6 A reporting entity that does not apply the guidance in the Variable Interest Entities Subsections to one or more VIEs or potential VIEs because of the condition described in paragraph 810-10-15-17(c) shall disclose all the following information:

The number of legal entities to which the guidance in the Variable Interest Entities Subsections is not being applied and the reason why the information required to apply this guidance is not available
The nature, purpose, size (if available), and activities of the legal entities and the nature of the reporting entity’s involvement with the legal entities
The reporting entity’s maximum exposure to loss because of its involvement with the legal entities
The amount of income, expense, purchases, sales, or other measure of activity between the reporting entity and the legal entities for all periods presented. However, if it is not practicable to present that information for prior periods that are presented in the first set of financial statements for which this requirement applies, the information for those prior periods is not required.

A reporting entity that is not required to apply the VIE guidance because it qualifies for the exhaustive-efforts scope exception (see Section 3.4.3) must provide the above disclosures.

11.2.4.2 Disclosures About Money Market Funds

As discussed in Sections 3.3.4 and 3.3.4.1, a reporting entity that has an interest in certain money market funds should not be evaluated for consolidation under either the voting interest entity model or the VIE model. However, a reporting entity that qualifies for this scope exception is required to disclose any explicit arrangements to provide financial support to the legal entity as well as any instances of such support provided for the periods presented in the performance statement. ASC 810-10-15-12(f)(2) provides the following examples (not all-inclusive) of the types of support that reporting entities should consider:

i. Capital contributions (except pari passu investments)

ii. Standby letters of credit

iii. Guarantees of principal and interest on debt investments held by the legal entity

iv. Agreements to purchase financial assets for amounts greater than fair value (for instance, at amortized cost or par value when the financial assets experience significant credit deterioration)

v. Waivers of fees, including management fees.

11.2.4.3 Disclosure Requirements for Private-Company Alternative

ASC 810-10

50-2AD Paragraph superseded by Accounting Standards Update No. 2018-17.

50-2AE Paragraph superseded by Accounting Standards Update No. 2018-17.

50-2AF Paragraph superseded by Accounting Standards Update No. 2018-17.

Accounting Alternative for Entities Under Common Control

50-2AG A reporting entity that neither consolidates nor applies the requirements of the Variable Interest Entities Subsections to a legal entity under common control because it meets the criteria in paragraph 810-10-15-17AD shall disclose the following:

The nature and risks associated with a reporting entity’s involvement with the legal entity under common control.
How a reporting entity’s involvement with the legal entity under common control affects the reporting entity’s financial position, financial performance, and cash flows.
The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position resulting from its involvement with the legal entity under common control.
The reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control. If the reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control cannot be quantified, that fact shall be disclosed.
If the reporting entity’s maximum exposure to loss (as required by (d)) exceeds the carrying amount of the assets and liabilities as described in (c), qualitative and quantitative information to allow users of financial statements to understand the excess exposure. That information shall include, but is not limited to, the terms of the arrangements, considering both explicit and implicit arrangements, that could require the reporting entity to provide financial support (for example, implicit guarantee to fund losses) to the legal entity under common control, including events or circumstances that could expose the reporting entity to a loss.

50-2AH In applying the disclosure guidance in paragraph 810-10-50-2AG(d) through (e), a reporting entity under common control shall consider exposures through implicit guarantees. Determining whether an implicit guarantee exists is based on facts and circumstances. Those facts and circumstances include, but are not limited to, whether:

The private company (reporting entity) has an economic incentive to act as a guarantor or to make funds available.
The private company (reporting entity) has acted as a guarantor for or made funds available to the legal entity in the past.

50-2AI In disclosing information about the legal entity under common control, a private company (reporting entity) shall present these disclosures in addition to the disclosures required by other guidance (for example, in Topics 460 on guarantees, Topic 850 on related party disclosures, and Topic 842 on leases). Those disclosures could be combined in a single note or by including cross-references within the notes to financial statements.

A reporting entity that is not required to apply the VIE guidance because it qualifies for the private-company alternative must provide the disclosures described above, as applicable. See Section 3.5 for more information about the private-company alternative.

11.2.5 Other Disclosure Considerations

11.2.5.1 Aggregation of Disclosures

ASC 810-10

50-9 Disclosures about VIEs may be reported in the aggregate for similar entities if separate reporting would not provide more useful information to financial statement users. A reporting entity shall disclose how similar entities are aggregated and shall distinguish between:

VIEs that are not consolidated because the reporting entity is not the primary beneficiary but has a variable interest
VIEs that are consolidated.

In determining whether to aggregate VIEs, the reporting entity shall consider quantitative and qualitative information about the different risk and reward characteristics of each VIE and the significance of each VIE to the entity. The disclosures shall be presented in a manner that clearly explains to financial statement users the nature and extent of an entity’s involvement with VIEs.

