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 consolidated total 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 addition to the requirements discussed above, a registrant should consider the following:

• The separate financial statements of a significant equity method investee may be included in the annual report filed by the registrant or in an amendment to the annual report depending on a number of considerations, including the equity method investee’s year-end and filing status and whether the investee is a foreign business.
• When applying the income test to equity method investees for which a registrant has elected the fair value option in accordance with ASC 825-10-15-4, the registrant should calculate the income and revenue components as follows:

  • Income component — Use the change in fair value of the investee reflected in the registrant’s income test.
  • Revenue component — Compare the registrant’s proportionate share of the investee’s revenue with the registrant’s revenue.
• If the registrant reports a discontinued operation retrospectively, it will need to reevaluate the significance of its equity method investees for all periods.
• The registrant may wish to ask the SEC for a waiver if an equity method investee becomes significant because of unusual circumstances.
• Smaller reporting companies have different reporting requirements related to significant equity method investments.
• When filed with the SEC, the separate financial statements of a significant equity method investee should take into consideration PBE adoption dates for certain ASUs (e.g., ASU 2023-09 and ASU 2024-03).