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SEC 4520 - Unconsolidated majority-owned subsidiaries and 50 percent or less-owned persons
Publication date: 30 Jun 2023
us PwC SEC Volume 4520
[Editor’s note: SEC 4520 addresses disclosure requirements relating to equity-method investments and investments accounted for using the fair value option which would have otherwise been accounted for using the equity method. See SEC 4520.902 regarding unconsolidated majority-owned subsidiaries.]
.1 General
The SEC maintains disclosure requirements relating to 50% or less-owned persons accounted for by the equity method. The level of disclosure required is based on whether the disclosures are associated with an annual or interim period and the registrant’s smaller reporting company status.
[Editor’s note: The SEC staff interprets the phrase “50% or less-owned person accounted for by the equity method” to include any investment accounted for by the equity method even if voting ownership exceeds 50%. See SEC FRM 2405.3. Additionally, the SEC staff has interpreted the related disclosure requirements to apply to any investment accounted for by the fair value option when the investment would have otherwise been accounted for by the equity method. See SEC FRM 2435. References throughout SEC 4520 to “equity-method investees” include all investees accounted for by the equity method or the fair value option when the investment would otherwise have been accounted for by the equity method. Similarly, references to applying the “equity method” encompass the use of the fair value option when the equity method would have otherwise been required.]
.11 What are the SEC’s disclosure requirements relating to equity-method investees of a registrant that is not a smaller reporting company?
The SEC’s disclosure requirements relating to equity-method investees of a registrant that is not a smaller reporting company are set forth in S-X 3-09 and S-X 4-08(g) for annual periods and S-X 10-01(b)(1) for interim periods. These requirements are summarized as follows:
- S-X 3-09 requires financial statements for each equity-method investee which individually meets either the first or third test of significance (i.e., the investment test or the income test) in S-X 1-02(w)(1) using a 20% threshold. See SEC 4520.2.
- S-X 4-08(g) requires summarized financial information in the notes to the registrant’s audited annual financial statements covering all equity-method investees if any one of the three significant subsidiary tests outlined in S-X 1-02(w) is met when equity-method investees are considered individually or on an aggregate basis by any combination of equity-method investees using a 10% threshold. See SEC 4520.3.
- S-X 10-01(b)(1) requires summarized statement of comprehensive income information in the notes to interim financial statements for each equity-method investee if (i) separate financial statements would otherwise be required for annual periods using a 20% threshold and (ii) the investee would be required to file Form 10-Q if the investee were a registrant. See SEC 4520.4.
.12 What are the SEC’s disclosure requirements relating to equity-method investees of a registrant that is a smaller reporting company?
The SEC’s disclosure requirements relating to equity-method investees of a registrant that is a smaller reporting company are set forth S-X 8-03(b)(3), which requires specified summarized financial information in the notes to the registrant’s financial statements based on specified tests of significance using a 20% threshold. See SEC 4520.5.
.13 Are S-X 3-09, S-X 4-08(g), S-X 10-01(b)(1) and S-X 8-03(b)(3) applicable to investments that are accounted for using the fair value option if the investment would have otherwise been accounted for using the equity method?
Yes. The SEC staff has stated that the disclosure requirements of S-X 3-09 and S-X 4‑08(g) also apply to investments accounted for using the fair value option if the investment would otherwise have been accounted for using the equity method. See SEC FRM 2435. We understand that the SEC staff similarly applies the requirements of S-X 10-01(b)(1) and S-X 8-03(b)(3) to investments accounted for using the fair value option if the investment would otherwise have been accounted for using the equity method.
.2 S-X 3-09 Requirements
.21 When are financial statements of an equity-method investee required under S-X 3-09?
S-X 3-09 requires financial statements for each equity-method investee which individually meets either the investment test or income test of significance under S-X 1-02(w)(1) using a 20% threshold. If the threshold for either significance test is exceeded for any year for which financial statements of the registrant are presented, then S-X 3-09 financial statements are required for all years. See SEC 4520.25 regarding the associated audit requirements.
[Editor’s note: The S-X 3-09 significance tests are generally performed for each year that is presented in the registrant's financial statements. S-X 3-09 financial statements, which previously were not required, could subsequently be required in a future filing as a result of retrospective revisions to the registrant's financial statements (e.g., for discontinued operations). The SEC staff has provided guidance relating to situations involving the impact of changes in accounting principle that are retroactively applied and discontinued operations at SEC FRM 2410.8.]
[Editor’s note: Significance may need to be assessed even if the carrying value of the investment is zero (or is a negative amount). For instance, if a registrant's recorded equity in the investee's losses exceed its investment, or if the investment is written down by the registrant to zero, the income test may still be applicable (e.g., the impact on the registrant's income in the current year may be significant under the income test).]
See SEC 4520.908.
.22 How should financial statements required under S-X 3-09 be prepared?
