A Roadmap to SEC Reporting Considerations for Method Investees October 2020 This publication contains general information only and Deloitte is not, by means of this publication, rendering , 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.

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Publications in Deloitte’s Roadmap Series

Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP — 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 and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees — SEC Reporting Considerations 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 Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of 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 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 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 — 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). For example, under the final rule’s amendments to the income test, significance is calculated by using the lower of a measure that is based on (1) income from continuing operations before taxes or (2) revenue, if certain conditions are met. In addition, if income averaging is applicable, registrants use “absolute values” rather than “zero” for any loss years to calculate their average for the past five fiscal years.

Although the final rule introduced the use of aggregate worldwide market value of the registrant’s common equity rather than total assets as the denominator in the investment test for business acquisitions and dispositions that meet certain conditions, it retained the use of total assets as the denominator in the calculation of the investment test under Rules 3-09, 4-08(g), and 10-01(b)(1).

The final rule must be applied for fiscal years beginning after December 31, 2020; however, early application is permitted. Since application of the final rule is expected to benefit registrants that are subject to financial statement or financial information requirements for equity method investments under Rule 3-09, Rule 4-08(g), or Rule 10-01(b)(1), it is assumed that most registrants will early apply the final rule. Accordingly, this edition of the Roadmap reflects the final rule’s requirements. Note that unless otherwise indicated, since only certain aspects of the significance tests in Rule 1-02(w) were affected by the final rule, the guidance in this Roadmap is relevant to registrants that apply either the current requirements or the final rule.Appendix B provides guidance for registrants that will continue to apply the current requirements through 2020.

vii Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

We are continuing to monitor developments related to the SEC staff’sdisclosure effectiveness initiative, a broad-based review of (1) the disclosures required by the SEC’s rules and (2) the presentation and delivery of those disclosures.

Subscribers to the Deloitte Tool (DART) may access any interim updates to this publication by selecting the Roadmap from the Roadmap Series page on DART. If a “Summary of Changes Since Issuance” displays, subscribers can view those changes by clicking the related links or by opening the “active” version of the Roadmap.

We hope you find this Roadmap to be a useful resource in applying the financial reporting guidance for equity method investments, and we welcome your suggestions for future improvements. If you need assistance with applying the guidance or have other questions about this topic, we encourage you to consult our technical specialists and other professional advisers.

Sincerely, Deloitte & Touche LLP

viii Contacts

If you have questions about the information in this publication, please contact these Deloitte professionals:

Lisa Mitrovich Kathleen Malone Partner Managing Director Deloitte & Touche LLP Deloitte & Touche LLP +1 202 220 2815 +1 203 761 3770 [email protected] [email protected]

Doug Rand Tony Goncalves Managing Director Managing Director Deloitte & Touche LLP Deloitte & Touche LLP +1 202 220 2754 +1 202 879 4910 [email protected] [email protected]

ix Introduction to SEC Reporting Requirements for Equity Method Investees by Domestic Filers Under Regulation S-X

Overview To ensure that investors receive relevant financial information about a registrant’s significant activities, Regulation S-X requires registrants that have a significant equity method investee to provide financial information about the investee in their filings with the SEC.1 The SEC has indicated that the term “50 percent or less owned persons” refers to all investments accounted for under the equity method2 even if the voting ownership exceeds this percentage. The applicable SEC disclosure requirements are primarily in Regulation S-X, Rules 3-09, 4-08(g), 8-03 (related to smaller reporting companies (SRCs)), and 10-01(b)(1)3 as well as Section 2400 of the SEC’s Financial Reporting Manual (FRM).

An SEC registrant that has an equity method investee must consider whether financial information about the investee should be provided in any reports filed with the SEC that include the registrant’s financial statements. If an equity method investee is considered significant to a registrant, the registrant may be required to provide separate financial statements of the investee in certain filings with the SEC, summarized financial information of the investee in the footnotes to its financial statements, or both. Such filings may include Forms 10-K and 10-Q, registration statements, and proxy statements.

The amount of information a registrant must present depends on the level of significance, which is determined by performing the following significant tests in Regulation S-X,Rule 1-02(w), as applicable: • Investment in and advances to the equity method investee (investment test). • Lower of income from continuing operations before income taxes, exclusive of amounts attributable to any noncontrolling interest or revenue (income test). • Proportionate share of total assets (asset test).

1 For a list of abbreviations used in this publication, see Appendix D. 2 The SEC disclosure requirements discussed in this Roadmap do not apply to an entity that is accounted for under the cost method before the adoption of ASU 2016-01 or at fair value or under the practicability exception to fair value after the adoption of ASU 2016-01. They do apply, however, to an investment that is eligible for the equity method of accounting but for which a registrant elects the fair value option. See Sections 1.4.3 and 1.4.5 for more information. 3 For a list of the titles of standards and other literature referred to in this publication, see Appendix C.

1 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

When performing the significance tests, registrants should ensure that they: • Document the tests each period. This is particularly important since the significance of an equity method investee may change each period. For example, in some cases, such as a near- break-even year for the registrant or a large income or loss at the investee level, the current year’s significance may change, making the equity method investee significant for the first time and thus requiring audited financial statements for the current year and unaudited financial statements for prior years under Rule 3-09. • Update the tests each period. For example, registrants should update and assess the significance tests for all appropriate periods after they report a retrospective change for the classification of a component as a discontinued operation. Note that in considering significance under Rule 10-01(b)(1) for interim periods, registrants should use the as of the end of the most recently completed fiscal year that is included in the quarterly report since it will reflect the impact of any such retrospective change. Seeparagraph 2410.8 and the note to paragraph 2420.7 of the FRM.

Separate Financial Statements — Annual Requirements To determine whether separate financial statements are required, a registrant must apply both the investment test and the income test to each equity method investee. The test that results in the highest significance level will be used to determine the financial statement reporting requirements.

If the significance of an individual equity method investee is greater than 20 percent, the registrant must provide, in its Form 10-K or related amendment, such investee’s financial statements for the periods in which the registrant used the equity method to account for the investee. These financial statements are not required for interim periods.

Summarized Financial Information — Annual Requirements All three significance tests must be performed in the determination of whether summarized financial information is required in the footnotes to the annual financial statements. The test that results in the highest significance level will be used to establish the financial reporting requirements.

Under SEC rules, if the significance of an equity method investee, individually or as part of an aggregated group, is 10 percent or less for all years presented, summarized financial information is not required.

If the significance of an equity method investee, individually or as part of an aggregated group, is greater than 10 percent, the registrant’s annual financial statements must include summarized financial information for all equity method investees. Such information should not be labeled “unaudited.”

Summarized Income Statement Information — Interim Requirements The registrant’s interim financial statements must include only summarized income statement information of an equity method investee if the investee is significant to the registrant during the interim period.

2 Introduction to SEC Reporting Requirements for Equity Method Investees by Domestic Filers Under Regulation S-X

The following table compares the annual requirements for separate financial statements, the annual requirements for summarized financial information, and the interim requirements for summarized income statement information under Rules 3-09, 4-08(g), and 10-01(b)(1), respectively:

Comparison of Regulation S-X Rules — Annual and Interim Requirements for Equity Method Investees

Financial Information of Equity Regulation Applicable Significance Percent Method S-X Rule Period Individually Aggregate Test Significant Investee Rule 3-09 Annual X • Investment >20% Historical • Income financial statements* Rule 4-08(g) Annual X X • Investment >10% Summarized • Income financial statement Asset • information Rule 10-01(b)(1) Interim X • Investment >20% Summarized • Income income statement information

* The annual financial statements of a significant equity method investee must be audited only for the periods in which the applicable significance tests exceed 20 percent but may be unaudited for periods in which the equity method investee is not significant.

Rule 3-13 Waivers and Other Requests Note that there may be situations in which registrants wish to seek relief from complying with the various reporting requirements under Regulation S-X, including omitting financial statements of an equity method investee under Rule 3-09. Regulation S-X, Rule 3-13, has historically given the SEC staff the authority to permit the omission or substitution of certain financial statements otherwise required under Regulation S-X “where consistent with the protection of investors.” In recent remarks, SEC leadership has encouraged registrants to seek modifications to their financial reporting requirements under Rule 3-13, particularly when the requirements are burdensome but may not be material to the total mix of information available to investors. The SEC staff has indicated that it is also available to discuss potential waiver fact patterns by phone before a registrant submits a waiver request.

When assessing a waiver request, the SEC staff may consider, for example, whether the income significance test under Rule 3-09 is anomalous for a registrant in a break-even position in which the revenue component does not apply.4 In such a situation, the staff may consider other metrics when assessing the overall significance of the investment. Because registrants must continue to assess the significance of an equity method investee in each reporting period and present up to three years of financial statements, it is permissible for them to request in their Rule 3-09 waiver letter that the SEC extend any relief granted to current and future filings for which the same year of Rule 3-09 financial statements would be required, provided that the facts have not changed and the investment continues to be insignificant in future periods.

For additional guidance on Rule 3-13 waivers and prefiling letter requests, seeAppendix B of Deloitte’s A Roadmap to SEC Comment Letter Considerations, Including Industry Insights.

4 The revenue component of the income significance test does not apply if either the registrant or equity method investee did not have material revenue for the two most recently completed fiscal years.

3 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Additional Guidance The Q&As in this Roadmap offer additional guidance on these topics, and registrants should review them along with Regulation S-X, as well as consider consulting with their audit and legal professionals, to determine their SEC reporting requirements. Note that this Roadmap does not provide guidance on the U.S. GAAP requirements related to equity method investees. For such guidance, readers should refer to Deloitte’s A Roadmap to Accounting for Equity Method Investments and Joint Ventures.

