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Equity Method Investees — SEC Reporting Considerations

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Equity Method Investees — SEC Reporting Considerations A Roadmap to SEC Reporting Considerations for Equity Method Investees October 2020 This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances. As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Copyright © 2020 Deloitte Development LLC. All rights reserved. Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation — Identifying a Controlling Financial Interest Contingencies, Loss Recoveries, and Guarantees Contracts on an Entity’s Own Equity Convertible Debt Current Expected Credit Losses Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees — SEC Reporting Considerations Fair Value Measurements and Disclosures Foreign Currency Transactions and Translations Guarantees and Collateralizations — SEC Reporting Considerations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures and Metrics Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows iii Contents Preface vii Contacts ix Introduction to SEC Reporting Requirements for Equity Method Investees by Domestic Filers Under Regulation S-X 1 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information 5 1.1 Form and Content of Financial Statements and Summarized Financial Information 5 1.1.1 SEC Filings Requiring Separate Financial Statements, Summarized Financial Information, or Both, of Equity Method Investees — Q&A Regulation S-X: Rule 3-09(a)-1 5 1.1.2 Form and Content of Separate Financial Statements of Equity Method Investees — Q&A Regulation S-X: Rule 3-09(b)-1 7 1.1.3 Regulation S-X, Rule 3-09, and Lower-Tier Equity Method Investees — Q&A Regulation S-X: Rule 3-09-1 10 1.1.4 Form and Content of Summarized Financial Information of Equity Method Investees — Q&A Regulation S-X: Rule 4-08(g)-1 11 1.2 Audit Requirements of Regulation S-X, Rule 3-09, Financial Statements 14 1.2.1 Audit Requirements of Financial Statements for Equity Method Investees — Q&A Regulation S-X: Rule 3-09(b)-2 14 1.2.2 Independent Auditor Requirements of Financial Statements for Equity Method Investees — Q&A Regulation S-X: Rule 3-09(b)-3 15 1.3 Interaction of Regulation S-X, Rules 3-09 and 4-08(g), With Other Financial Information Required Under Regulation S-X or U.S. GAAP 16 1.3.1 Interaction of Regulation S-X, Rule 3-05, With Rule 3-09 — Q&A Regulation S-X: Rule 3-09-2 16 1.3.2 Interaction of Regulation S-X, Rules 3-10 and 3-16, With Regulation S-X, Rule 3-09 — Q&A Regulation S-X: Rule 3-09-3 17 1.3.3 Interaction Between U.S. GAAP and SEC Guidance With Respect to Providing Financial Information Regarding Equity Method Investees — Q&A Regulation S-X: Rule 4-08(g)-2 18 1.4 Financial Statement Requirements for Equity Method Investees When the Registrant Acquires, Disposes, or Changes Its Method of Accounting for the Investment During the Year 20 1.4.1 Financial Statements Required for the Year of Acquisition or Disposition of a Significant Equity Method Investee — Q&A Regulation S-X: Rule 3-09-4 20 1.4.2 Change From Consolidation to Equity Method of Accounting — Q&A Regulation S-X: Rule 3-09(b)-4 21 1.4.3 Change From Consolidation to Fair Value or Cost Method of Accounting — Q&A Regulation S-X: Rule 3-09(b)-5 22 iv Contents 1.4.4 Change From Equity Method of Accounting to Consolidation — Q&A Regulation S-X: Rule 3-09(b)-6 23 1.4.5 Change From Equity Method of Accounting to Fair Value or Cost Method of Accounting — Q&A Regulation S-X: Rule 3-09(b)-7 24 1.5 Financial Statement Due Dates 24 1.5.1 Due Date of Financial Statements for Equity Method Investees — Q&A Regulation S-X: Rule 3-09(b)-9 24 1.6 Considerations for SRCs 29 Chapter 2 — Measuring Significance 31 2.1 Considerations Related to Measuring Significance 31 2.1.1 Significance Tests for Determining Reporting and Disclosure Requirements for Equity Method Investees — Q&A