Financial statements prepared pursuant to S-X 3-09 are generally the same as if the equity-method investee were a registrant. There are, however, exceptions to this general principle. For example:
- the periods to be presented are based on the audited financial statement requirements of S-X 3-01 and S-X 3-02 for a registrant (see SEC 4520.23);
- the S-X 3-09 financial statements should only depict the portion of a fiscal year for which the investee was accounted for by the registrant using the equity method (see SEC FRM 2405.4 and SEC 4520.23); and
- S-X 3-09 financial statements are generally not required to comply with GAAP disclosures specified for a public company, for example, in the areas of segments and earnings per share, unless the entity meets the definition of a public entity set forth in the applicable accounting literature (see SEC FRM 2400.5).
See SAB Topic 6-K.4.a. for the requirement to provide separate financial statements for lower tier investees (e.g., investees accounted for by the equity method by an equity-method investee of the registrant). The SAB Topic notes that financial statements of lower tier companies may have to be furnished if they are significant in relation to the registrant. See also SEC FRM 2405.6.
S-X 3-09 financial statements (including non-issuer financial statements) filed with the SEC should generally comply with all relevant Staff Accounting Bulletins. Financial statement schedules specified by S-X Article 12 are considered part of the financial statements and registrants are required to include such schedules, as applicable, with the financial statements of significant equity-method investees under S-X 3-09. See Topic G from the highlights of the March 2019 meeting of the CAQ SEC Regulations Committee.
.23 For what periods should S-X 3-09 financial statements be presented?
General principle
S-X 3-09(b) provides that the investee's separate financial statements should be as of the same dates and for the same periods as the registrant’s annual audited financial statements under S-X 3-01 and S-X 3-02 (if practicable). Therefore, balance sheets should generally be as of the end of the two latest fiscal years, and other statements should cover the three latest fiscal years. If the equity-method investee has a different fiscal year-end from the registrant, the financial statements of the equity-method investee may be based on the investee's fiscal year, rather than that of the registrant.
[Editor's note: Special accommodations for emerging growth companies (EGCs), which allow a registrant that is an EGC to provide only two years of financial statements for investees accounted for by the equity method, may apply. See SEC FRM 10220.5.]
See SEC 4520.903 and .911.
Year of acquisition
When providing S-X 3-09 financial statements relating to the year in which a registrant acquired an equity-method investee, those financial statements should begin with the date of acquisition and conclude with the end of the fiscal year. In the alternative, the registrant may contact the SEC staff to obtain permission to provide financial statements for a different period (e.g., for the full fiscal year of acquisition). See SEC FRM 2405.4 and SEC 4520.27.
[Editor’s note: Separate equity-method investee financial statements are not required under S-X 3-09 for periods prior to the registrant's ownership of the investment. However, pre-acquisition financial statements may be required for other purposes (e.g., under Item 2.01 of Form 8-K as a significant acquired business -- see the Note to SEC FRM 2405.4).]
Consider the following example:
Facts: Company Y is a calendar year-end, non-smaller reporting company, US domestic SEC registrant. On April 4, 2023, Company Y acquired a 25% interest in the common stock of Investee D (a calendar year-end private company). Company Y accounts for Investee D using the equity method. At the time of making its investment in Investee D, Company Y determined that Investee D was significant at the 45% level (i.e., under Items 2.01 and 9.01 of Form 8-K). In connection with the preparation of Company Y's 2023 Form 10-K, Company Y determined that Investee D was significant above the 20% level.
Analysis: In connection the acquisition of its 25% interest in Investee D, Company Y was required to file audited financial statements of Investee D as of December 31, 2022 and 2021 and for the years then ended, in order to comply with the requirements of Items 2.01 and 9.01 of Form 8-K. The period covered by the audited financial statements of Investee D that are required in Company Y's 2023 Form 10-K pursuant to S-X 3-09 should be from the date of acquisition (April 4, 2023) through the end of the fiscal year (December 31, 2023). Alternatively, Company Y may contact the SEC staff to obtain relief under S-X 3-13 to provide financial statements for a different period (e.g., calendar year 2023) in connection with the 2023 Form 10-K. See SEC 4520.27.
Year of disposition
When providing S-X 3-09 financial statements relating to the year in which a registrant disposes of an equity-method investee, the investee's statement of comprehensive income and statement of cash flows should generally be presented through the date of disposal. See SEC FRM 2405.4 The SEC staff will consider a request for relief under S-X 3-13 to accept an investee's financial statements for the entire year if obtaining the partial-year financial statements would result in undue hardship. See SEC 4520.27.
[Editor’s note: If the investee is sold near the end of the registrant's most recent year, or after the registrant's year-end, it is unlikely that the SEC staff will waive the requirement to provide the financial statements if the significance test is met for the year of disposal.]
.24 When are S-X 3-09 financial statements due in connection with Form 10-K?
[Editor’s note: The timing guidance discussed in SEC 4520.24 relates only to Form 10-K. See SEC 4520.905 for information relating to registration statements and proxy statements.]
S-X 3-09 provides a limited grace period for filing the separate financial statements of an equity-method investee in connection with the investor's Form 10-K. The registrant may initially file its Form 10-K without the investee's separate financial statements and then file the investee's separate financial statements by an amendment to the Form 10-K before the end of the grace period described below.
