8.6 Impact of Reporting a Discontinued Operation on Financial Information About Other Entities
When a component meets the discontinued-operations criteria in ASC 205-20, a registrant must consider the impact this may have on its requirement to provide financial statements or financial information about other entities (e.g., acquired businesses, equity method investees, guarantors, and issuers of guaranteed securities).
8.6.1 SEC Regulation S-X, Rule 3-05: Financial Statements of Businesses Acquired or to Be Acquired
Under SEC Regulation S-X, Rule 3-05, SEC registrants are required to evaluate
the significance of an acquired or to be acquired business (acquiree) in
accordance with the tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset,
income, or investment test), to determine whether the acquiree’s financial
statements are required. Because the income test is based on a measure of income
and revenue (after intercompany eliminations) from continuing operations, the
reporting of a discontinued operation could affect the results of the
significance test.
As discussed in Section
8.3, a company may be required, or may elect, to file its audited annual
financial statements that give retrospective effect to a discontinued operation.
For businesses acquired after the date on which the retrospectively adjusted
financial statements are filed, registrants must use those retrospectively
revised financial statements when performing the significance tests.
Paragraph
2025.1 of the FRM further indicates that registrants must
also use these adjusted financial statements to evaluate (1) probable
acquisitions and (2) the “[a]ggregate impact of all individually insignificant
businesses that have occurred since the end of the most recently completed
fiscal year.”
Note 1 to paragraph 2025.1 of the FRM indicates that for businesses acquired on or before the date on which the retrospectively adjusted financial statements are filed, significance may be measured on the basis of “either (A) the registrant’s audited financial statements for its most recently completed fiscal year that were filed prior to the retrospectively adjusted financial statements giving effect to the discontinued operation or (B) the registrant’s filed financial statements for the most recently completed fiscal year that reflect retrospective application of the discontinued operation.” This paragraph goes on to state that a “registrant must consistently use [either option A or B] to measure significance of all individual acquisitions completed on or before the date the retrospectively adjusted financial statements are filed.”
8.6.2 SEC Regulation S-X, Rules 3-09 and 4-08(g): Financial Statements and Summarized Financial Information for Equity Method Investments
Under SEC Regulation S-X, Rules 3-09 and 4-08(g), SEC registrants are required
to evaluate the significance of an equity method investee by performing the
tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, income, or
investment test), to determine whether they must provide the investee’s
(1) financial statements, (2) summarized financial information, or (3) both.
Because the calculation for the income test is based on a measure of income and
revenue (after intercompany eliminations) from continuing operations, the reporting of a discontinued operation could
affect the results of the significance test.
The prescribed significance tests are performed annually in connection with the
filing of a Form 10-K (i.e., at the end of the registrant’s fiscal year).
Accordingly, significance is not remeasured when updated financial statements
that reflect retrospective adjustments are filed in a Form 8-K (or included in
or incorporated into a registration statement). However, when a registrant files
its next Form 10-K, it should be mindful that significance should be measured
for each annual period presented in the financial statements on the basis of
amounts that were retrospectively adjusted. Consequently, as a result of
retrospective adjustments for discontinued operations, a previously
insignificant equity method investee may become significant and a registrant may
be required to file the investee’s financial statements (or summarized
information under Rule 4-08(g)) in the registrant’s next Form 10-K — even if the
registrant was not required to provide these items in a prior Form 10-K. See
paragraph
2410.8 of the FRM for additional guidance.
Example 8-4
Significance of an Equity Method Investee When a Discontinued Operation Is Reported
Company A, an SEC registrant, disposed of Component B on November 30, 20X5. Historically, A has not been required to provide separate financial statements for Equity Method Investment C because C has not met the significance thresholds. While preparing its Form 10-K for the year ended December 31, 20X5, which retrospectively reflects B as a discontinued operation for all periods presented, A determines that C is now more than 20 percent significant to each of the three years ended December 31, 20X5, as a result of the retrospective presentation of discontinued operations. Company A must file C’s audited financial statements as of December 31, 20X5, and December 31, 20X4, and for the three years ended December 31, 20X5.
8.6.3 SEC Regulation S-X, Rule 3-10: Financial Statements of Guarantors and Issuers of Guaranteed Securities
Registrants that have registered debt with subsidiary or parent guarantees may
make use of certain accommodations in SEC Regulation S-X, Rule 3-10, and provide
summarized financial information in lieu of separate financial statements for
guarantor subsidiaries.
When a registrant disposes of a guarantor subsidiary, that subsidiary is
typically released from its guarantee. Changes in the
composition of guarantors and nonguarantors (e.g., a change
in a subsidiary designated as guarantor to one designated as
nonguarantor) may affect the summarized financial
information. For further details, see Section
2.3.2.4.2 of Deloitte’s Roadmap SEC
Reporting Considerations for Guarantees and
Collateralizations.