Further, the guidance discussed in the Q&As generally applies only to registrants that do not qualify as SRCs. For guidance applicable to registrants that qualify as SRCs, see Section 1.6.

4 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

1.1 Form and Content of Financial Statements and Summarized Financial Information 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 Regulation S-X, Rule 3-09, requires a registrant to provide separate financial statements of 50 percent or less owned entities (“equity method investees”) if they are greater than 20 percent significant to the registrant. Regulation S-X,Rules 4-08(g) and 10-01(b)(1), require a registrant to provide summarized financial information for significant equity method investees.

Question What SEC filings require inclusion of separate financial statements, summarized financial information, or both, of equity method investees?

Answer Any time a registrant’s financial statements are included or incorporated in a filing with the SEC, the registrant must determine whether to include separate financial statements, summarized financial information, or both, of equity method investees under Rules 3-09, 4-08(g), and 10-01(b)(1).

Financial Statements of the Registrant Included in Forms 10-K, Registration Statements, and Proxy Statements Separate Financial Statements (Under Rule 3-09) The registrant must provide separate financial statements of an equity method investee in its Form 10-K, registration statement, or proxy statement if the results of the applicable significance tests exceed 20 percent.

In certain circumstances, a registrant may be able to omit the separate financial statements of an equity method investee from a draft registration statement. A draft registration statement may be voluntarily submitted to the SEC staff for nonpublic review before the registrant’s public filing for (1) initial public offerings (IPOs) and initial registration statements under the Securities

5 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Act of 1933, (2) initial registration statements under Section 12(b) of the Securities Exchange Act of 1934 for a class of securities (e.g., Form 10), and (3) Securities Act offerings within one year of an IPO or Exchange Act Section 12(b) registration (the latter circumstance is only available for the initial submission).1 A registrant may be able to omit the separate financial statements of an equity method investee2 in a draft registration statement if it reasonably believes that those financial statements will not be required at the time of the public filing (or, for emerging growth companies (EGCs), at the time of the contemplated offering).3 This accommodation is for the aforementioned registration statements and does not affect the requirement to provide separate financial statements of an equity method investee under Rule 3-09 in a registrant’s Form 10-K.

Summarized Financial Information (Under Rule 4-08(g)) Section 1.3.3 discusses circumstances in which a registrant may be able to omit summarized financial information from its SEC filing. Unless these circumstances are met, if the results of any of the three significance tests exceed 10 percent for equity method investees, the registrant must provide summarized financial information for all periods presented in its Form 10-K, registration statement, or proxy statement in accordance with Rule 4-08(g).

Note that the significant subsidiary test under Rule 4-08(g) for the presentation of summarized financial information for equity method investees is based on the three significant subsidiary tests specified in Regulation S-X,Rule 1-02(w), whereas the requirement to provide separate financial statements for equity method investees in accordance with Rule 3-09 is based on the investment and income tests only. Note 2 to paragraph 2420.3 of the FRM clarifies the reasons for this difference. When Rule 3-09 was revised to delete the asset test (seeSEC Final Rule Release No. 33-7118), the asset test was retained for Rule 4-08(g) to ensure a minimum level of financial information about equity method investees, particularly for situations in which the investment test was not significant but the registrant’s proportionate interest in the investee’s assets was material (such as might be the case with a highly leveraged equity method investee).

When preparing annual financial statements, registrants should also consider ASC 323-10-50-3(c) to determine whether equity method investees are material in relation to the registrants’ financial position or results of operations (and thus should disclose summarized information about the investees’ assets, liabilities, and results of operations).

1 See Deloitte’s August 24, 2017 (originally issued July 11, 2017), Heads Up, which discusses the nonpublic review process. 2 This guidance regarding omitting financial information is consistent with certain accommodations that are available for the historical financial statements of the registrant. 3 See Compliance and Disclosure Interpretations (C&DIs) on Securities Act forms (Questions 101.04 and 101.05) and C&DIs on the Fixing America’s Surface Transportation (FAST) Act (Questions 1 and 2).

6 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

Financial Statements of the Registrant Included in Interim Reports on Form 10-Q Separate Financial Statements (Under Rule 3-09) Rule 3-09 does not apply to quarterly reports on Form 10-Q. Accordingly, even if the audited financial statements of an equity method investee are presented in the registrant’s on Form 10-K, the interim financial statements of the equity method investee do not have to be included in the registrant’s subsequent quarterly reports on Form 10-Q.

Summarized Financial Information (Under Rule 10-01(b)(1)) Rule 10-01(b)(1) states, in part:

Summarized statement of comprehensive income information shall be given separately as to each subsidiary not consolidated [unconsolidated subsidiary] or 50 percent or less owned persons [equity method investees] or as to each group of such subsidiaries or fifty percent or less owned persons for which separate individual or group statements would otherwise be required for annual periods.

Accordingly, summarized income statement information is required in a footnote to the registrant’s financial statements in a Form 10-Q ifboth (1) the significance of the equity method investee exceeds 20 percent under either the income test or the investment test as prescribed in Rule 1-02(w) and (2) quarterly financial information would be required if the equity method investee were a registrant (see below).

As noted in Rule 10-01(b)(1) and in paragraph 2420.6 of the FRM, summarized income statement information need not be furnished for any equity method investee that would not be required, pursuant to Exchange Act Rule 13a-13 or 15d-13, to file quarterly financial information with the SEC if it were a registrant. For example, certain investment companies, foreign private issuers, asset-backed issuers, mutual life insurance companies, and certain mining companies do not file quarterly reports on Form 10-Q, and thus are not required to provide summarized financial information.

When preparing interim financial statements, registrants should also consider ASC 323-10-50-3(c) and ASC 270-10-50-1(h) in determining whether significant equity method investees are material (and thus should be disclosed).

1.1.2 Form and Content of Separate Financial Statements of Equity Method Investees Q&A Regulation S-X: Rule 3-09(b)-1

Question What are the form and content requirements under Rule 3-09 for the separate financial statements of significant equity method investees?

Answer Regulation S-X, Rule 3-09(b), requires that if the equity method investee and the registrant have the same fiscal year-end, the dates and periods covered by the separate financial statements should be the same as those of the registrant’s audited consolidated financial statements required by Regulation S-X, Rules 3-01 and 3-02 (i.e., two years of balance sheets and three

7 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

years of statements of operations, statements of comprehensive income, statements of changes in stockholders’ equity, and cash flow statements for a registrant that is not an EGC4 or SRC).

If the equity method investee and the registrant have different fiscal year-ends, the separate financial statements of the equity method investee may be as of the equity method investee’s year-end. See Rule 3-09(b)(2).

Two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of changes in stockholders’ equity, and cash flow statements are required even if the applicable significance tests are not met in all periods. A registrant may, however, provide unaudited financial statements for years in which the significance test is not met. See Section 1.2.1 for further discussion.5

If the registrant has not used the equity method to account for an equity method investee for all periods reflected in its historical financial statements, the financial statements of the equity method investee should be for the period in which the equity method of accounting was used.6

At the April 2004 AICPA SEC Regulations Committee joint meeting with the SEC staff, the staff indicated that if the equity method investee is a , its financial statements should comply with U.S. GAAP (for investees that meet the definition of a foreign business, see discussion below) and all provisions of Regulation S-X. If the equity method investee is a nonpublic company, it is not required to comply with U.S. GAAP that apply only to public companies, such as ASC 260 (earnings per share) and ASC 280 (segment reporting), but the form and content of the financial statements, including the schedule requirements, must comply with Regulation S-X. Further, at the March 2019 CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff indicated that Regulation S-X, Article 12, schedules are considered part of the financial statements and that registrants are required to include such schedules, as applicable, with the financial statements of their significant equity method investees under Rule 3-09. However, if a required Article 12 schedule is burdensome to prepare and not material for investors, a registrant may request relief under Regulation S-X, Rule 3-13, from providing the schedule.

Note that new or modified accounting standards under U.S. GAAP generally have different adoption dates, which depend on whether a company is a public business entity (PBE). At the 2016 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff discussed the adoption dates of accounting standards for equity method investees. Equity method investees whose financial statements are included in a registrant’s filing under Rule 3-09 because the equity method investee is significant to the registrant are considered PBEs under U.S. GAAP. Therefore, such an equity method investee would generally be required to use the adoption dates for PBEs when preparing its financial statements. The SEC staff has provided relief from this requirement specifically for the FASB’s standards on revenue (ASC 606) and leasing (ASC 842). More specifically, the SEC staff announced7 that it would not object to elections

4 The Jumpstart Our Business Startups (JOBS) Act created a new category of issuers called EGCs whose requirements in certain areas differ from other categories of issuers. For example, EGCs are permitted to file only two years of balance sheets, statements of operations, statements of comprehensive income, and statements of changes in stockholders’ equity in a Securities Act registration statement for an IPO of common equity securities. See Section 10220 of the FRM for more information. 5 See Section 1.1.1, which notes that a registrant may be able to omit the separate financial statements of an equity method investee in a draft registration statement submitted for nonpublic review if it reasonably believes that those financial statements will not be required at the time of the public filing (or, for EGCs, at the time of the contemplated offering). See also the C&DIs on Securities Act formsQuestions ( 101.04 and 101.05) and C&DIs on the FAST Act (Questions 1 and 2). 6 If a registrant wants to provide financial statements for the entire year rather than for the period in which the equity method of accounting was used, the registrant may consider preclearance with the SEC staff. Seeparagraph 2405.4 of the FRM. If preclearance is required, registrants should consider consultation with their auditors and SEC legal counsel. 7 See Deloitte’s July 20, 2017, Heads Up, which discusses the SEC staff’s announcement.