Under the S-X 3-09 grace period, the registrant is required to file the investee's separate financial statements within the following number of days after the investee's year end:
- 60 days if the investee is a large accelerated filer, except investees that are foreign businesses
- 75 days if the investee is an accelerated filer, except investees that are foreign businesses
- 90 days for all other investees, except investees that are foreign businesses
- six months for investees that are foreign businesses.
For example, assume a calendar year-end registrant, an accelerated filer, has two equity-method investees that are not foreign businesses, not large accelerated filers, and not accelerated filers. Investee A has a January 31 fiscal year-end and Investee B has an April 30 fiscal year-end.
In this fact pattern, the pertinent filing dates are as follows:
- The registrant's December 31, 2022 Form 10-K would be due by March 16, 2023 (the 75th day after December 31, 2022).
- The registrant would file Investee A's financial statements no later than May 1, 2023 (the 90th day after January 31, 2023).
- The registrant would file Investee B's financial statements no later than July 31, 2023 (because the 90th day after April 30, 2023, July 29, 2023, is a Saturday).
Regardless of the registrant's accelerated filer status, the financial statements of both equity-method investees may be filed by an amendment to the Form 10-K within the due dates based on the investees' filer status, as noted above.
[Editor’s note: S-X 3-09(b)(1) provides an accommodation for filing the financial statements of the investee where the registrant is an accelerated filer and the equity-method investee is not an accelerated filer. The SEC staff has indicated that it will provide an accommodation in all situations where the registrant is subject to shorter deadlines than the other entity. Therefore, under S-X 3-09(b)(1), the reference to the registrant as an "accelerated filer" should be interpreted to include both accelerated filers and large accelerated filers, and the reference to the other entity as "not an accelerated filer" should be interpreted to include investees that are accelerated filers when the registrant is a large accelerated filer. See S-X 3-09(b) and SEC FRM 2405.8.]
See SEC 4520.910.
.241 Is Rule 12b-25 available to extend the due date of S-X 3-09 financial statements?
Generally, no. Rule 12b-25 is not available to extend the due date of S-X 3-09 financial statements unless the investee itself is an SEC registrant and is eligible to use Exchange Act Rule 12b-25. See Exchange Act Rule 12b-25(f) and Exchange Act Rules CDI 135.01.
[Editor’s note: Exchange Act Rules CDI 135.01 refers to investees that are less than 50% owned. However, we understand the SEC staff applies the same guidance to a 50% owned equity-method investee.]
.25 Are S-X 3-09 financial statements required to be audited?
Yes, but only for years in which the appropriate 20% significant subsidiary threshold was exceeded. Financial statements that are required for any year in which an equity-method investee was not significant may be presented on an unaudited basis. For example, assume Company X performed its S-X 3-09 significance assessment in connection with its Form 10-K for the year ending December 31, 2023 and determined that its equity method investee, Investee A, exceeded the significance threshold in 2023, but not in 2022 or 2021. In this case, financial statements of Investee A would be filed for 2021, 2022, and 2023, however, only the financial statements for 2023 would be required to be audited.
Audits of financial statements required by S-X 3-09 must be performed in accordance with (i) PCAOB standards, (ii) AICPA standards, or (iii) both PCAOB standards and AICPA standards, as appropriate. Local, non-US GAAS (including International Standards on Auditing) is not acceptable to the SEC. Auditors of financial statements presented to comply with S-X 3-09 must comply with the SEC independence rules even if the audit of such financial statements is performed in accordance with standards other than PCAOB standards. See Question 3 of section O, Other Independence, in the SEC FAQs “Office of the Chief Accountant: Application of the Commission’s Rules on Auditor Independence” available at https://www.sec.gov/info/accountants/ocafaqaudind080607.htm. See also SEC FRM 4110.5 #7.
.26 Are there any accommodations applicable to S-X 3-09 financial statements of a foreign equity-method investee?
Yes. In SEC Financial Reporting Release No. 44 (FRR 44), the SEC provided accommodations to domestic issuers that are required to provide S-X 3-09 financial statements of foreign equity-method investees in their filings if the investee meets the definition of a foreign business (defined in S-X 1-02(l)).
The accommodations set forth in FRR 44 are summarized below.
1. Financial statements of foreign equity-method investees that meet the definition of a foreign business only need to comply with Item 17 of Form 20-F, and they are subject to the updating requirements specified in Item 8.A of Form 20-F. Pursuant to Item 17 of Form 20-F, the financial statements may be prepared on a comprehensive basis of accounting other than US GAAP. Quantitative reconciliation of net income and material balance sheet items may be required, but the additional information specified by US GAAP for disclosure in notes to financial statements is not necessary. No reconciliation is required if the foreign business prepares its financial statements in accordance with IFRS as issued by the IASB or does not exceed the 30% level under the tests of significance which call for the inclusion of its financial statements. Even if a quantified reconciliation is not required, a discussion of the differences between local and US GAAP should be presented unless the financial statements are prepared in accordance with IFRS as issued by the IASB.
[Editor’s note: Refer to SEC FRM 6410.6 for information regarding the periods that must be covered by the US GAAP reconciliation when not all years being tested exceed the 30% significance level.]
