SEC Reporting Considerations for Equity Method Investees

A registrant is required to identify all investments accounted for under the equity method. For each of those investments, it should measure their significance by using the applicable tests and thresholds under SEC Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)(1). If an equity method investee is considered significant to a registrant, the registrant may be required to provide either or both of the following:

1. Separate financial statements of the investee.
2. Summarized financial information of the investee in the footnotes to the registrant’s financial statements.

The amount of information a registrant must present about an investee depends on the investee’s significance level. To determine the significance level, a registrant performs the applicable tests (as indicated below) for each equity method investee individually and, in certain cases, for all such investees in the aggregate:

• The investment test — The registrant’s and its other subsidiaries’ investments in and advances to the tested equity method investment are compared with the total consolidated assets of the registrant as of the end of the most recently completed fiscal year.
• The asset test — The registrant compares its share of the investee’s assets with the registrant’s consolidated total assets. Such amounts are generally as of the most recently completed fiscal year for both the investee and the registrant.
• The income test — The test has two components:

  • Income component — The absolute value of the registrant’s proportionate share of the investee’s pretax income or loss from continuing operations is compared with the absolute value of the registrant’s own pretax income or loss from continuing operations.
  • Revenue component — If both the registrant and the investee have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the registrant’s proportionate share of the investee’s revenue with the registrant’s revenue. The determination of whether the investee has material revenue is separate from the determination of whether the registrant has material revenue.
  An investee will only be considered significant under the income test if both the income component and the revenue component (if applicable) exceed the significance threshold. When both components exceed the significance threshold, the lower of the income or revenue component is used to determine significance in accordance with the income test.

When separate financial statements of the investee are required, a registrant must present such statements as of and for the same periods as the registrant’s financial statements unless the registrant did not account for the investment by using the equity method for the whole period for which its financial statements are required. In such cases, the investee’s financial statements should only be presented for the periods in which the investee was accounted for under the equity method, which may result in partial-year financial statements.

Under SEC rules, to determine whether it must provide summarized financial information in its annual financial statements, the registrant performs the applicable significance tests on all equity method investees individually and as part of an aggregated group.

In March 2023, the FASB issued ASU 2023-02, which expands the applicability of the proportional amortization method (PAM) to investments that would otherwise be accounted for under the equity method of accounting. Registrants that have material investments and have elected the accounting policy choice to apply PAM may consider consulting with their audit and legal professionals and reaching out to the SEC to discuss their fact patterns.