8 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

by certain PBEs to use the non-PBE effective dates for the sole purpose of adopting the new revenue and leasing standards. This relief is limited to the subset of PBEs “that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC” (i.e., such as those provided to satisfy the requirements of Rule 3-09).

Further, ASU 2019-10 provides a framework to stagger effective dates and amends the effective dates for some standards to give implementation relief to certain types of entities. Specifically, the standard introduces a new “two-bucket” framework for determining the effective dates for future major accounting standards. The buckets in the framework are defined as follows: • Bucket 1 — All PBEs that are SEC filers (as defined in GAAP), excluding SRCs (as defined by the SEC). • Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.

Since equity method investees, whose financial statements are included in a registrant’s filing under Rule 3-09 because the equity method investee is significant to the registrant, are PBEs but not SEC filers, their financial statements may comply with Bucket 2 effective dates for the new credit losses standard and future major accounting standards that apply the two-bucket approach. See Deloitte’s November 19, 2019, Heads Up.

Under Rule 3-09(c), if financial statements are required for two or more equity method investees, a registrant may present (1) consolidated financial statements of the group (when appropriate under U.S. GAAP — e.g., when one equity method investee should consolidate another equity method investee) or (2) combined financial statements, if such presentation clearly exhibits the financial position, results of operations, and cash flows of the consolidated or combined group. In accordance with Section 2415 of the FRM, combined financial statements should be presented only for entities under common control or common management, and then only for those periods in which that condition existed.

In general, equity method investees’ financial statements should be presented in accordance with U.S. GAAP; however, for investees that meet the definition of a foreign business,8 registrants may instead file the investees’ financial statements in accordance with IFRS® Standards as issued by the International Accounting Standards Board (IASB®) or home-country GAAP, with a reconciliation to U.S. GAAP. See Section 6350 of the FRM for further information. Note also that, by definition, a 50:50 joint venture accounted for under the equity method would not be a foreign business if a domestic company holds either interest given that a 50 percent interest held by a domestic company would preclude the entity from being “majority owned by persons who are not citizens or residents of the United States.” See the highlights of the November 2014 meeting of the International Practices Task Force for more information.

8 See SEC Regulation S-X, Rule 1-02(l), and Section 2425 of the FRM.

9 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

1.1.3 Regulation S-X, Rule 3-09, and Lower-Tier Equity Method Investees Q&A Regulation S-X: Rule 3-09-1 When a registrant owns an equity method investment in an entity that, in turn, holds an equity method investment in another entity, the investment in the second entity is referred to as a lower-tier equity method investee.

Question Does the Regulation S-X, Rule 3-09, requirement for a registrant to provide separate financial statements of significant equity method investees apply to lower-tier equity method investees?

Answer Yes. Pursuant to paragraph 2405.6 of the FRM and SAB Topic 6.K.4(a), Rule 3-09 applies to all equity method investees that are significant to theregistrant’s consolidated financial statements, whether these entities are directly or indirectly owned by the registrant. Therefore, a registrant should test lower-tier equity method investees for significance on the basis of the of the lower-tier equity method investee to the registrant on a consolidated basis and should provide separate financial statements when appropriate.

Interpretive Response 2 of SAB Topic 6.K.4(a) describes how the significance tests should be applied to lower-tier investees:9

Since the disclosures provided by separate financial statements of an investee are considered necessary to evaluate the overall financial condition of the registrant, the significant subsidiary test is computed based on the materiality of the lower tier investee to the registrant consolidated.

The example below illustrates the significance calculation for the application of the income component of the income test of the significant subsidiary rules to such a lower tier investee situation.

Example • Registrant A owns 50 percent of Investee B and uses the equity method to account for its investment. Investee B owns 45 percent of Investee C and uses the equity method to account for its investment. • Registrant A had consolidated pretax income from continuing operations (including equity earnings of B) of $5 million. • Investee B had pretax income from continuing operations of $3.8 million. • Investee C had pretax income from continuing operations of $4.8 million. Because the registrant’s share of C’s pretax income [(50% × 45% × $4,800) ÷ $5,000 = 22%] exceeds 20 percent, the income component of the income test has been met. The registrant would apply a similar approach to determining whether the revenue component of the income test also exceeds 20 percent.

9 Note that the requirement to perform the asset test for purposes of the significant subsidiary test in Rule 3-09 was eliminated after the issuance of SAB Topic 6.K.4(a).

10 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

1.1.4 Form and Content of Summarized Financial Information of Equity Method Investees Q&A Regulation S-X: Rule 4-08(g)-1

Question What are the form and content requirements of Regulation S-X, Rules 4-08(g) and 10-01(b)(1), for the summarized financial information of equity method investees?

Answer Annual Requirements As noted in paragraph 2420.4 of the FRM and as discussed at the July 2007 AICPA SEC Regulations Committee joint meeting with the SEC staff (the “July 2007 joint meeting”), if the significance test is met in any year, the summarized financial information should be as of and for the same periods as the registrant’s financial statements (i.e., two years of balance sheet information and three years of statement of operations information for a registrant that is not an EGC10 or SRC), even if the significance level is not met in all periods.

The following is a summary of the example discussed during the July 2007 joint meeting:

Example

Company A owns 30 percent of the common stock of Investee I and 40 percent of the common stock of Investee J.

Company A accounts for both investees under the equity method.

For the year ended December 31, 20Y0, A has determined that the highest significance level of I and J individually and in the aggregate is as follows:

20Y0 20X9 20X8

Investee I 7% 2% 1%

Investee J 5% 1% 3%

Aggregated 12% 3% 4%

There are no qualitative factors suggesting that the information for 20X9 and 20X8 would be material to an investor.

The SEC staff indicated that A is required to present summarized information in its 20Y0 Form 10-K for all periods presented (i.e., balance sheet information as of 20Y0 and 20X9 and income statement information for 20Y0, 20X9, and 20X8). This is true even though the investees only exceeded the significance threshold (in the aggregate) in one year, 20Y0. As illustrated in other examples during the July 2007 joint meeting, the answer would be the same regardless of the year in which the investees individually or in the aggregate exceeded the 10 percent significance threshold.

10 See footnote 4.

11 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Under Regulation S-X, Rule 1-02(bb), the following financial statement line items are required in the summarized financial information: • Current and noncurrent assets. • Current and noncurrent liabilities. • Redeemable preferred stock. • Noncontrolling interests. • . • Gross profit. • Income (loss) from continuing operations. • Net income (loss). • Net income (loss) attributable to the entity.

Summarized financial information must be presented in the notes to the annual financial statements and should be presented in accordance with U.S. GAAP.

Note that new or modified accounting standards under U.S. GAAP generally have different adoption dates, which depend on whether a company is a PBE. At the 2016 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff discussed the adoption dates of accounting standards for equity method investees. Equity method investees whose financial information is included in an SEC filing as a result of Rule 4-08(g) are considered PBEs under U.S. GAAP. Therefore, subject to materiality requirements, a registrant should also consider whether to use the adoption dates for PBEs when it is preparing the summarized financial information of equity method investees that is required by Rule 4-08(g).11 The SEC staff has provided relief from this requirement specifically for the revenue (ASC 606) and leasing (ASC 842) standards. More specifically, the SEC staff announced12 that it would not object to elections by certain PBEs to use the non-PBE effective dates for the sole purpose of adopting the FASB’s new standards on revenue (ASC 606) and leasing (ASC 842).

Further, as discussed in Section 1.1.2, ASU 2019-10 introduced a new “two-bucket” framework for determining the effective dates for future major accounting standards. Equity method investees that are not issuers would still be considered PBEs if their financial information is included in an SEC filing under Rule 4-08(g). As PBEs, they may use Bucket 2 effective dates for the new credit losses standard and future major accounting standards to which the two-bucket approach is applied. However, this relief is limited to the subset of PBEs “that otherwise would not meet the definition of a public business entity except for a requirement to include or inclusion of its financial statements or financial information in another entity’s filing with the SEC” (i.e., such as those provided to satisfy the requirements of Rule 4-08(g)).

Rule 1-02(bb) and SEC ASR 302 (FRC Section 213.03.c) provide guidance on how equity method investees in specialized industries should present summarized financial information. For example, if these entities do not present classified balance sheets, they should provide other information about the nature and amount of the major components of assets and liabilities. If necessary, equity method investees in specialized industries may also substitute other

11 See Section 1.1.2 for a discussion of the requirements under Rule 3-09. 12 See footnote 7.

12 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information information for sales and related costs and for a more meaningful presentation. ASR 302 (FRC Section 213.03.c) provides the following examples: • “A bank . . . could present total interest income, total interest , provision for loan losses, and security gains or losses in lieu of sales and related costs and expenses.” • “[A]n insurance company could present information as to net premiums earned, net investment income, underwriting costs and expenses, and realized gains or losses or investments.” • “A finance company . . . should disclose the portion of its total assets represented by net loan receivables when that item represents one of that company’s largest assets.” • “Long-term liabilities and redeemable preferred stock should be disclosed regardless of the type of balance sheet presented.”

In accordance with paragraph 2420.4 of the FRM, summarized financial information should not be labeled “unaudited.”

The summarized financial information may be presented (1) for each equity method investee individually or (2) on a combined basis with the information of other equity method investees. As discussed at the March 2001 AICPA SEC Regulations Committee joint meeting with the SEC staff, the SEC staff believes that Rule 4-08(g) permits aggregation in most circumstances. However, aggregation can sometimes be misleading or result in the suppression of important information. The SEC staff may, for example, request that investees in different businesses be aggregated separately or may request separate presentation for individual investees that are quantitatively or qualitatively very significant.