[Editor's note: The accommodation not to reconcile separate financial statements of 30% or less significant foreign business equity-method investees does not affect a domestic registrant's measurement of earnings under US GAAP or disclosures under Regulation S-X. Accordingly, equity earnings in the registrant's financial statements should be accounted for under US GAAP and any applicable S-X 4-08(g) disclosures (see SEC 4520.3) should be provided.]
If the foreign equity-method investee does not meet the definition of a foreign business, the registrant can file financial statements prepared in accordance with a comprehensive basis of accounting other than US GAAP, provided that a reconciliation to US GAAP under Item 18 of Form 20-F is provided. The reconciliation must be provided regardless of the level of significance (i.e., even if the significance level is 30% or less). Reconciliation to US GAAP would be required even if the financial statements were prepared under IFRS as issued by the IASB because the accommodation only applies to investees that meet the S-X 1-02(l) definition of a foreign business.
[Editor’s note: Registrants may wish to contact the staff in the SEC's Division of Corporation Finance in this situation since this could impose a reporting requirement on the investee that exceeds the reporting requirement that would be applicable to the entity if it were a registrant.]
2. For the purposes of filing a Form 10-K, S-X 3-09(b) permits a registrant to include the audited financial statements of a significant foreign equity-method investee that meets the definition of a foreign business (as defined in S-X 1-02(l)) as an amendment to the previously filed Form 10-K within six months after the end of the investee’s fiscal year. However, the six-month deadline described in S-X 3-09(b) only relates to the filing of a Form 10-K. If a registrant files a new or amended registration statement or proxy statement prior to the six-month deadline, S-X 3-12(f) indicates that the last year of audited financial statements of the significant foreign business equity method investee may be no older than 15 months at the time of filing. See also SEC 4520.905.
As noted above, S-X 3-09 requires that financial statements provided for significant equity-method investees be as of the same dates and for the same periods as the audited consolidated financial statements of the registrant (as practicable). When the financial statements are provided for a foreign business as defined by S-X 1-02(l), and the equity-method investee is a first-time adopter of IFRS as issued by the IASB, the requirements of S-X 3-09 would be satisfied by having financial statements for the latest two years if the date of transition to IFRS-IASB was at the beginning of the earliest year provided, regardless if the financial statements of the foreign business were previously provided (e.g., the foreign business financial statements have previously been provided on a US GAAP basis). However, when the financial statements of the foreign business have previously been provided and prepared in accordance with IFRS as issued by the IASB, and the foreign business decides to change to US GAAP, the SEC staff has indicated that three years of financial statements would be required under this fact pattern. See Topic D from the highlights of the November 2016 meeting of the CAQ International Practices Task Force.
.27 Will the SEC staff consider requests for relief from providing the financial statements required by S-X 3-09?
Yes. The SEC staff will consider a registrant's request for relief under S-X 3-13 from providing the financial statements required by S-X 3-09. If the SEC staff grants a request for relief from providing financial statements required by S-X 3-09, the SEC staff may still require the presentation of summarized information in accordance with S-X 4-08(g). The SEC staff sometimes requires more detailed disclosure (e.g., investee cash flow statement information and information relating to the investee's significant accounting policies) when accepting financial statement note disclosure in satisfaction of the requirements of S-X 3-09.
.3 S-X 4-08(g) Requirements
.31 When is disclosure required under S-X 4-08(g)?
S-X 4-08(g) requires summarized financial information in the notes to the registrant’s annual audited financial statements if any one of the three significant subsidiary tests outlined in S-X 1-02(w) is met when equity-method investees are considered individually or on an aggregate basis by any combination of equity method investees. The threshold for evaluation under S-X 4-08(g) is 10% (not 20%, as in the case of S-X 3-09).
S-X 4-08(g) requires summarized financial information regardless of whether the significance test is met by an individual investee or from a combination of investees. For purposes of computing the income significance test under S-X 4-08(g), entities reporting losses should not be aggregated with entities reporting income. See S-X 1-02(w)(1)(iii)(B)(3).
[Editor's note: The SEC excludes the asset test from the determination of whether complete financial statements are needed for an equity-method investee under S-X 3-09. However, the asset test is required for equity-method investees when assessing whether summarized financial information must be included in the footnotes to the registrant's financial statements under S-X 4-08(g).]
See SEC 4520.907.
.32 What disclosures are required under S-X 4-08(g)?
If any one of the three significance tests is met, then summarized financial information must be presented for all equity-method investees (not just any that are individually significant). The summarized financial information required by S-X 4-08(g) is set forth in S-X 1-02(bb).
[Editor’s note: S-X 1-02(bb) permits some flexibility for specialized industries for which other information may be more meaningful. For example, a bank might present total interest income, total interest expense, provision for loan losses, and security gains and losses in lieu of sales and related costs and expenses.]
The SEC believes the summarized information should cover all entities. However, 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. See Note 1 to SEC FRM 2420.3 and Topic VI.E from the highlights of the March 2014 meeting of the CAQ SEC Regulations Committee.
Summarized financial information should be presented in accordance with US GAAP and in US dollars.