Regulation S-X: Rule 3-09(a)-3 31 2.1.2 Significance Thresholds for Determining Reporting and Disclosure Requirements for Equity Method Investees — Q&A Regulation S-X: Rule 3-09(a)-4 33 2.1.3 Determining When Summarized Income Statement Information Is Required in Interim Financial Statements — Q&A Regulation S-X: Rule 10-01(b)-1 34 2.1.4 Testing Two or More Equity Method Investees for Significance Under Regulation S-X, Rule 4-08(g) — Q&A Regulation S-X: Rule 4-08(g)-6 36 2.1.5 Testing Two or More Equity Method Investees for Significance Under Regulation S-X, Rule 3-09 — Q&A Regulation S-X: Rule 3-09(a)-10 38 2.1.6 Effect of Discontinued Operations or a Retrospectively Applied Change in Accounting Principle When Measuring Significance — Q&A Regulation S-X: Rule 3-09(a)-11 39 2.2 Investment Test 41 2.2.1 Performing the Investment Test for Equity Method Investees Under Regulation S-X, Rule 3-09 — Q&A Regulation S-X: Rule 3-09(a)-5 41 2.2.2 Performing the Investment Test for Equity Method Investees Under Regulation S-X, Rule 4-08(g) — Q&A Regulation S-X: Rule 4-08(g)-3 42 2.3 Asset Test 43 2.3.1 Performing the Asset Test for Equity Method Investees Under Regulation S-X, Rule 4-08(g) — Q&A Regulation S-X: Rule 4-08(g)-4 43 2.4 Income Test 45 2.4.1 Performing the Income Test for Equity Method Investees Under Regulation S-X, Rule 3-09 — Q&A Regulation S-X: Rule 3-09(a)-6 45 2.4.2 Performing the Income Test for Equity Method Investees Under Regulation S-X, Rule 4-08(g) — Q&A Regulation S-X: Rule 4-08(g)-5 48 2.4.3 Determining a Registrant’s Share of the Income or Loss of the Equity Method Investee — Q&A Regulation S-X: Rule 3-09(a)-7 50 2.4.4 Using Average Income When Performing the Income Component of the Income Test — Q&A Regulation S-X: Rule 3-09(a)-8 51 2.4.5 Performing the Income Component of the Income Test When a Registrant or Equity Method Investee Has a Loss in the Fiscal Year — Q&A Regulation S-X: Rule 3-09(a)-9 54 2.4.6 Performing the Income Component of the Income Test When a Registrant Is a Successor to a Predecessor Company — Q&A Regulation S-X: Rule 1-02(w)(3)-9 57 v Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020) Contents Appendix A — Regulation S-X, Rules 1-02(w), 1-02(bb), 3-09, 4-08(g), 8-03, and 10-01(b)(1) 58 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule 64 Appendix C — Titles of Standards and Other Literature 75 Appendix D — Abbreviations 79 Appendix E — Changes Made in the 2020 Edition of This Roadmap 80 vi Preface October 2020 To the clients, friends, and people of Deloitte: We are pleased to present the 2020 edition of A Roadmap to SEC Reporting Considerations for Equity Method Investees. This Roadmap combines the SEC’s guidance on reporting for equity method investments with Deloitte’s interpretations (Q&As) and examples in a comprehensive, reader-friendly format. For a summary of key changes made to this Roadmap since publication of the 2019 edition, see Appendix E. The financial statements and disclosures required by SEC rules related to significant equity method investments are important to stakeholders because such investments can significantly affect a registrant’s financial results and reporting. Further, equity method investees are not consolidated, so they are not subject to the same disclosure requirements that may apply to consolidated subsidiaries under U.S. GAAP. On May 20, 2020, the SEC issued a final rule that amends the financial statement requirements for acquisitions and dispositions of businesses, including real estate operations, and related pro forma financial information. The final rule modifies certain aspects of the significance tests in Regulation S-X, Rule 1-02(w), which registrants use to determine their requirements related to financial statements or financial information for equity method investments under Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)(1).
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