Paragraph 2420.4 of the FRM, SAB Topic 6.K.4(b), and SEC ASR 302 (FRC Section 213.03.b) note that summarized financial information should be complete and should cover all equity method investees (not just the investee or investees that are significant). Entities’ requests to exclude summarized financial information will not routinely be granted. The SEC staff acknowledges that in some circumstances, such as when it is impracticable to accumulate such information and the information to be excluded is de minimis, summarized information may be excluded for a specific entity.

Interim Requirements Paragraph 2420.6 of the FRM indicates that the registrant’s interim financial statements are required to include only summarized income statement information of an equity method investee if both (1) the significance of the equity method investee exceeds 20 percent under either the income test or the investment test as prescribed in Regulation S-X, Rule 1-02(w), and (2) interim financial information would be required if the equity method investee were a registrant. See Section 1.1.1 for further discussion of when summarized financial information must be provided in interim financial statements.

Rule 1-02(bb)(ii) indicates that if Rule 10-01(b)(1) requires that summarized financial information be included in interim financial statements, registrants must disclose the following income statement line items: • Revenues. • Gross profit. • Income (loss) from continuing operations.

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• Net income (loss). • Net income (loss) attributable to the entity.

In accordance with paragraph 2420.8 of the FRM, if summarized financial information is required, a registrant should provide year-to-date information for both the current interim period and the comparative prior-year interim period. Summarized financial data for interim periods is only required for investees that are significant.

For further discussion, see Section 1.3.3.

1.2 Audit Requirements of Regulation S-X, Rule 3-09, Financial Statements 1.2.1 Audit Requirements of Financial Statements for Equity Method Investees Q&A Regulation S-X: Rule 3-09(b)-2

Question Are the separate financial statements of equity method investees required to be audited for all periods presented?

Answer It depends. The separate financial statements of equity method investees are required to be audited only for periods in which the applicable significance tests set forth in Regulation S-X, Rule 1-02(w), exceed 20 percent.

If the equity method investee becomes significant at the greater than 20 percent level in the current year, the registrant is required to present two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of stockholders’ equity, and cash flow statements for the equity method investee even if it was not significant in the earliest two years. However, in this case, Regulation S-X, Rule 3-09(b), does not require that the periods in which the equity method investee was not significant be audited (i.e., registrants may present unaudited financial statements for periods in which the significance level was not greater than 20 percent). If the equity method investee was significant in the previous years, but becomes insignificant (at or below the 20 percent level) during the current year, the registrant would still need to present two years of balance sheets and three years of statements of operations, statements of comprehensive income, statements of stockholders’ equity, and cash flow statements of the equity method investee; however, the current-year financial statements may be unaudited.

While periods for which the investment is not significant need not be audited, if such periods were previously audited, professional standards may require an auditor to address those periods in the audit report. If such periods were not previously audited, professional standards may require an auditor to state that in the report and that therefore the auditor assumes no responsibility for them.

14 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

Example 1 • Registrant C has a nonpublic equity method investee, Company D. • In 20X8, 20X9, and 20Y0, D was significant at the 15 percent, 18 percent, and 30 percent levels, respectively. • Registrant C and Company D both have December 31 year-ends. Registrant C is required to present audited financial statements for D as of and for the year ended December 31, 20Y0, and either audited or unaudited financial statements as of December 31, 20X9, and for the years ended December 31, 20X9, and December 31, 20X8.

Example 2 • Registrant E has a nonpublic equity method investee, Company F. • In 20X8, 20X9, and 20Y0, F was significant at the 25 percent, 27 percent, and 15 percent levels, respectively. • Registrant E and Company F both have December 31 year-ends. Registrant E is required to present audited financial statements for F as of December 31, 20X9, and for the years ended December 31, 20X9, and December 31, 20X8, and either audited or unaudited financial statements as of and for the year ended December 31, 20Y0.

1.2.2 Independent Auditor Requirements of Financial Statements for Equity Method Investees Q&A Regulation S-X: Rule 3-09(b)-3 SEC rules require the filing of audit reports related to issuers13 and certain entities that are not issuers (nonissuers), such as equity method investees.

Question Does an independent public accounting firm that issues a report on the financial statements of an equity method investee in accordance with Regulation S-X, Rule 3-09, have to be registered with the PCAOB, and should the audit report filed with the SEC refer to the standards of the PCAOB, to generally accepted auditing standards (GAAS), or to both?14

Answer It depends. As indicated in paragraph 4110.5 of the FRM, in certain circumstances, an independent public accounting firm that issues an audit report on the financial statements of a nonissuer entity under Rule 3-09 may need to be registered with the PCAOB. Footnote 3 of paragraph 4110.5 of the FRM states that the “auditor of the financial statements of the non-issuer entity must be registered if, in performing the audit, the auditor played a ‘substantial role’ in the audit of the issuer, as that term is defined in PCAOB Rule 1001(p)(ii). If the ‘substantial role’ test is not met, the firm is not required to be registered.”

13 Under Section 3 of the Securities Exchange Act of 1934, “[t]he term ‘issuer’ means an issuer (as defined in section 3), the securities of which are registered under section 12, or that is required to file reports pursuant to section 15(d), or that files or has filed a registration statement that has not yet become effective under the . . . and that it has not withdrawn.” 14 Although the SEC may require auditors to refer to the standards of the PCAOB in certain circumstances, of nonissuers are under the jurisdiction of the AICPA. For audits of nonissuers, auditors are required by AICPA AU-C 700.31 to state that the audit was conducted in accordance with GAAS. There may, however, be situations in which an audit of a nonissuer is required by the SEC to refer to PCAOB standards, in which case the audit report will refer to both sets of standards. See footnote 15.

15 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

If the principal auditor’s report refers to another auditor’s report on the financial statements of a nonissuer entity, the other auditor’s report must refer to the standards of the PCAOB in addition to GAAS. Conversely, if the principal auditor’s report does not refer to another auditor’s report on the financial statements of the nonissuer entity, the other auditor’s report need not refer to the standards of the PCAOB.

Note that although the chart in paragraph 4110.5 of the FRM indicates the situations in which the auditor is required to refer to the standards of the PCAOB, it does not specify the circumstances in which the auditor must refer to GAAS in addition to the PCAOB standards. One instance in which the auditor must refer to both sets of standards is when a nonissuer entity files an audit report with the SEC under Regulation S-X, Rule 2-05.15

In addition, auditors of financial statements filed in accordance with Rule 3-09 must comply with the SEC’s independence requirements, regardless of whether the audit is conducted in accordance with GAAS, PCAOB standards, or both.16

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 1.3.1 Interaction of Regulation S-X, Rule 3-05, With Rule 3-09 Q&A Regulation S-X: Rule 3-09-2 A registrant may acquire a business that has significant equity method investees.

Question Assume that the registrant must provide separate financial statements of the acquired business under Regulation S-X, Rule 3-05. Do the separate financial statements of the acquiree need to comply with Regulation S-X, Rule 3-09, for its equity method investees?

Answer It depends. Although neither the SEC staff nor the CAQ SEC Regulations Committee has issued guidance on this question, the SEC staff view regarding Rule 3-05 financial statements of an acquiree set forth in paragraph 2005.5 of the FRM is applied by analogy in practice. Paragraph 2005.5 states, in part:

Financial statements of recently acquired businesses of the acquiree or equity method investees of the acquiree need not be filed unless their omission would render the acquiree’s financial statements misleading or substantially incomplete.

The determination of when the omission of an equity method investee’s financial statements would render the acquiree’s financial statements misleading or substantially incomplete does not necessarily involve the same 20 percent threshold as the determination of significance under Rule 3-09.

15 Circumstances in which audit reports are required to refer to both PCAOB and GAAS include, but are not limited to, those in which entities (1) make confidential submissions of an initial public registration statement under the JOBS Act, (2) file a Form 10 to effect an initial registration of securities, (3) file voluntarily with the SEC, and (4) file auditors’ reports with the SEC under Rule 2-05. 16 For more information, see Question 3 in Section O, “Other Independence,“ in the SEC’s Office of the Chief : Application of the Commission’s Rules on Auditor Independence — Frequently Asked Questions (updated as of June 27, 2019).

16 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

Example • Registrant A acquires a 100 percent interest in Company B. • Company B is significant at 51 percent; therefore, A must provide separate financial statements of B pursuant to Rule 3-05. • Company B owns a 40 percent equity method investment in Company X. If the omission of X’s financial statements would render B’s financial statements misleading or substantially incomplete, X’s financial statements may also be required pursuant to Rule 3-09.

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 Regulation S-X, Rules 3-10 and 3-16, may require a registrant to provide financial statements of guarantors or affiliates, respectively. Such guarantors or affiliates may also have significant equity method investees.

Question Assume that the registrant must provide separate financial statements of a guarantor or affiliate under Rules 3-10 or 3-16. Do the separate financial statements of a guarantor or affiliate need to comply with Regulation S-X, Rule 3-09, regarding its equity method investees?

Answer Yes. At the April 2007 AICPA SEC Regulations Committee joint meeting with the SEC staff, the SEC staff indicated that if a registrant is required to provide Rule 3-16 financial statements for an affiliate, the registrant must also provide separate financial statements for significant equity method investees held by such an affiliate. This view is based on the intent of Rule 3-16, which is to provide investors with information that would be required if the affiliate whose equity securities are pledged were a registrant. The SEC staff clarified that Rule 3-16 is not limited to presenting the primary financial statements of the affiliate.