See SEC 4520.901 and .912.
.33 For what periods should S-X 4-08(g) disclosures be provided?
The summarized financial information should be presented insofar as is practicable as of the same dates and for the same periods as presented by the registrant in its audited consolidated financial statements (e.g., two years for balance sheet information and three years for statement of comprehensive income information).
[Editor's note: A registrant is required to present summarized financial data under S-X 4-08(g) for all years for which financial statements are presented if the significance threshold is met for any of the years for which financial statements are presented (and assuming that the registrant owned the investment(s) for all those years). For example, a registrant would be required to present the summarized financial data for all of its equity-method investments for 2023, 2022 and 2021 in the financial statements included in its 2023 Form 10-K, even if the significance test was only met in 2022.]
.34 Can the disclosures required by S-X 4-08(g) be labeled as “unaudited?”
No. The summarized financial data required by S-X 4-08(g) may not be labeled “unaudited." See SEC FRM 2420.4.
.35 Does the S-X 3-09 timing guidance (and grace period) discussed in SEC 4520.23 apply to disclosures required in Form 10-K by S-X 4-08(g)?
No. There is no grace period with respect to the disclosures required by S-X 4-08(g). The disclosures required by S-X 4-08(g) must be included in a registrant's financial statements when the Form 10-K is initially filed. See SEC 4520.905.
.4 S-X 10-01(b)(1) Requirements
.41 When is disclosure required under S-X 10-01(b)(1)?
S-X 10-01(b)(1) requires the disclosure of summarized statement of comprehensive income information in interim financial statements for each equity-method investee, if (i) separate financial statements would otherwise be required for annual periods and (ii) the investee would be required to file Form 10-Q if the investee were a registrant.
[Editor's note: Foreign private issuers are not required to file Form 10-Q, so the requirement of S-X 10-01(b)(1) to provide summarized financial information would not apply to an investee that would be a foreign private issuer if it were a registrant. See SEC FRM 2420.6.]
.42 How is significance assessed under S-X 10-01(b)(1) for purposes of determining whether “separate financial statements would otherwise be required for annual periods”?
Registrants should use the first and third significance tests specified by S-X 1-02(w) (i.e., the investment test and the income test), substituting 20% for 10% to determine whether "separate financial statements would otherwise be required for annual periods" (i.e., the analysis that would be required by S-X 3-09). The significance tests are performed for each individual investee and not on an aggregate basis. However, unlike the calculation of significance in annual periods, the SEC staff does not permit the use of any type of income averaging techniques in interim periods. See SEC FRM 2420.7b.
The significance calculations should be based on the balance sheets and the year-to-date statements of comprehensive income included in the interim financial statements. See SEC FRM 2420.7. Consider the following example:
Facts: Company X is a US domestic calendar year-end registrant. Company X is preparing its Form 10-Q for the quarter ended June 30, 2023. In accordance with S-X 10-01(c), Company X's Form 10-Q will include balance sheets as of June 30, 2023 and December 31, 2022 and statements of comprehensive income for the three- and six-month periods ended June 30, 2023 and 2022.
Analysis: Company X should perform four significance tests for each equity-method investee. The two investment tests of significance should be based on the balance sheets as of June 30, 2023 and December 31, 2022. The two income tests of significance should be based on the statements of comprehensive income for the six-month periods ended June 30, 2023 and 2022. If any of the four calculations exceeds 20%, then the summarized statement of comprehensive income information for that investee must be presented for both year-to-date periods. Company X does not need to perform the income test on the statements of comprehensive income for the three-month periods ended June 30, 2023 and 2022 and would not be required to provide summarized statement of comprehensive income information for the three-month periods even if it is required to provide that information for the year-to-date periods.
[Editor's note: If Company X were making this assessment in connection with its Form 10-Q for the quarter ended March 31, 2023, then the significance tests would be based on the balance sheets as of March 31, 2023 and December 31, 2022, as well as the statements of comprehensive income for the three-month periods ended March 31, 2023 and 2022.]
.43 What disclosures are required under S-X 10-01(b)(1)?
For investees that are significant (see SEC 4520.42), the following statement of comprehensive income information is required to be disclosed (although disclosure for each significant investee may be aggregated):
- 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
The registrant should present the minimum disclosures listed above for both the current and prior year comparative year-to-date periods included in that quarterly report.
See SEC FRM 2420.8.
[Editor's note: Disclosures for insignificant investees may be provided on a voluntary basis; however, if those disclosures are aggregated with disclosures for significant investees, disclosures related only to significant investees is still required.]
See SEC 4520.901.
.5 S-X 8-03(b)(3) Requirements
.51 How are the requirements of S-X 8-03(b)(3) applied?
S-X 8-03(b)(3) requires summarized financial statement note disclosure of sales, gross profit, net income (loss) from continuing operations, net income (loss), and net income (loss) attributable to the investee(s) based on specified tests of significance using a 20% threshold.
[Editor’s note: As written, S-X 8-03 applies only to interim financial statements. However, the SEC staff applies S-X 8-03(b)(3) to both interim and annual financial statements. See Note 1 to SEC FRM 2420.9.]