50-10 A reporting entity shall determine, in light of the facts and circumstances, how much detail it shall provide to satisfy the requirements of the Variable Interest Entities Subsections. A reporting entity shall also determine how it aggregates information to display its overall involvements with VIEs with different risk characteristics. The reporting entity must strike a balance between obscuring important information as a result of too much aggregation and overburdening financial statements with excessive detail that may not assist financial statement users to understand the reporting entity’s financial position. For example, a reporting entity shall not obscure important information by including it with a large amount of insignificant detail. Similarly, a reporting entity shall not disclose information that is so aggregated that it obscures important differences between the types of involvement or associated risks.

A reporting entity should consider both quantitative and qualitative information about the different risks and rewards of each VIE, and the magnitude of those risks and rewards, in determining whether to aggregate disclosures about multiple VIEs. Under either an aggregated or separate presentation, the reporting entity should consider the objectives of ASC 810-10-50-2AA to ensure that disclosures are presented in a manner that clearly explains to financial statement users the nature and extent of the reporting entity’s involvement with the VIEs.

When considering whether to aggregate disclosures about multiple VIEs, a reporting entity should assess whether the disclosures are more informative on an aggregated or disaggregated basis from the perspective of a user that is trying to understand the amount and nature of the reporting entity’s involvement with the VIE. While disaggregated information may seem to be more useful in most cases, it may sometimes result in excessive and lengthy disclosures.

11.2.5.2 Interaction With ASC 860 Disclosures

If a reporting entity (1) securitizes assets under ASC 860 (regardless of whether the securitization achieved sale accounting or is accounted for as a financing or a failed sale) and (2) has a variable interest in, or is the primary beneficiary of, the securitization vehicle, the reporting entity should provide the disclosures required by both ASC 860-10-50 and ASC 810-10-50. This information may be disclosed in more than one note to the financial statements as long as the overall disclosure objectives are met.

11.3 General Disclosures for Consolidated Subsidiaries

11.3.1 Consolidation Policy and Other Disclosures

ASC 810-10

50-1 Consolidated financial statements shall disclose the consolidation policy that is being followed. In most cases this can be made apparent by the headings or other information in the financial statements, but in other cases a note to financial statements is required.

In addition to disclosing the consolidation policy it applies (for both VIEs and voting interest entities), a reporting entity should consider the disclosure requirements in ASC 280-10-50 for any subsidiary that qualifies as a segment of the reporting entity. In accordance with ASC 235-10, companies that have at least one material subsidiary should include a statement such as the following in their accounting policies footnote: “The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. All intercompany profits, transactions, and balances have been eliminated.”

In addition:

Whenever a company’s consolidation policy is unusual or complex, or the company changes its policy, it should disclose details about such policy or changes in the policies footnote.
When some or all of the assets of a subsidiary are not available for the use of the corporate group because of a government regulation, a business restriction, a loan requirement, or otherwise, the details of the restricted assets should be disclosed in a footnote. The assets themselves may need to be separately classified in the consolidated balance sheet to properly reflect the restrictions. Note that ASC 810-10-45-25 requires separate presentation for certain assets and liabilities of a consolidated VIE. See Section 11.1.1 for further discussion.

11.3.2 Disclosure Requirements for a Parent With a Less Than Wholly Owned Subsidiary

ASC 810-10

50-1A A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the following for each reporting period:

Separately, on the face of the consolidated financial statements, both of the following:
1. The amounts of consolidated net income and consolidated comprehensive income
2. The related amounts of each attributable to the parent and the noncontrolling interest.
Either in the notes or on the face of the consolidated income statement, amounts attributable to the parent for any of the following, if reported in the consolidated financial statements:
1. Income from continuing operations
2. Discontinued operations
3. Subparagraph superseded by Accounting Standards Update No. 2015-01.
Either in the consolidated statement of changes in equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest. That reconciliation shall separately disclose all of the following:
1. Net income
2. Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners
3. Each component of other comprehensive income.
In notes to the consolidated financial statements, a separate schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.

Example 2 (see paragraph 810-10-55-4G) illustrates the application of the guidance in this paragraph.

Example 2: Presentation and Disclosures Involving Noncontrolling Interests

55-4G This Example illustrates the application of this Subtopic’s presentation and disclosure guidance by a parent with one or more less-than-wholly-owned subsidiaries.