The SEC staff noted that a similar requirement would exist for subsidiary guarantors/issuers under Rule 3-10. If a registrant is required to provide Rule 3-10 financial statements for guarantors, the registrant must also provide separate financial statements, in accordance with Rule 3-09, for significant equity method investees held by the guarantors.

If a registrant includes financial statements under Rule 3-10, Rule 3-16, or both, the significance of an equity method investee of the guarantor or affiliate would be determined in relation to the guarantor or affiliate rather than in relation to the registrant.

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Example • Registrant A has registered debt that is guaranteed by one of its non-wholly-owned domestic subsidiaries, Company B. • Because the guarantor is not wholly owned, A must file separate financial statements of the guarantor in accordance with Rule 3-10. • Company B holds a 25 percent equity method investment in Company C. • The investment in C is 40 percent significant to B. Because B’s investment in C is deemed significant, separate audited financial statements of C would be required under Rule 3-09.

Changing Lanes On March 2, 2020, the SEC issued a final rule that revises the disclosure requirements for certain registered securities under Rules 3-10 and 3-16 and introduces new rules, Regulation S-X, Rules 13-01 and 13-02. The final rule is effective for filings after January 4, 2021; however, earlier application is permitted. On the basis of the final rule’s amendments, we expect situations in which separate financial statements are required for guarantors or affiliates to occur even less frequently than they do under current requirements. For more information about the final rule, see Deloitte’s March 10, 2020,Heads Up.

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 Regulation S-X, Rule 4-08(g), requires a registrant to disclose summarized financial information of equity method investees when the significance of the equity method investee to the registrant (individually or in the aggregate) exceeds 10 percent. This information is required as a footnote to the registrant’s audited annual financial statements.

ASC 323-10-50-3(c) requires similar disclosures in the notes to the registrant’s financial statements when an equity method investee is material. The summarized financial information required by Rule 4-08(g) generally satisfies the requirements of ASC 323-10-50-3(c). If an equity method investee does not exceed the 10 percent significance test but is material, the registrant should provide the information required by ASC 323-10-50-3(c).

Question If a registrant includes the separate financial statements of a significant equity method investee in an SEC filing in accordance with Regulation S-X,Rule 3-09, must it also present the summarized financial information in its financial statements in accordance with Rule 4-08(g) and ASC 323-10-50-3(c)?

Answer It depends. If the registrant includes the financial statements of an equity method investee in an SEC filing, SAB Topic 6.K.4(b) provides relief from the requirement to also provide summarized financial information of an equity method investee in the footnotes to the financial statements. SAB Topic 6.K.4(b) clarifies that the objective of the summarized financial information required by Rule 4-08(g) is to provide the minimum level of disclosure about a registrant’s investment in an equity method investee that would be considered relevant to users of the registrant’s

18 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

financial statements. By including the audited financial statements of an equity method investee in the SEC filing, the registrant has actually provided more than the minimum level of information and therefore has satisfied the requirements of Rule 4-08(g) and ASC 323. For more information, see paragraph 2420.5 of the FRM. If the registrant has more than one equity method investee and the aggregate significance of all equity method investees to the registrant exceeds 10 percent, summarized financial data under Rule 4-08(g) would be required for the equity method investees for which separate financial statements are not provided.

In certain circumstances, such as when the registrant and equity method investee have different fiscal year-ends, the financial statements of the equity method investee may not be required as of the original due date of the Form 10-K and may be filed in an amendment to the Form 10-K. As explained in paragraph 2420.5 of the FRM, if the separate financial statements of the equity method investee are not filed at the same time as the registrant’s Form 10-K, the registrant must include the summarized financial information in its audited financial statements.

Further, if the separate financial statements of the equity method investee are not included in the same document or filing as the registrant’s financial statements, the registrant’s financial statements may not be compliant with U.S. GAAP (e.g., ASC 323) or SEC rules and regulations (e.g., Rule 4-08(g)) if the summarized financial information is omitted. Examples include, but are not limited to, the following: • When the registrant’s financial statements are included in a filing by another SEC registrant (and the filing will not include separate financial statements for the registrant’s investments in significant equity method investees). For example, the registrant’s financial statements may be required under Regulation S-X, Rule 3-05 (if the registrant is acquired by another registrant), or Rule 3-09 (if the registrant is an equity method investee of another registrant). These circumstances are discussed further in Sections 1.1.3 and 1.3.1. • In an annual report to shareholders, in which the registrant is permitted to omit the full financial statements of the equity method investee.17

In these situations, the registrant is required to include summarized financial information for equity method investees in its financial statements.

A registrant should carefully consider the circumstances under which it may rely on the accommodation in SAB Topic 6.K.4(b) to omit the summarized financial information of an equity method investee otherwise required by Rule 4-08(g) and ASC 323-10-50-3(c).

17 See the note to paragraph 2420.5 of the FRM.

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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 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 Under Regulation S-X, Rule 3-09(b), a registrant must file financial statements of significant equity method investees. The financial statements must be for the same periods as the registrant’s audited financial statements required by Regulation S-X, Rules 3-01 and 3-02 (i.e., two years of balance sheets and three years of statements of operations, comprehensive income, stockholders’ equity, and cash flows).

Question What financial statements must a registrant file in the year that it acquires or disposes of a significant equity method investee?

Answer In the year of acquisition of a significant equity method investee, the registrant should provide audited financial statements of the equity method investee from the date of acquisition through year-end. This view was expressed at the March 2001 AICPA SEC Regulations Committee joint meeting with the SEC staff and reiterated at theSeptember 2006 AICPA SEC Regulations Committee joint meeting with the SEC staff. As also indicated inparagraph 2405.4 of the FRM, financial statements of equity method investees for periods before the registrant’s ownership of the investment do not have to be presented (although, as discussed in the note to paragraph 2405.4, they may have been required pursuant to Regulation S-X, Rule 3-05).

Similarly, as noted in paragraph 2405.4 of the FRM, if a registrant disposes of a significant equity method investee in the current year, audited financial statements should be presented through the disposal date. If the equity method investee is not significant in the current year but was significant in the previous two years, the registrant should present unaudited financial statements for the current year through the disposal date and audited financial statements for the previous two years.

An acquisition or disposition of a significant equity method investee during a fiscal year results in a requirement to present the equity method investee’s financial statements for a partial year. However, paragraph 2405.4 of the FRM also indicates that the SEC staff will, upon a written request, consider accepting the financial statements of the equity method investee for the full fiscal year if the partial-year financial statements cannot be obtained without undue difficulty or cost. In such circumstances, registrants should also consider consultation with their auditors and SEC legal counsel.

20 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

1.4.2 Change From Consolidation to Equity Method of Accounting Q&A Regulation S-X: Rule 3-09(b)-4 Under Regulation S-X, Rule 3-09(b), a registrant must file financial statements of significant equity method investees. The financial statements must be for the same periods as the registrant’s audited financial statements required by Regulation S-X, Rules 3-01 and 3-02 (i.e., two years of balance sheets and three years of statements of operations, comprehensive income, stockholders’ equity, and cash flows). The SEC staff has also stated that an investee’s financial statements (filed to meet the requirements of Rule 3-09) should only include the periods within the fiscal year in which the investee was accounted for under the equity method.

Question What financial statements must a registrant file for a significant equity method investee when its formerly consolidated subsidiary no longer meets the criteria for consolidation and the registrant changes to the equity method of accounting?

Answer In accordance with paragraph 2405.4 of the FRM, “the investee’s separate annual financial statements should only depict the period of the fiscal year in which it was accounted for by the equity method.” Therefore, the registrant is not required to provide the investee’s financial statements for the prior periods because the financial statements of the equity method investee and registrant were consolidated before the change to the equity method of accounting.

A change from consolidation to the equity method of accounting during a fiscal year may result in a requirement to present the equity method investee’s financial statements for a partial year. However, paragraph 2405.4 of the FRM indicates that the SEC staff will, upon a written request, consider accepting the financial statements of the equity method investee for the full fiscal year if the partial-year financial statements cannot be obtained without undue difficulty or cost. In such circumstances, registrants should also consider consultation with their auditors and SEC legal counsel.

Example • Registrant A owns 100 percent of Company B. • Registrant A and Company B both have calendar year-ends. • On July 1, 20X0, A sold 51 percent of B’s shares. • Effective July 1, 20X0, A will deconsolidate B and will use the equity method to account for its investment in B. • Company B is greater than 20 percent significant to A when tested on December 31, 20X0. Registrant A is required to file audited financial statements of B for the period from July 1, 20X0, through December 31, 20X0.

21 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

1.4.3 Change From Consolidation to Fair Value or Cost Method of Accounting Q&A Regulation S-X: Rule 3-09(b)-5

Question In certain circumstances, a registrant may lose control of a majority-owned subsidiary that was previously consolidated (e.g., as a result of the subsidiary’s bankruptcy) and therefore must apply the fair value method (including the practicability exception to fair value) or the cost method to account for its interest in the subsidiary even though the subsidiary continues to be majority-owned. Do Regulation S-X, Rules 3-09 and 4-08(g), apply to a majority-owned subsidiary that is accounted for at fair value (including the practicability exception to fair value) or under the cost method?18

Answer On the basis of informal discussions with the SEC staff, we believe that Rules 3-09 and 4-08(g)do not apply to a majority-owned subsidiary accounted for at fair value (including the practicability exception to fair value) or under the cost method. However, Rules 3-09 and 4-08(g) do apply to those investments eligible for the equity method of accounting for which the fair value option has been elected.