[Editor’s note: The annual and interim disclosure requirements applicable to a smaller reporting company are analogous to the requirements of S-X 4-08(g) and S-X 10-01(b)(1). There is no analog to S-X 3-09 that is applicable to a smaller reporting company.]
See SEC 4520.901.
S-X 8-03(b)(3) indicates that significance should be assessed based on the registrant's consolidated assets, equity, or income from continuing operations attributable to the registrant. However, since comparing a registrant's investment to its equity could require more disclosure for smaller reporting companies than other registrants, the SEC staff interprets significance for purposes of S-X 8-03(b)(3) in a manner consistent with S-X 1-02(w) substituting 20% for 10% and using all three tests of significance. See Note 2 to SEC FRM 2420.9.
When assessing significance in connection with an annual period, if significance of any individual investee or any combination of investees exceeds 20%, the registrant should provide the summarized note disclosure in the registrant’s financial statements for all investees for each period presented.
[Editor’s note: Similar to S-X 4-08(g), the SEC believes the summarized information should cover all entities. However, 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. See Note 3 to SEC FRM 2420.9 and Topic VI.E from the highlights of the March 2014 meeting of the CAQ SEC Regulations Committee.]
When assessing significance in connection with interim periods, summarized note disclosure is only required for each investee that is significant (i.e., using a threshold of 20%) and the equity-method investee would be required to file quarterly financial information with the SEC pursuant to Exchange Act Rules 13a-13 or 15d-13 if it were a registrant. See SEC FRM 2420.6.
.52 Can the annual financial statement disclosures required by S-X 8-03(b)(3) be labeled as “unaudited?”
No. The summarized financial data required to be included in the registrant’s annual financial statements by S-X 8-03(b)(3) may not be labeled “unaudited." See SEC FRM 2420.9.
.6 Sec staff interpretations of significant subsidiary tests
Information relating to SEC staff interpretations of the significant subsidiary test is set forth in SEC 4400.
.9 Frequently asked questions
.901 Does the FASB’s definition of a public business entity encompass an entity whose financial statements or financial information are required by S-X 3-09, S-X 4-08(g), S-X 10-01(b)(1) or S-X 8-03(b)(3)?
Generally, yes. The FASB’s definition of a public business entity (PBE) set forth in ASU 2013-12: Definition of a Public Business Entity includes business entities whose financial statements or financial information are required to be or are included in an SEC filing. Accordingly, financial statements required by S-X 3-09 and financial information required by S-X 4-08(g), S-X 10-01(b)(1) or S-X 8-03(b)(3) should generally be prepared on the basis that the entity is considered a PBE, absent other guidance.
.902 Do S-X 3-09 and S-X 4-08(g) apply to unconsolidated majority-owned subsidiaries in addition to equity investees?
Yes. S-X 3-09 and S-X 4-08(g) apply to both unconsolidated majority-owned subsidiaries and equity-method investees. The US Generally Accepted Accounting Principles (US GAAP) accounting model relating to consolidations has changed substantially since the time S-X 3-09 and S-X 4-08(g) were first issued. As a result of these changes, instances in which a majority-owned subsidiary is not consolidated occur less frequently than they did previously. Accordingly, SEC 4520 is focused on investments accounted for by the equity method and does not separately discuss unconsolidated subsidiaries.
.903 May financial statements of an equity-method investee that are provided under S-X 3-09 be prepared in accordance with the requirements applicable to a smaller reporting company if the investee meets the definition of a smaller reporting company?
No. A registrant required to provide separate financial statements of an equity-method investee under S-X 3-09 may not rely on accommodations for smaller reporting companies with respect to the investee, even if that investee would meet the definition of a smaller reporting company if it were a registrant. See SEC FRM 5210.1.
.904 Can combined financial statements be presented for two or more significant equity-method investees for which financial statements are required by S-X 3-09?
If S-X 3-09 requires financial statements for two or more investees, those financial statements may be combined or consolidated if the financial position, results of operations, and cash flows will be clearly exhibited, and such combination is allowed by GAAP. Judgment needs to be exercised in determining whether a particular grouping of companies results in a reasonable presentation. In addition, the SEC staff has indicated that the presentation of combined financial statements is generally only appropriate for entities under common control or management, and then only for periods of common control or management. See SEC FRM 2415.
.905 How does the S-X 3-09 grace period with respect to Form 10-K discussed in SEC 4520.24 apply to a registration statement being prepared after the registrant’s Form 10-K is filed but before the Form 10-K is amended to include the S-X 3-09 financial statements of a significant equity-method investee?
If a registrant is preparing a registration statement or transactional proxy statement after filing its Form 10-K, the S-X 3-09 requirement to file the equity-method investee's separate financial statements, updated to include its most recently completed fiscal year, follows the due dates noted in SEC 4520.24. In other words, the registrant’s filing of a registration statement or transactional proxy statement does not (by itself) accelerate the requirement to update the equity-method investee’s financial statements to include its most recently completed fiscal year.
