NOTE to SECTION 2410
With the exception of Section 2410.1, the guidance in Section 2410 also applies to calculating S-X 4-08(g) significance. Section 2410.1 does not apply to S-X 4-08(g) significance because the number of significance tests and the significance thresholds used under S-X 4-08(g) can differ from the number of significance tests and the significance thresholds used under S-X 3-09. See Section 2420.1. (Last updated: 6/30/2010)
2410.1 General -
As noted in Section 2405.3, S-X 3-09 requires the registrant to file separate annual
financial statements for each significant equity method investee for which either the income or the investment test set forth in S-X 1-02(w) exceeds 20% for any of the registrant's fiscal years required to be presented in the filing (see Note 2 to Section 2405.3). The asset test in S-X 1-02(w) does not apply. (Last updated: 6/30/2010)
2410.2 Amounts Used to Measure Significance Under S-X 3-09 (Last updated: 9/30/2010)
The S-X 1-02(w) income test is based on the registrant's "equity in the income from continuing operations before income taxes of the subsidiary exclusive of amounts attributable to any noncontrolling interests" (i.e., the numerator) compared to "such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year" (i.e., the denominator). Such equity in an investee's pretax earnings or loss is not required to be shown or disclosed in the registrant's financial statements, so the amount to be used as the numerator and denominator in the income test must be calculated.
NOTE to SECTION 2410.2
Significance should be measured for each fiscal year presented. The staff believes that the purpose of the S-X 3-09 reference to S-X 1-02(w) is to describe the mechanics of the significance tests, not to limit application of the tests to the most recently completed fiscal year. (Last updated: 9/30/2010)
2410.3 Income Test — Implementation Point 1 — Calculating the Numerator (Last updated: 9/30/2010)
The numerator is calculated based on the registrant's proportionate share of the pre-tax income from continuing operations reflected in the separate financial statements of the investee prepared in accordance with U.S. GAAP for the period in which the registrant recognizes income or loss from the investee under the equity method adjusted for any basis differences. In determining the basis differences that should be included for this test, the registrant should consider ASC 323-10-35-34
and ASC 323-10-35-32A
. While not an exclusive list, items impacting net income of the registrant that should be excluded from the test are: impairment charges at the investor level, gains/losses from stock sales by the registrant; dilution gains/losses from stock sales by the investee, preferred dividends.
See the related discussion about the effect of different fiscal year ends and one quarter (or less) lags at Section 2410.7. Foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB should use IFRS as issued by the IASB in performing this analysis. The aforementioned guidance does not apply if the registrant elected to use the fair value option. See Section 2435.
NOTES to SECTION 2410.3
- Numerator - ASC 323-10-45-2 states that the investor's share of accounting changes reported in the financial statements of the investee shall be classified separately. Such amounts are not included in the numerator of the income test.
- Numerator - In the year significant influence is either attained or lost, the registrant's equity in the income or loss of the investee presented in the registrant's statement of comprehensive income will only include results of the investee for the portion of the year during which the investment was accounted for using the equity method. Do not annualize these amounts when calculating S-X 3-09 significance. (Last updated: 9/30/2010)
2410.4 Income Test — Implementation Point 2 — Calculating the Denominator (Last updated: 10/30/2020)
Using the statement of comprehensive income presentation depicted in S-X Article 5 as an example, the calculation of the denominator of the income test should begin with the amount identified at S-X 5-03(b)10
(i.e., the registrant's income or loss before income tax expenses and other items) adjusted to:
- Include for all investees the registrant's equity in the earnings (or loss) of the investee from continuing operations before income taxes, exclusive of amounts attributable to any noncontrolling interests of the investee.
- Exclude the portion of the registrant's income or loss before income tax expenses and other items identified at S-X 5-03(b)10 attributable to any non-controlling interests in the registrant's subsidiaries.
2410.5 Income Test — Implementation Point 3 — Income Averaging
The registrant should not exclude its equity in the income or loss of the investee when determining whether the registrant qualifies for income averaging under computational note 2 to S-X 1-02(w). If a registrant qualifies to use income averaging and the tested equity method investee incurred a loss, then, pursuant to computational note 1 to S-X 1-02(w), the registrant's equity in the income or loss of the investee should be excluded from the income of the registrant when computing the registrant's average income.
2410.6 Income Test — Implementation Point 4 - Intercompany Transactions (Last updated: 3/31/2009)
Because an equity method investee is not consolidated, intercompany transactions should not be eliminated when measuring significance of an equity method investee.