Rule 3-09(a) states, in part:

If any of the conditions set forth in §210.1-02(w), substituting 20 percent for 10 percent in the tests used therein to determine a significant subsidiary, are met fora majority-owned subsidiary not consolidated by the registrant or by a subsidiary of the registrant, separate financial statements of such subsidiary shall be filed. [Emphasis added]

Rule 4-08(g) requires that summarized financial information be presented in the notes to the financial statements for equity method investees accounted for under the equity method.

Regulation S-X, Rule 1-02(x), defines subsidiary as follows:

A subsidiary of a specified person is an affiliatecontrolled by such person directly, or indirectly through one or more intermediaries. [Emphasis added]

A subsidiary accounted for as a cost method investment or at fair value would not meet this definition since it would not be controlled by the registrant either directly or indirectly. Therefore, Rules 3-09 and 4-08(g) do not apply to investments accounted for as cost method investments or at fair value.

18 In 2016, the FASB issued ASU 2016-01, which requires entities to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee, and certain other investments) at fair value and recognize any changes in fair value in net income. Therefore, once an entity has adopted the guidance in ASU 2016-01 (it is effective for PBEs with fiscal years beginning after December 15, 2017), investments can no longer be classified as cost investments. However, ASU 2016-01 includes a practicability exception for investments without a readily determinable fair value that permits such investments to be measured at cost and adjusted for observable price changes in value and impairments.

22 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

Example

A registrant has a majority-owned subsidiary that files for bankruptcy. Before the bankruptcy filing, the registrant controls and consolidates the subsidiary. After the bankruptcy filing, the registrant no longer controls the subsidiary and changes to the cost method of accounting (before the adoption of ASU 2016-01) or fair value, including the practicability exception to fair value (after the adoption of ASU 2016-01).

Because the registrant no longer controls the subsidiary and accounts for it under the cost method or fair value, the definition of subsidiary in Rule 1-02(x) is not met. Therefore, the registrant would not be required to provide the financial information required by Rules 3-09 and 4-08(g).

1.4.4 Change From Equity Method of Accounting to Consolidation Q&A Regulation S-X: Rule 3-09(b)-6

Question What financial statements must a registrant file for a significant equity method investee when the registrant increases its interest in, and begins to consolidate, the entity?

Answer We believe that financial statements would only be required for the period in which the registrant used the equity method to account for the investment. Our view is by analogy to the SEC staff’s view expressed at theJune 2005 AICPA SEC Regulations Committee joint meeting with the SEC staff on applying Regulation S-X,Rule 3-09, in the year a formerly consolidated subsidiary becomes an equity method investee. See Section 1.4.2 for further discussion about changing from consolidation to equity method.

An increase in ownership of an equity method investee that results in consolidation should be accounted for prospectively and not by retrospectively restating prior periods. Because the prior periods are not restated and because, before consolidation, the investee will continue to be presented under the equity method, the registrant must provide Rule 3-09 financial statements for those periods.

Example • Registrant A and Company B both have calendar year-ends. • Registrant A owns 49 percent of B and uses the equity method to account for its investment. • On November 1, 20Y0, A acquires an additional interest in, and begins to consolidate, B. • Company B was greater than 20 percent significant when tested in 20X9 and 20X8 and for the period from January 1, 20Y0, through October 31, 20Y0. In its Form 10-K for the fiscal year ended December 31, 20Y0, A should file the audited financial statements of B as of October 31, 20Y0, and December 31, 20Y0, and for the 10-month period ended October 31, 20Y0, and the years ended December 31, 20X9, and 20X8.

23 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

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

Question What financial statements must a registrant file for a significant equity method investee when the registrant decreases its interest in the equity method investee and then uses the fair value method (including the practicability exception to fair value) or the cost method19 to account for its interest?

Answer A registrant that disposes of a portion of its share in a significant equity method investee and begins to apply the cost method of accounting should present the financial statements of the equity method investee for the period in which the equity method was used to account for it. Regulation S-X, Rule 3-09, does not apply to periods in which the fair value (including the practicability exception to fair value) or cost method is used to account for the investment. For further discussion, see Sections 1.4.1 and 1.4.3. However, Rules 3-09 and 4-08(g) do apply to those investments that are eligible for the equity method of accounting and for which the fair value option has been elected.

1.5 Financial Statement Due Dates 1.5.1 Due Date of Financial Statements for Equity Method Investees Q&A Regulation S-X: Rule 3-09(b)-9

Question What is the due date for a registrant to file the financial statements of a significant equity method investee?

Answer It depends. A registrant must consider the requirements in Regulation S-X, Rule 3-09, when filing its annual report on Form 10-K or a registration statement or proxy statement.

Financial Statement Requirements in Annual Reports As discussed in paragraph 2405.7 of the FRM, to determine the due date for filing the financial statements of an equity method investee in a Form 10-K, a registrant must consider the following: • The filing status of the registrant and the equity method investee in accordance with Rule 12b-2 of the Securities Exchange Act of 1934 (e.g., large accelerated filer, accelerated filer). (An equity method investee that is not an SEC registrant should apply the considerations in the table below as if it were a nonaccelerated filer.)

19 See footnote 18.

24 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

• Whether the equity method investee is a foreign business (as defined in Regulation S-X, Rule 1-02(l)). • Whether the registrant and the equity method investee have different fiscal year-ends.

The Filing Status of the Registrant and the Equity Method Investee in Accordance With Exchange Act Rule 12b-2 A registrant is required to file the financial statements of a significant equity method investee in its annual report on Form 10-K. However, Regulation S-X, Rule 3-09(b)(1), provides an accommodation for an accelerated filer20 that owns an interest in a significant equity method investee that is not an accelerated filer (i.e., whose financial statements are due after the registrant’s Form 10-K due date). The accommodation allows such a registrant to file the financial statements of the equity method investee after the due date of its Form 10-K. (This accommodation is referred to herein as the “grace period.”)

At the April 2006 AICPA SEC Regulations Committee joint meeting with the SEC staff (the “April 2006 joint meeting”), the SEC staff clarified that Rule 3-09(b)(1) also applies to large accelerated filers. The minutes of the April 2006 joint meeting include a table (summarized below) highlighting the due dates for filing financial statements of equity method investees. This table is appropriate when (1) the equity method investee is not a foreign business and (2) the registrant and the equity method investee have the same fiscal year-end.

Equity Method Investee Registrant

Large Accelerated21 Accelerated Nonaccelerated

Large No accommodation No accommodation No accommodation accelerated necessary — file the necessary — file the necessary — file the equity method investee’s equity method investee’s equity method investee’s financial statements financial statements financial statements by the due date of the by the due date of the by the due date of the registrant’s Form 10-K. registrant’s Form 10-K. registrant’s Form 10-K.

Accelerated File the equity method No accommodation No accommodation investee’s financial necessary — file the necessary — file the statements within 75 days equity method investee’s equity method investee’s of the registrant’s and financial statements financial statements equity method investee’s by the due date of the by the due date of the year-end. registrant’s Form 10-K. registrant’s Form 10-K.

Nonaccelerated File the equity method File the equity method No accommodation investee’s financial investee’s financial necessary — file the statements within 90 days statements within 90 days equity method investee’s of the registrant’s and of the registrant’s and financial statements equity method investee’s equity method investee’s by the due date of the year-end. year-end. registrant’s Form 10-K.

If the registrant does not file the equity method investee’s financial statements in its annual report on Form 10-K, it should file them by the appropriate due date noted above in an amendment to the annual report. See also paragraphs 2405.8 and 2405.9 of the FRM. As

20 On March 12, 2020, the SEC issued a final rule that amends the definitions of “accelerated filer” and “large accelerated filer” to exclude any issuer with both annual revenues of less than $100 million and public float of less than $700 million. See Deloitte’s March 19, 2020,Heads Up for more information about the final rule. 21 See footnote 20.

25 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

indicated in note 2 to paragraph 2405.11 of the FRM, this accommodation applies only to annual reports.

Whether the Equity Method Investee Is a Foreign Business Rule 3-09(b)(1) permits a registrant to file the financial statements of an equity method investee that is a foreign business (as defined in Rule 1-02(l)) within six months afterthe investee’s fiscal year-end (unless the investee and the registrant have different fiscal year-ends, which is discussed further below).22 As also noted in paragraph 2405.10 of the FRM, if the separate financial statements of a foreign equity method investee are due after the registrant’s Form 10-K, the financial statements should be filed in an amendment to the registrant’s annual report on Form 10-K.

Example • Registrant A owns 30 percent of Company B and uses the equity method to account for its investment. • Company B meets the definition of a foreign business and is greater than 20 percent significant to A. • Registrant A and Company B both have December 31 fiscal year-ends. Registrant A must file the financial statements of B by June 30, 20X9. This can be accomplished by filing an amendment to A’s December 31, 20X8, Form 10-K, regardless of A’s filing status.

Whether the Registrant and the Equity Method Investee Have Different Fiscal Year-Ends Rule 3-09(b)(2) states the following regarding circumstances in which the registrant and equity method investee have different fiscal year-ends:

If the fiscal year of any 50 percent or less owned person endswithin the registrant’s number of filing days before the date of the filing, or if the fiscal year ends after the date of the filing, the required financial statements may be filed as an amendment to the reportwithin the subsidiary’s number of filing days, or within six months if the 50 percent or less owned person is a foreign business. [Emphasis added]

The term “number of filing days” is further defined by Rule 3-09(b)(3) as the number of days the entity has after its year-end to file its Form 10-K on the basis of its filing status (e.g., 90 days if the registrant is a nonaccelerated filer).