However, the grace period provided by S-X 3-09(b)(1) was not intended to permit a registrant to file a registration statement or transactional proxy statement without any financial statements for a significant equity-method investee. Consider the following example:
Facts: Company Z is a calendar year-end accelerated filer. Company Z owns 40% of the common stock of Investee Q, a calendar year-end US private company. Company Z accounts for its investment in Investee Q using the equity method of accounting. Investee Q has been significant to Company Z above 20% at all times since the date Company Z first acquired its investment (five years ago). Company Z intends to file its 2023 Form 10-K on March 15, 2024 (the 75th day after December 31, 2023). Company Z intends to file Investee Q's financial statements as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023 by an amendment to its (Company Z's) 2023 Form 10-K by April 1, 2024 (because the 90th day after December 31, 2023, March 30, 2024, is a Saturday).
Analysis: The grace period provided by S-X 3-09(b)(1) only applies to Form 10-K. Accordingly, if Company Z wants to file a new or amended registration statement or transactional proxy statement after it files its 2023 Form 10-K, but before it amends its Form 10-K to include the Investee Q financial statements referred to above, then Company Z would need to apply the S-X 3-12 age of financial statement requirements based on whether the registrant (Company Z) satisfies the conditions of S-X 3-01(c) to determine whether Investee Q's financial statements for its most recently completed year-end are required to be included or incorporated by reference in the registration statement. If Company Z does not meet the conditions of S-X 3-01(c), for example, because it incurred a loss in its most recent fiscal year (i.e., 2023) or because it reported losses in the two fiscal years immediately preceding the most recent fiscal year (i.e., 2022 and 2021), then Company Z would be required to include or incorporate by reference the audited financial statements of Investee Q for the year ended December 31, 2023 (together with financial statements for the other relevant prior years) within the registration statement. If Company Z meets the conditions of S-X 3-01(c), then the registration statement is not required to include or incorporate by reference Investee Q's audited financial statements for the most recent fiscal year (i.e., 2023). However, if the registration statement includes or incorporates by reference Company Z's most recent fiscal year-end audited financial statements (i.e., 2023), then audited 2022 financial statements for Investee Q (together with financial statements for the other relevant prior years) would also need to be included or incorporated by reference within the registration statement. See Topic VI.B. from the highlights of the March 2013 meeting of the CAQ SEC Regulations Committee.
[Editor's note: If Investee Q were a foreign business, the age of financial statement requirements would allow Company Z to file a registration statement during the grace period without including Investee Q's audited financial statements for the most recent fiscal year (i.e., 2023) even if Company Z did not meet the conditions of S-X 3-01(c), because S-X 3-01(h), S-X 3-02(d), and S-X 3-12(f) refer to the updating requirements of Item 8.A of Form 20-F, which indicates that the most recent annual financial statements of a foreign business can be as old as 15 months at the time the registration statement is filed. In this case, Company Z would include or incorporate by reference Investee Q's audited financial statements for 2022 (together with financial statements for the other relevant prior years) without regard to Company Z's eligibility under S-X 3-01(c).]
.906 Can a registrant omit information required by S-X 4-08(g) for an equity-method investee that is significant under S-X 3-09?
Perhaps. SAB Topic 6-K.4.b. notes that if separate financial statements of significant investees are included in an annual report to shareholders, the summarized data required by S-X 4-08(g) is not required for those entities. The SEC staff also extends this relief to filings on Form 10-K. However, if the investee's financial statements are not filed at the same time as the registrant's annual report/Form 10-K, the registrant must include summarized financial information for those entities required by S-X 4-08(g) in the financial statements when they are filed. See SEC FRM 2420.5.
[Editor’s note: This discussion also applies to registrants that prepare an Annual Report to Shareholders. If the Annual Report does not include the separate financial statements (that were originally included with the Form 10-K), then summarized financial information should be included in the notes to the financial statements.]
[Editor's note: The guidance in SAB Topic 6-K.4.b. is intended to provide relief from disclosure requirements which would otherwise be duplicative. SAB Topic 6-K.4.b. does not relieve a registrant of the requirement to provide summarized financial statement disclosure for an investee unless the separate financial statements of that investee are included in the annual report/Form 10-K at the time it is initially filed. Consider the following example:
Facts: Company Z is a calendar year-end US domestic SEC registrant. Company Z has three equity-method investees with the following significance levels:
Investee A
|
25% significant
|
|
Investee B
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12% significant
|
|
Investee C
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5% significant
|
Analysis: Company Z is required to provide summarized financial information for all three investees pursuant to S-X 4-08(g). Company Z is also required to file separate financial statements of Investee A pursuant to S-X 3-09. SAB Topic 6-K.4.b. indicates that Company Z may exclude the summarized information relating to Investee A from Company Z's disclosures under S-X 4-08(g) if Investee A's separate financial statements are included in Company Z's annual report/Form 10-K when it is initially filed. SAB Topic 6-K.4.b. does not relieve Company Z of the requirement to provide summarized financial statement information relating to Investees B and C in the notes to Company Z's financial statements. The relief also would not apply to the summarized financial information of Investee A if Investee A's separate financial statements were to be filed by an amendment to Company Z's Form 10-K as permitted by S-X 3-09.]