55-4H This Example involves all of the following assumptions:

Entity ABC has one subsidiary, Subsidiary A.
The tax rate for all years is 40 percent.
Entity ABC has 200,000 shares of common stock outstanding and pays dividends of $10,000 each year on those common shares. Entity ABC has no potentially dilutive shares.
Subsidiary A has 10,000 shares of common stock outstanding and does not pay dividends.
Entity ABC owns all 10,000 shares in Subsidiary A for the entire year 20X1.
On June 30, 20X1, Subsidiary A purchases a portfolio of securities for $100,000 and classifies those securities as available for sale.
On December 31, 20X1, the carrying amount of the available-for-sale securities is $105,000.
For the year ended December 31, 20X1, the amount of Subsidiary A’s net income included in the consolidated financial statements is $24,000.
On January 1, 20X2, Entity ABC sells 2,000 of its shares in Subsidiary A to an unrelated entity for $50,000 in cash, reducing its ownership interest from 100 percent to 80 percent.
Immediately before the January 1, 20X2 sale, Subsidiary A’s equity was as follows:
The January 1, 20X2 sale of Subsidiary A’s shares by Entity ABC is accounted for as an equity transaction in the consolidated financial statements, as follows:
1. A noncontrolling interest is recognized in the amount of $41,000 ($205,000 × 20 percent).
2. Additional paid-in capital attributable to Entity ABC is increased by $9,000, calculated as the difference between the cash received ($50,000) and the carrying amount of the noncontrolling interest ($41,000).
3. Additional paid-in capital attributable to Entity ABC is also increased by $1,000, which represents the carrying amount of Subsidiary A’s accumulated other comprehensive income related to the ownership interest sold to the noncontrolling interest ($5,000 × 20 percent = $1,000). Accumulated other comprehensive income attributable to Entity ABC is decreased by a corresponding amount.
4. The journal entry to record the sale of Subsidiary A’s shares to the noncontrolling shareholders is as follows:
For the year ended December 31, 20X2, the amount of Subsidiary A’s net income included in the consolidated financial statements is $20,000.
On January 1, 20X3, Entity ABC purchases 1,000 shares in Subsidiary A from the noncontrolling shareholders (50 percent of the noncontrolling interest) for $30,000 for cash, increasing its ownership interest from 80 percent to 90 percent.
Immediately before the January 1, 20X3 purchase, the carrying amount of the noncontrolling interest in Subsidiary A was $48,000, which included $4,000 in accumulated other comprehensive income.
The January 1, 20X3 purchase of shares from the noncontrolling shareholders is accounted for as an equity transaction in the consolidated financial statements, as follows:
1. The noncontrolling interest balance is reduced by $24,000 ($48,000 × 50 percent interest acquired by Entity ABC).
2. Additional paid-in capital of Entity ABC is decreased by $6,000, calculated as the difference between the cash paid ($30,000) and the adjustment to the carrying amount of the noncontrolling interest ($24,000).
3. Additional paid-in capital of Entity ABC is also decreased by $2,000, which represents the carrying amount of Subsidiary A’s accumulated other comprehensive income related to the ownership interest purchased from the noncontrolling shareholders ($4,000 × 50 percent = $2,000).
4. Accumulated comprehensive income attributable to Entity ABC is increased by a corresponding amount ($2,000).
5. The journal entry to record that purchase of Subsidiary A’s shares from the noncontrolling shareholders is as follows:
For the year ended December 31, 20X3, the amount of Subsidiary A’s net income included in the consolidated financial statements is $15,000.

55-4I This consolidated statement of financial position illustrates application of the requirement in paragraph 810-10-45-16 that Entity ABC present the noncontrolling interest in the consolidated statement of financial position within equity, but separately from the parent’s equity.

55-4J This consolidated statement of income illustrates the requirements in paragraph 810-10-50-1A that the amounts of consolidated net income and the net income attributable to Entity ABC and the noncontrolling interest be presented separately on the face of the consolidated income statement. It also illustrates the requirement in paragraph 810-10-50-1A(b) that the amounts of income from continuing operations and discontinued operations attributable to Entity ABC should be disclosed.

55-4K This statement of consolidated comprehensive income illustrates the requirements in paragraph 810-10-50-1A(a) that the amounts of consolidated comprehensive income and comprehensive income attributable to Entity ABC and the noncontrolling interest be presented separately on the face of the consolidated statement in which comprehensive income is presented.

55-4L This consolidated statement of changes in equity illustrates the requirements in paragraph 810-10-50-1A(c) that Entity ABC present a reconciliation at the beginning and the end of the period of the carrying amount of total equity, equity attributable to Entity ABC, and equity attributable to the noncontrolling interest. It also illustrates that because the noncontrolling interest is part of the equity of the consolidated group, it is presented in the statement of changes in equity.

See Deloitte’s Roadmap Noncontrolling Interests for detailed, comprehensive guidance on the presentation and disclosure requirements for a parent with a less than wholly owned subsidiary.

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

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.