Paragraph 2405.8 of the FRM clarifies these requirements by explaining that if the “number of filing days” after the equity method investee’s fiscal year-end is before the date by which the registrant is required to file its annual report, then the financial statements of the equity method investee do not have to be filed before the due date of the registrant’s Form 10-K. Further, if the equity method investee’s financial statements are due after the registrant is required to file its annual report, the registrant should file the financial statements of the equity method investee in an amendment to its Form 10-K.23

As discussed at the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff, if the registrant’s and equity method investee’s fiscal year-ends differ by six months, the registrant may file either the investee’s financial statements for the fiscal year ending before the registrant’s year-end or after the registrant’s year-end. The registrant’s selected approach

22 The actual dates referred to in these examples are based on the non-leap-year calendar. In a leap year, the due dates would be one day earlier. 23 The 15-day extension for filing of a registrant’s Form 10-K permitted by Exchange Act Rule 12b-25 does not apply to the financial statements of an equity method investee filed in an amendment to Form 10-K. See the note toparagraph 2405.8 of the FRM.

26 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information should be applied consistently on an investee-by-investee basis and contemplate the registrant’s specific facts and circumstances, including the information that is most useful to investors. The acceptability of the two approaches would not be dependent on whether the registrant recognizes its equity in the earnings of the investee on a lag basis.

The following examples illustrate the filing due dates for the separate financial statements of equity method investees under specific circumstances. In each case, the equity method investee is considered to be significant to the registrant:

Example 1 • Registrant A and equity method investee B both have a December 31 fiscal year-end. • Registrant A is a large accelerated filer. • Company B is an accelerated filer and does not meet the definition of a foreign business. Because B is not a foreign business and A and B have the same fiscal year-end, only the filing status of A and B must be considered in determining the due date for A to file the financial statements of B in its Form 10-K. Since B is an accelerated filer, A must file the financial statements of B within 75 days of A’s and B’s year-end, or by March 16.

Example 2 • Registrant A is a large accelerated filer and has a December 31 fiscal year-end. • Equity method investee B is an accelerated filer, does not meet the definition of a foreign business, and has a September 30 fiscal year-end. • As a large accelerated filer, A must file its Form 10-K within 60 days of its fiscal year-end, or by March 1. Because A and B have different fiscal year-ends, the guidance in Rule 3-09(b)(2), as well as filing status, must be considered in determining the due date for A to file the financial statements of B in its Form 10-K. Since A is a large accelerated filer, A’s Form 10-K is due by March 1. Since B’s fiscal year-end (September 30) precedes A’s year-end (and does not fall between A’s year-end and filing due date [January 1 to March 1]), A is required to file B’s financial statements for the year ended September 30 in its Form 10-K by March 1.

Example 3 • Registrant A is a large accelerated filer and has a December 31 fiscal year-end. • Equity method investee B is a nonaccelerated filer, does not meet the definition of a foreign business, and has a January 31 fiscal year-end. Because A and B have different fiscal year-ends, the guidance in Rule 3-09(b)(2), as well as filing status, must be considered in determining the due date for A to file the financial statements of B in its Form 10-K. Since A is a large accelerated filer, A’s number of filing days is 60 (i.e., Form 10-K due by March 1). Since B’s fiscal year-end falls between A’s year-end and Form 10-K due date (January 1 to March 1) and B is a nonaccelerated filer, A may file the financial statements of B as an amendment to its Form 10-K within 90 days after B’s year-end (i.e., by May 1).

27 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example 4 • Registrant A is a large accelerated filer and has a December 31 fiscal year-end. • Equity method investee B is a foreign business with a September 30 fiscal year-end. Because A and B have different fiscal year-ends and B is a foreign business,24 the guidance in Rules 3-09(b)(1) and 3-09(b)(2) must be considered in determining the due date for A to file the financial statements of B in its Form 10-K. As a large accelerated filer, A must file its Form 10-K within 60 days of its fiscal year-end, or by March 1. Company B’s fiscal year-end (September 30) does not fall between A’s year-end and filing due date (January 1 to March 1); however, because B is a foreign business, A may file the financial statements of B in an amendment to its Form 10-K within six months of B’s fiscal year-end (March 31).

Example 5 • Registrant A is an accelerated filer and has a December 31 fiscal year-end. • Equity method investee B is a nonaccelerated filer, does not meet the definition of a foreign business, and has a June 30 fiscal year-end. Because A and B have different fiscal year-ends, the guidance in Rule 3-09(b)(2), as well as filing status, must be considered in determining the due date for A to file the financial statements of B in its Form 10-K. Since A is an accelerated filer, A’s number of filing days is 75 (i.e., Form 10-K due by March 16). Since B’s fiscal year-end differs by six months, A may either file the financial statements of B for the fiscal year ending before A’s year-end (i.e., Form 10-K due by March 16) or for the fiscal year ending after A’s year-end as an amendment to its Form 10-K within 90 days after B’s year-end (i.e., by September 28).

Financial Statement Requirements in a Registration Statement or Proxy Statement A registrant may need to update the separate financial statements of an equity method investee before it amends its annual report (and therefore before the filing due dates discussed above) if the registrant files a registration statement or proxy statement during the grace period. Paragraph 2405.11 of the FRM and the related notes indicate that if the investee is not a foreign business and the registrant is filing a registration statement or proxy statement, it should apply Rule 3-09(b), which states that “[i]nsofar as practicable, the separate financial statements required by this section shall be as of the same dates and for the same periods as the audited consolidated financial statements required by [Rules] 3-01 and 3-02.”

Further, as noted in the highlights of the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff indicated that a registrant should apply the age of financial statement requirements under Regulation S-X, Rule 3-12, on the basis of “whether the registrant satisfies the conditions of Rule 3-01(c) of Regulation S-X to determine whether the investee’s financial statements . . . are required.” Rule 3-01(c) indicates that registration statements may be filed during the period between 45 days after a registrant’s year-end, but before the due date (or filing) of the registrant’s Form 10-K (“extended period”), without audited financial statements for the most recent year-end if the registrant meets the following conditions: • The registrant has filed annual, quarterly, and other reports required by Sections 13 or 15(d) of the Exchange Act.

24 In September 2008, the SEC issued Final Rule Release No. 33-8959, which accelerated the reporting deadline for annual reports on Form 20-F filed by a foreign private issuer from six months to four months after its fiscal year-end for fiscal years ending on or after December 15, 2011.

28 Chapter 1 — Presentation of Separate Financial Statements and Summarized Financial Information

• The registrant reasonably expects to report income attributable to the registrant, after taxes, for the most recent year for which audited financial statements have not been filed. • The registrant has reported income attributable to the registrant, after taxes, for one of the two prior years.

Thus, if a registrant qualifies under Rule 3-01(c) to file a registration statement during this extended period, a similar accommodation would apply to the significant equity method investee. However, if a registrant does not qualify under Rule 3-01(c) (i.e., the registrant is not a timely filer or has not reported nor expects to report income), the financial statements of the significant equity method investee would be required in any registration statement filed more than 45 days after year-end.

If the investee is a foreign business, the separate financial statements of the equity method investee included in a registration statement or proxy statement cannot be more than 15 months old. Accordingly, if a registrant plans to file a registration or proxy statement more than 15 months after the equity method investee’s year-end, the financial statements of the equity method investee for the most recently completed fiscal year are required even if they are not yet due to be filed on the basis of the Form 10-K due dates discussed above. For more information, see paragraph 2405.11 of the FRM and the highlights of the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff.

1.6 Considerations for SRCs Regulation S-K, Item 10(f)(1), defines an SRC as an issuer, excluding an investment company, an asset- backed issuer, or a majority-owned subsidiary whose parent is not an SRC, that meets either of the following conditions: • It had less than $250 million of public float as of the last business day of its second fiscal quarter (i.e., it had less than $250 million of the amount that was disclosed on the cover page of Form 10-K that also was used to determine whether the issuer was an accelerated or large accelerated filer). • It had less than $100 million of revenue as of the most recently completed fiscal year for which audited financial statements were available and either of the following:

o No public float.

o Public float of less than $700 million as of the last day of its second fiscal quarter.

Under the scaled disclosure requirements in Regulation S-K and Regulation S-X, SRCs may provide two years, rather than three years, of audited financial statements and related MD&A in certain registration statements and periodic reports. In addition, they may omit disclosures about selected financial data, unaudited quarterly financial information, contractual obligations, and qualitative and quantitative information about market risk.

29 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Similarly, an SRC has different reporting requirements related to significant equity method investments. As indicated in paragraph 2400.2 of the FRM, Rule 3-09’s bright-line significance tests do not apply25 to SRC registrants. However, SRC registrants should provide financial statements of equity method investees when such information is material to the registrants’ investors. Further, while Rule 4-08(g) also does not apply to SRC registrants, such registrants are required under Regulation S-X, Rule 8-03(b)(3), to provide summarized financial data in their annual and interim financial statements.26 They should provide the summarized information, including the revenues, gross profit, income (loss) from continuing operations, and net income (loss), for all equity method investees that exceed 20 percent significance individually or in the aggregate. In a manner consistent with Rule 4-08(g), the summarized financial data included in the annual financial statements may not be labeled “unaudited.”

While Rule 8-03(b)(3) indicates that significance should be measured on the basis of “a registrant’s consolidated assets, equity or income from continuing operations,” note 2 to paragraph 2420.9 of the FRM clarifies that, notwithstanding Rule 8-03(b)(3)’s reference to a registrant’s consolidated equity, an SRC registrant should compute significance according to the tests outlined in Rule 1-02(w). That is, an SRC registrant should use the investment, income, and asset tests discussed in Chapter 2 of this Roadmap.