If one or more investees are excluded from S-X 4-08(g) disclosures due to the filing of investee financial statements pursuant to SAB Topic 6-K.4.b., the SEC staff will not object to the omission of all S-X 4-08(g) disclosures if the registrant believes that such disclosure is not material and the significance of the remaining investees does not exceed 10 percent (in the aggregate). See Topic VI.E. in the highlights of the March 2014 meeting of the CAQ SEC Regulations Committee.
Notwithstanding the guidance in SAB Topic 6-K.4.b., if a domestic registrant furnishes separate financial statements of a foreign equity-method investee that are not reconciled to US GAAP (see SEC 4520.26), the domestic registrant should furnish summarized financial data of the foreign equity-method investee pursuant to S-X 4-08(g) in accordance with US GAAP in its primary financial statements. The summarized financial data must also be presented in US dollars. See footnote 40 to Securities Act Release 33-7053 (April 1994) and footnote 30 to Financial Reporting Release No. 44 (FRR 44) (December 1994).
.907 How are S-X 3-09 and S-X 4-08(g) applied by multiple series registrants?
A statutory trust (or limited partnership) that registers the offer and sale of beneficial interests (or limited partnership interests) in multiple series is commonly referred to as a multiple series registrant. In a typical multiple series scenario, the trust or partnership (rather than each individual series) is the registrant. However, each series is considered a security. Typically, investors invest in one or more individual series being offered by a registrant, and the capital raised by a particular series is invested separately from the capital of any other series of the registrant. See SEC FRM 2410.9.
Disclosure relating to these types of registrants is presented on a series basis. Accordingly, significance for purposes of applying S-X 3-09 and S-X 4-08(g) must be assessed at the individual series level to determine if separate financial statements or summarized financial data of any investments made by an individual series must be provided. See Securities Act Sections CDI 104.01.
The fact that the trust or limited partnership (rather than the individual series) is the issuer does not negate the requirement for series-level disclosure under S-X 3-09 and S-X 4-08(g). Consider the following example:
Facts: Series A is one of five series within a registrant and the registrant's Form 10-K includes the financial statements of each of the five series. Series A has an equity method investment which has a greater than 20% significance level to Series A (but represents only 5 percent significance to the registrant overall).
.908 Does S-X 3-09 apply to the financial statements of an acquired or to be acquired business?
A registrant may need to file financial statements of a recently acquired or to be acquired business under S-X 3-05. The SEC staff has indicated that financial statements of an equity method investee of the acquired/to be acquired business in this situation are not required to be filed unless the omission of the investee's financial statements would render the financial statements of the acquired/to be acquired business misleading or substantially incomplete. Following the acquisition, the significance of the equity-method investee would be evaluated in the context of the acquirer/registrant. See SEC FRM 2005.5.
.909 If an equity-method investee is a registrant, may it delay filing its own Form 10-K as a result of the S-X 3-09 grace period available to the investor?
.910 If the S-X 3-09 grace period ends before the due date of the investor’s Form 10-K, would the investor be required to file the investee’s S-X 3-09 financial statements before filing the investor’s Form 10-K?
No. If the investee's annual financial statements would be due before the due date of the registrant's Form 10-K (e.g., the domestic investee's year-end is October 31 and the registrant's year-end is December 31), then the registrant may file the investee's separate S-X 3-09 financial statements no later than the time the registrant files its Form 10-K. The registrant is not required to file the separate financial statements of the investee earlier than the due date of the registrant's Form 10-K.
.911 Which financial statements should a registrant provide under S-X 3-09 when the registrant’s and the investee’s fiscal years differ by 6 months?
Registrants generally file financial statements for the equity-method investee's fiscal year-end that is closest to the registrant's fiscal year-end regardless of whether such equity-method investee's fiscal year-end is before or after the registrant's fiscal year-end. If the equity-method investee's fiscal year differs from the registrant by six months (e.g., registrant has a December 31 year-end and equity-method investee has a June 30 year-end), the registrant may choose to file the equity-method investee's financial statements for the fiscal year ending prior to the registrant's December 31 year-end (i.e., June 30, 2023 for a registrant with a December 31, 2023 year-end) or after the registrant's December 31 year-end (i.e., June 30, 2024 for a registrant with a December 31, 2023 year-end), provided that the selected approach is applied consistently on an equity-method investee by equity-method investee basis. Registrants should consider their specific facts and circumstances and the informational needs of users of their financial statements when deciding which approach to apply. The acceptability of the two approaches would not be dependent on whether the registrant recorded its equity in the equity-method investee's earnings on a lag basis. See Topic VI.A. from the highlights of the March 2013 meeting of the CAQ SEC Regulations Committee.
.912 Does S-X 4-08(g) require the presentation of individually significant investees separate and apart from insignificant investees?
Generally no. The SEC staff has indicated that, in general, S-X 4-08(g) permits the aggregation of all investees, whether individually significant or not. However, 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 also may be requested for individual investees that are very significant quantitatively or qualitatively. The decision to disclose separate summarized information for an individual investee will depend on the particular facts and circumstances.
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