2410.7 Income Test — Implementation Point 5 - Effect of Different Fiscal Years and One Quarter (or Less) Lag (Last updated: 6/30/2010)
The investee's financial statements a registrant is required to file under S-X 3-09 may differ from the investee's financial results used by the registrant to calculate the registrant's equity in the income or loss of the investee presented in the registrant's financial statements. This may occur when a registrant and an investee have different fiscal years or when they have the same fiscal year, but the registrant computes its equity in the income or loss of the investee on a consistent one quarter (or less) lag basis. In these circumstances, the S-X 3-09 significance tests should be determined using the investee's financial results used by the registrant to calculate the registrant's equity in the income or loss of the investee presented in the registrant's financial statements, not amounts derived from the investee's financial statements required to be filed under S-X 3-09. For example, consider a registrant with a December 31 year end and an investee with a June 30 year end. Assume the registrant consistently recognizes its equity in the income of the investee using the investee's twelve months ended September 30. In this case, the registrant calculates the S-X 3-09 significance tests consistent with FRM 2410.2 using the investee's results for the twelve months ended September 30. If the investee is significant, the investee's financial statements for the twelve months ended June 30 would satisfy the requirements of S-X 3-09 because those are the annual financial statements the investee would be required to present pursuant to S-X 3-01 and 3-02 if the investee were a registrant.
2410.8 Income Test — Implementation Point 6 - Effect of Discontinued Operations or Retrospectively Applied Change in Accounting Principle (Last updated: 3/17/2016)
If a registrant has a discontinued operation or a retrospectively applied change in accounting principle subsequent to the registrant’s filing of its Form 10-K
, the staff will not object if a registrant uses its historical financial statements in its most recent Form 10-K
to determine whether S-X 3-09
financial statements and S-X 4-08(g)
financial information is required. In other words, the registrant need not recompute significance using the financial statements that give retrospective effect to the discontinued operation or change in accounting principle and are included or incorporated into the registration or proxy statement. In addition, the staff will not object if a registrant, when filing a subsequent Form 10-K
, does not recompute S-X 3-09
and S-X 4-08(g)
significance for periods earlier than the one during which a retrospectively applied change in accounting principle
occurred. However, for a discontinued operation, a registrant must recompute S-X 3-09
and S-X 4-08(g)
significance for all periods presented. As a result, a previously insignificant investee may become significant as a result of a discontinued operation.
Discontinued Operation and Change in Accounting Principle Exception for Form 10-K for the Year of Disposal
financial statements and S-X 4-08(g)
financial information for a disposed equity method investment will not be required in the Form 10-K
for the year of disposal if (A) in the year an equity method investment is disposed, either a different event occurs after the disposal requiring a component of the registrant to be reported as a discontinued operation or a change in accounting principle is adopted by the registrant in the year of the disposal; and (B) the equity method investment is not significant for any of the registrant’s fiscal years required to be presented in the Form 10-K
, including the year of disposal, based on the historical financial statements of the registrant that have not been retrospectively adjusted to give effect to the discontinued operation or change in accounting principle.
2410.9 Multiple Series Registrants - S-X 3-09 Significance Calculations (Last updated: 9/30/2009)
a. Multiple series registrants are formed as trusts or partnerships under state law, which establishes the registrant as a legal entity and as an issuer. As an issuer, the registrant may conduct offerings of interests in different series where such series are not considered registrants or even legal entities. However, each series is considered a security. Typically, investors will 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. For purposes of SEC reporting, the trust (or partnership) is the sole registrant, not the individual series. However, separate financial statements of each individual series must be provided because an investor invests in an individual series.
b. Significance must be assessed at the individual series level for purposes of S-X 3-09 and 4-08(g) to determine if separate financial statements or summarized financial data of any investments made by an individual series must be provided. Even though the trust or partnership is the issuer, that issuer status does not negate the requirement for series level disclosure and the provision of series level financial statements under S-X 3-09 and 4-08(g).
Series A is one of 5 series within a registrant and the registrant's Form 10-K
includes the financial statements of all such series. Series A made an investment which has a greater than 20% significance level to Series A (but represents only 5% significance to the registrant overall). Separate financial statements for the investment must be provided in the registrant's 10-K under the provisions of S-X 3-09.
For further discussion about multiple series registrants, see the Division of Corporation Finance's C&DIs for Securities Act Sections, Question 104.01.