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SEC 4510 - Parent company financial information
Publication date: 30 Jun 2023
us PwC SEC Volume 4510
.1 General
SEC rules require certain disclosures when a registrant is restricted in its ability to transfer or dividend assets (cash or other assets) from one or more subsidiaries. The nature of the disclosures depends on the magnitude of the restriction/limitation in relation to the registrant's consolidated net assets.
- S-X 4-08(e) requires financial statement note disclosure of restrictions which limit the payment of dividends by the registrant. The financial statement note disclosure requirements set forth in S-X 4-08(e) apply to both annual shareholder reports and certain SEC filings (e.g., Form 10-K). See SEC 4510.2.
- S-X 5-04 (for Commercial and Industrial Companies) and S-X 7-05 (for Insurance Companies) require a financial statement schedule (Schedule I or II, respectively) containing condensed parent company financial data if the restricted net assets of consolidated subsidiaries (as defined in S-X 1-02(dd)) exceeds 25% of consolidated net assets as of the end of the most recent fiscal year. The condensed parent company financial information may be presented either in an audited financial statement schedule (Schedule I or II, as applicable) or in the notes to the audited financial statements. See SEC 4510.3.
- S-X 9-06 provides a similar disclosure requirement applicable to bank holding companies.
- S-X 12-04 provides guidance regarding the preparation of Schedule I/II. See SEC 4510.3 and SEC FRM 2810.
[Editor’s note: ASR 302 (FRP 213) and SAB Topic 6-K.2 also discuss parent company financial information disclosure requirements. That guidance has not been updated to reflect the changes adopted by the SEC in Release 33-10532, Disclosure Update and Simplification. Accordingly, care should be exercised when considering those sources of guidance.]
.2 Disclosures required by S-X 4-08(e)
The SEC has indicated that one of the major sources of restrictions limiting the payment of dividends by the registrant arises from material restrictions on a parent's ability to control its subsidiaries and investees’ transfer of funds to the parent company. S-X 4-08(e) seeks certain funds-flow oriented disclosures, which the SEC has indicated may be predictive of impending cash flow problems.
The SEC’s views are predicated on the assumption that a parent company must have a continual infusion of cash from its operating entities. A parent company which is a holding company oftentimes must rely on cash from its operating units to service its indebtedness or continue its cash dividend policy. Conversely, a registrant which is principally an operating company may generate adequate cash for such purposes from its own operations.
- S-X 4-08(e)(1) requires disclosure of the most significant restrictions on the registrant's ability to pay dividends and the amount of retained earnings or net income restricted or free of restrictions;
- S-X 4-08(e)(2) requires disclosure of the amount of consolidated retained earnings which represents undistributed earnings of 50% or less-owned persons accounted for by the equity method; and
- S-X 4-08(e)(3) requires disclosure (when material) of (i) the nature of any restrictions on the ability of consolidated and unconsolidated subsidiaries to transfer funds to the parent in the form of cash dividends, loans or advances and (ii) the separate amounts of restricted net assets of consolidated and unconsolidated subsidiaries.
.3 Condensed parent company financial information
S-X 5-04 and S-X 7-05 require a financial statement schedule (Schedule I/II) containing condensed parent company financial data if the restricted net assets of consolidated subsidiaries (as defined in S-X 1-02(dd)) exceeds 25% of consolidated net assets as of the end of the most recent fiscal year. In this context, "consolidated net assets" is considered by the SEC staff to be the registrant shareholders' equity (i.e., not total equity). See Discussion Document A of the July 2008 meeting of the CAQ SEC Regulations Committee.
S-X 12-04 and SEC FRM 2810.1 provide guidance regarding the preparation of Schedule I/II.
S-X 9-06 provides specific rules related to the preparation of the parent company financial information by bank holding companies. This information must be included in the notes to the registrant’s financial statements.
.4 Restricted net assets
The term "restricted net assets” is defined in S-X 1-02(dd). These tests are performed as of the end of the most recent fiscal year.
[Editor’s note: The computation of restricted net assets requires the creation of US GAAP balance sheet information for each subsidiary or investee.]
.9 Frequently asked questions
.901 Are disclosures relating to restricted net assets required as a part of Management’s Discussion and Analysis?
The instructions to S-K 303 provide that where financial statement note disclosure of restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends, loans, or advances is required by S-X 4-08(e)(3), management's discussion of liquidity should include the nature and extent of the restrictions and the impact they have had, or are reasonably likely to have, on the ability of the parent company to meet its cash obligations. See Instruction 5 to S-K 303(b).
.902 What is the basis used for a subsidiary’s net assets when calculating restricted net assets?
SAB Topic 6-K states that the determination of each subsidiary's net assets included in consolidated net assets is made by allocating (pushing down) to each subsidiary any related consolidation adjustments such as intercompany balances, intercompany profits, and differences between fair value and historical cost arising from a business combination accounted for as a purchase. SAB Topic 6-K was published prior to the issuance of ASU 2014-17, Business Combinations (Topic 805) Pushdown Accounting. The SEC staff has not formally indicated whether registrants may apply the principles of ASU 2014-17 in computing restricted assets (i.e., whether fair values arising from a business combination must be pushed down to subsidiary financial statements). See Topic III.C in the Highlights of the October 2015 meeting of the CAQ SEC Regulations Committee.
.903 When a registrant has a consolidated shareholders’ deficit, what is the net asset base used for the computation of restricted net assets?
The SEC staff has advised that when a registrant has a consolidated shareholders’ deficit, its net asset base for purposes of calculating the proportionate share of restricted net assets of consolidated subsidiaries should be zero. Therefore, any restrictions placed on the net assets of subsidiaries with positive equity would result in the 25% threshold being exceeded and a corresponding requirement to provide parent company financial information. A registrant should consult with the SEC staff if it has a specific fact pattern that may support an alternative approach that would provide a more meaningful disclosure to investors. See SEC FRM 2810.4 and Topic VI.E in the Highlights of the March 2014 meeting of the CAQ SEC Regulations Committee.
.904 How does a subsidiary with a shareholder deficit impact the restricted net asset computation?
Subsidiaries with a shareholder deficit have no restricted net assets for purposes of the test. If each subsidiary where a restriction exists has a shareholder deficit, Schedule I/II, as applicable, is not required. The numerator of the restricted net assets test should not be decreased for negative net asset positions. See SEC FRM 2810.4.
.905 How do classes of outstanding stock classified outside of permanent equity impact the restricted net assets computation?
In making these tests, registrants may use amounts applicable to all classes of outstanding capital stock that are reported as equity (either temporary/mezzanine equity or permanent equity). See FRP 211.06.
.906 Are Schedules I/II prepared using the guidance in S-X 12-04 required to be covered by the report of the registrant’s independent registered public accounting firm?
Yes. The schedules specified by S-X 12-04 are required to be audited. See S-X 5-04(c) and S-X 7-05(c).
.907 Where can I find examples of the types of restrictions referred to in S-X 5-04 and S-X 7-05?
S-X 1-02(dd) contains guidance on restrictions.
.908 Do the requirements of S-X 5-04, 7-05, and 9-06 apply to interim financial statements?
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