ASC 323-10-50-1 through ASC 323-10-50-2 sets forth guidelines regarding disclosures that should be made in the financial statements of an investor when it accounts for investments under the equity method. The guidance states:

Excerpt from ASC 323-10-50-1

…references in this Subtopic to common stock refer to both common stock and in-substance common stock that give the investor the ability to exercise significant influence over the operating and financial polices of an investee even though the investor holds 50% or less of the common stock or in-substance common stock (or both common and in-substance common stock).

ASC 323-10-50-2

The significance of an investment to the investor’s financial position and results of operations shall be considered in evaluating the extent of disclosures of the financial position and results of operations of an investee. If the investor has more than one investment in common stock, disclosures wholly or partly on a combined basis may be appropriate.

The guidance also indicates that investments may be appropriately combined or grouped, either wholly or in part, for disclosure purposes. In addition, the nature and extent of disclosures may vary based on the significance of an investment to the investor.
If the investee is a variable interest entity (VIE), the investor is required to make the equity method investment disclosures in accordance with ASC 323-10-50, in addition to the required disclosures for VIEs in ASC 810-10-50. Refer to FSP 18.4 for additional information on the required disclosures for VIEs.
ASC 323-10-50-3 requires the following disclosures with regard to equity method investments:
  • Name of each investee and percentage of ownership of common stock by the investor

    Normally, the names of investees and the percentage owned would be included only for individually significant investees, for large holdings in publicly held investees, or where otherwise clearly informative to the users of financial statements. The percentage of ownership generally should be disclosed as a range where numerous individually immaterial investments in corporate joint ventures or other investees are accounted for under the equity method.
  • Accounting policies of the reporting entity with respect to investments in common stock

    The name of any significant investee in which the investor holds 20% or more of the outstanding voting stock (or an ownership interest of 3% to 5% for investments in limited partnerships, limited liability companies, trusts and similar entities), for which the investment is not accounted for under the equity method, should be disclosed. The reasons why the equity method is not considered appropriate should also be disclosed. Additionally, the name of any significant investee in which the investor holds less than 20% of the outstanding voting stock (or an ownership interest of 3% to 5% for investments in limited partnerships, limited liability companies, trusts and similar entities)in circumstances where such investment is accounted for under the equity method should be disclosed, along with the reasons why such treatment is considered appropriate.
  • Difference, if any, between the amount at which an investment is carried and the amount of underlying equity in net assets, and the accounting treatment for the basis difference

    Intra-entity (intercompany) income eliminations, as well as other basis differences such as goodwill, should be disclosed. Basis differences are discussed further in FSP and EM 3.3.1.
  • Market value of investments in common stock for which a quoted market value is available

    If specific circumstances lead the reporting entity to decide not to disclose this information (e.g., when the market for a stock is thin and quoted market value may not be representative of the investor’s holding), the reporting entity should disclose the reasons for reaching that determination.
  • Summarized information as to assets, liabilities, and results of operations of investees, either individually or grouped

    The disclosure of summarized financial information is also required under SEC rules. While the disclosure requirement for summarized financial information in ASC 323-10-50-3(c) is more general in nature, the SEC disclosure requirement provides specific guidance as to the financial captions that should be disclosed.

    S-X 4-08(g) sets forth disclosure requirements for annual periods, and S-X 10-01(b)(1) stipulates interim disclosure requirements. Refer to FSP 10.6.1 and FSP 10.6.2 for further discussion of SEC disclosure requirements on an annual and interim basis, respectively. If an investment accounted for by the equity method exceeds 20% based on the investment test or income test as defined in S-X 1-02(w), separate financial statements—not just summarized financial information—are required in the investor’s Form 10-K in accordance with S-X 3-09.
  • Material effects of possible conversions, exercises, or contingent issuances of investee securities that would significantly affect the investor’s share of reported earnings or losses of the investee

    Investee common stock equivalents and dilutive securities are taken into account in computing the investor’s earnings per share (see ASC 323-10-50-3(d)). Disclosure of the potential effects should normally be made only if the conversion, exercise, or issuance would significantly change the investor’s share of investee net assets or reported income. Otherwise, disclosures should be limited to the nature of the contingency and the effect on income for the most recent period and financial position at the end of the period. Refer to FSP 7 for further discussion of EPS considerations.

Equity method investments may also generate temporary differences for tax purposes that must be disclosed under ASC 740. Refer to FSP 16 for required disclosures related to deferred taxes. In addition to those disclosures, ASC 323-740-S99-1, Taxes of Investee Company, indicates that if an equity method investee's effective tax rate differs by more than 5% from the statutory Federal income tax rate, the investor is required to disclose the tax components of the reconciliation if such information is available and material to the investor's balance sheet or income statement.

10.6.1 Guarantee issued by investor on behalf of equity method investee

As further described in EM 3.2.3, an investor may issue a guarantee to a third party on behalf of an equity method investee. In such situations, the investor should consider the guidance in ASC 460, Guarantees, and if applicable record a liability to reflect its obligation. ASC 460 does not prescribe a specific account for the guarantor’s offsetting entry when it recognizes a liability at the inception of a guarantee. That offsetting entry depends on the circumstances in which the guarantee was issued. See ASC 460-10-55-23 for implementation guidance.
Subsequent accounting for the guarantee would be in accordance with ASC 460, and therefore would not impact the carrying amount of the equity method investment (i.e., the subsequent accounting for the equity method investment is governed by ASC 323). Subsequent changes in the fair value of the guarantee would be recorded separately from the equity method investment.
FSP 23.6 illustrates the required disclosures when accounting for a guarantee.

10.6.2 Disclosures required if fair value option is elected

If a reporting entity would have accounted for an investment using the equity method, but instead elected to use the fair value option, the reporting entity must include certain disclosures for equity method investments as required by ASC 825-10-50-28(f). See FSP for discussion of these disclosure requirements.

10.6.3 Annual summarized financial information—equity method investees

SEC rules provide significance thresholds for determining whether an SEC registrant is required to provide summarized financial information under S-X 4-08 and/or full separate financial statements under S-X 3-09 relating to an unconsolidated subsidiary or equity method investee. The rules are regarded by the SEC as an interpretation of ASC 323-10-50-3, which states that summarized financial information or separate statements may be required for equity investees if the investments are material in relation to the investor’s financial position or results of operations.
S-X 4-08(g) requires reporting entities to disclose summarized financial information of unconsolidated subsidiaries and equity method investees for all periods presented if any one of the three significant subsidiary tests outlined in S-X 1-02(w) exceeds 10% on an individual basis or on an aggregated basis for any combination of unconsolidated subsidiaries or equity method investees for any of the periods presented.
In accordance with FRM 2420.5, if separate financial statements of significant investees are included in an annual report to shareholders or a Form 10-K (as required by S-X 3-09), the summarized data required by S-X 4-08(g) is not required for those entities. In some cases, the financial statements required by S-X 3-09 are not filed concurrent with the Form 10-K, but rather are filed by amendment at a later date. In such cases, the SEC registrant may not omit the summarized financial information for the significant investees from the financial statements in its initial Form 10-K filing.
If required, the summarized financial information disclosures must include, at a minimum, the following financial statement captions:
  • Current assets
  • Noncurrent assets
  • Current liabilities
  • Noncurrent liabilities
  • Redeemable preferred stock
  • Noncontrolling interest
  • Net sales or gross revenue
  • Gross profit (or alternatively, costs and expenses applicable to net sales or gross revenues)
  • Income or loss from continuing operations
  • Net income or loss
  • Net income or loss attributable to the entity

If the balance sheet is not classified, information should be provided that indicates the nature and amount of major components of assets and liabilities. In addition, for specialized industries, other information may be substituted for sales and related costs if they are more meaningful.
Once the significance test is triggered, summarized financial information for all equity investees must be disclosed in the aggregate or individually (not just those that are significant individually). In other words, there is not a materiality threshold for individual entities that would exempt an investee from being included in the disclosures. In limited circumstances, the exclusion of such data may be appropriate for certain entities where it is impractical to gather the information and such information is de minimis. Although aggregation is generally permitted, the SEC staff has, in certain circumstances, issued comments that it believes aggregation is misleading or suppresses important information. In those cases, the SEC staff has requested that certain investees be presented separately. Separate information may be requested for individual investees that are significant quantitatively or qualitatively. The SEC staff has indicated that the disclosure requirements of S-X 4-08(g) and S-X 3-09 also apply to investments accounted for using the fair value option if the investment would otherwise have been accounted for using the equity method.

10.6.4 Interim summarized financial information—equity method investees

S-X 10-01(b)(1) requires reporting entities to include in their interim financial statements separate summarized income statement information for each equity method investee for which (1) separate financial statements of the investee would be required for annual periods, and (2) the investee would be required to file quarterly financial information in Form 10-Q if the investee were a registrant (e.g., the investee would not be a foreign private issuer if it were a registrant).
As discussed in SEC FRM 2420, reporting entities should use the investment and income tests in S-X 1-02(w) (see FSP 10.6.1), substituting 20% for 10%, to determine whether "separate financial statements would otherwise be required for annual periods." The investment tests would be based on the two balance sheets included in the Form 10-Q and the income tests would be based on the year-to-date income statements included in the Form 10-Q.
The minimum disclosures below must be included for each significant investee and may be aggregated with similar minimum disclosures for other significant investees. The information must be presented for both the current and prior comparative year-to-date periods included in the interim financial statements:
  • Net sales or gross revenues
  • Gross profit (or, alternatively, costs and expenses applicable to net sales or gross revenues)
  • Income or loss from continuing operations
  • Net income or loss, and
  • Net income or loss attributable to the entity

S-X 10-01(b)(1) requires disclosure of income statement information in the interim financial statements, whereas the annual requirements under S-X 4-08(g) require summarized financial information for both the balance sheet and income statement. Additionally, interim disclosures are only required for the investees that meet the significance tests, whereas on an annual basis a reporting entity must disclose summarized financial information for all equity method investees once the significance test is triggered. As discussed in FRM 2420, registrants should omit income averaging when implementing the income test for interim financial statements.
There are distinct requirements for a reporting entity when assessing the significance of equity method investments and unconsolidated investments for interim periods under S-X 10-01(b)(1) and annual periods under S-X 4-08(g) and S-X 3-09. For example, a reporting entity may be required to include S-X 10-01(b)(1) disclosures for an interim period and not be required to provide financial statements of the investee under S-X 3-09 for the annual periods if significance changes by year end given that significance tests include different information (e.g., year-to-date income statement for the interim period as compared to the income statement for the full annual period).
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