25 While Regulations S-X, Article 8, does not contain requirements that are equivalent to those in Rule 3-09 related to providing separate financial statements, a registrant’s filing should include financial statements of equity method investees when they would be material to investors. See paragraph 5330.2 of the FRM. 26 Rule 8-03 specifies the SRC requirements related to summarized financial information for interim financial statements; however,note 1 to paragraph 2420.9 of the FRM indicates that “the staff applies the S-X 8-03 requirement for summarized financial information to both annual and interim financial statements.”

30 Chapter 2 — Measuring Significance

2.1 Considerations Related to Measuring Significance Changing Lanes On May 20, 2020, the SEC issued a final rule that amends the significance tests under Regulation S-X, Rule 1-02(w). The final rule is effective for fiscal years beginning after December 31, 2020; however, early application is permitted. Under the final rule’s amendments to the income test, significance is calculated by using the lower of a measure that is based on (1) income from continuing operations before taxes or (2) revenue, if certain conditions are met. In addition, if income averaging is applicable, registrants use “absolute values” rather than “zero” for any loss years to calculate their average net income for the past five fiscal years. Although the final rule refers to eliminating intercompany transactions in the computation of significance (Rule 1-02(w)(1)), as noted in paragraph 2410.6 of the FRM, a registrant should not eliminate intercompany transactions when determining the significance of an equity method investee, since the equity method investee is not consolidated.

Application of the final rule is expected to benefit most registrants that are subject to the financial statement or financial information requirements for equity method investments under Regulation S-X, Rule 3-09, Rule 4-08(g), or Rule 10-01(b)(1). It is therefore assumed that most registrants will apply its amendments early. Note that unless otherwise indicated, since only certain aspects of the significance tests in Rule 1-02(w) were affected by the final rule, the guidance in this Roadmap is relevant to registrants that apply either the current requirements or the final rule.Appendix B provides guidance for registrants that will continue to apply the current requirements through 2020.

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 A registrant may be required to include separate financial statements, summarized financial information, or both, of significant equity method investees in its SEC filings. For more information about SEC filings that require separate financial statements or summarized financial information for equity method investees, see Section 1.1.1.

How much information a registrant must present depends on the level of significance, which is determined by performing the applicable significant-subsidiary tests in Regulation S-X, Rule 1-02(w). Depending on the significance of an equity method investee, the registrant may be required to provide separate financial statements under Regulation S-X,Rule 3-09, summarized financial information under Regulation S-X,Rule 4-08(g), or both.

31 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Question What tests must a registrant perform to determine whether an investment in an equity method investee is significant under Rule 3-09, Rule 4-08(g), or Regulation S-X,Rule 10-01(b)(1)?

Answer A registrant must use the applicable significant-subsidiary tests in Rule 1-02(w), as described below, to determine whether its interest in an equity method investee is significant. The three significance tests in Rule 1-02(w) are the investment test, the income test, and the asset test.

Annual Financial Statement Requirements In determining whether separate annual financial statements of an equity method investee are required under Rule 3-09(a), a registrant must perform the investment and income tests, but not the asset test, to assess the equity method investee for significance.1

However, to determine whether summarized financial information is required under Rule 4-08(g), a registrant must perform all three significance tests. The following table summarizes the applicable significance tests under Rules 3-09(a) and 4-08(g):

Test Equity Method Investee

Rule 3-09(a) Rule 4-08(g)

Investment Applicable Applicable

Asset Not applicable Applicable

Income Applicable Applicable

For more information about significance thresholds for determining reporting and disclosure requirements for equity method investees, see Section 2.1.2.

Interim Financial Statement Requirements Paragraph 2400.2 of the FRM states that “[Rule 3-09] does not require separate interim financial statements. Instead, [Rule 10-01(b)(1)] requires certain summarized interim income statement information of the investee if it is significant.”

The interim financial statements of the registrant must include summarized income statement information for each equity method investee that is significant on the basis of either the income test or the investment test. Paragraph 2420.7 of the FRM provides guidance on performing the income and investment tests to determine whether the equity method investee is significant to the interim period. For the requirements for presenting summarized financial information in interim periods, see Section 2.1.3.

1 As indicated in note 2 to paragraph 2420.3 of the FRM, the asset test was deleted from Rule 3-09 in 1994. The asset test was, however, retained for Rule 4-08(g) to “ensure a minimum level of financial information about an investee when the investment test significance was small, but the registrant’s proportionate interest in the investee’s assets was material, as might be the case for a highly leveraged investee.”

32 Chapter 2 — Measuring Significance

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 A registrant must use the applicable significant-subsidiary tests in Regulation S-X,Rule 1-02(w), to determine whether its interest in an equity method investee is significant. Depending on the significance of an equity method investee, the registrant may be required to provide separate financial statements under Regulation S-X,Rule 3-09, summarized financial information under Regulation S-X, Rule 4-08(g), or both.

Question What thresholds are used to determine when an investment in an equity method investee is significant under Rule 3-09, Rule 4-08(g), or Regulation S-X,Rule 10-01(b)(1)?

Answer The following paragraphs discuss the significance thresholds used to determine whether separate financial statements, summarized financial information, or both are required.

Annual Financial Statement Requirements Rule 3-09(a) requires a registrant to provide the separate financial statements of an equity method investee if the results of any of the applicable significance tests exceed 20 percent. Rule 4-08(g) requires a registrant to provide summarized financial information for all equity method investees (not just the investees that are significant) if the significance of any individual or combination of investees exceeds the 10 percent level.2

The following table shows the various significance thresholds and the applicable annual financial statement requirements for equity method investees under Rules 3-09 and 4-08(g):

Annual Financial Statement Requirements

Significance Separate Financial Statements Summarized Financial Information Thresholds (Rule 3-09) (Rule 4-08(g))

Does not No financial statements are required Summarized financial information is not exceed 10 required if significance does not exceed percent3 10 percent in any period

Between 10 No financial statements are required Summarized financial information is percent and 20 required if significance is between 10 percent percent and 20 percent in any period

2 Note that registrants should also consider ASC 323-10-50-3(c) in determining whether equity method investees are material (and thus should be disclosed). 3 For this threshold, if the significance of the equity method investee to the registrant is calculated as exactly 10 percent, no financial statements would be required under Rule 3-09 and summarized financial information would not be required under Rule 4-08(g). This same concept applies to the financial statement requirements at all levels of significance (i.e., between 10 percent and 20 percent, exceeds 20 percent).

33 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

(Table continued)

Annual Financial Statement Requirements

Significance Separate Financial Statements Summarized Financial Information Thresholds (Rule 3-09) (Rule 4-08(g))

Exceeds 20 Separate financial statements of each Summarized financial information is percent4 equity method investee are required if required if significance exceeds 20 significance exceeds 20 percent in any percent in any period5 period

Interim Financial Statement Requirements As discussed in Sections 1.1.1 and 2.1.1, Rule 3-09 does not apply to interim financial statements. Accordingly, separate financial statements under Rule 3-09 are not required for interim periods.

As indicated in paragraph 2420.6 of the FRM, the interim financial statements of the registrant must include summarized income statement information for each equity method investee whose significance exceeds 20 percent. For the requirements for presenting summarized financial information in interim periods, see Section 2.1.3 below.

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

Question How does a registrant determine when its interest in an equity method investee is significant for purposes of providing summarized income statement information in its notes to the interim financial statements in accordance with Regulation S-X,Rule 10-01(b)(1)?

Answer Rule 10-01(b)(1) requires that the registrant’s interim financial statements include summarized income statement information of an equity method investee if separate financial statements would otherwise be required for an annual period. Paragraph 2420.6 of the FRM provides guidance on applying Rule 10-01(b)(1), stating that a registrant must present summarized income statement information if both of the following apply: • The equity method investee is more than 20 percent significant on the basis of the results of either the income test or the investment test, described in Regulation S-X, Rule 1-02(w). • The equity method investee would be required to file quarterly financial information on Form 10-Q if it were a registrant.

4 Under certain circumstances, a registrant may combine financial information of related equity method investees when providing financial statements under Rule 3-09 and summarized financial information under Rule 4-08(g). For guidance on combining information to provide financial statements under Rule 3-09, see Section 1.1.2. For guidance on combining information to provide summarized financial information under Rule 4-08(g), see Section 1.1.4. 5 The summarized financial information of an equity method investee whose significance exceeds 20 percent may be omitted in certain circumstances if the registrant has provided the separate financial statements of the equity method investee under Rule 3-09. For further discussion, see Section 1.3.3.

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Paragraph 2420.6 of the FRM notes that certain entities, such as “foreign private issuers, asset-backed issuers, mutual life insurance companies and certain mining companies,” are not required to file financial information on Form 10-Q, and thus are not required to provide summarized income statement information.6

The final rule andparagraph 2420.7 of the FRM provides guidance on performing the income and investment tests under Rule 1-02(w) to determine whether the equity method investee is significant to the interim period. This paragraph indicates that a registrant should use the year- to-date interim-period income statement included in the quarterly report when performing the income test. The registrant need not use either the most recent quarterly-period results or the results for the most recently completed fiscal year when performing the significance test. Paragraph 2420.7 of the FRM states that when performing the investment test, a registrant should use both (1) the most recent balance sheet included in the filing (which should correspond to the year-to-date interim date used in the income test computation) and (2) the most recently completed fiscal-year-end balance sheet included in the quarterly report.7

If the results of either the income or investment test exceed the 20 percent significance level, the summarized income statement information should be presented for investees that are significant for both the current- and prior-year comparative year-to-date periods.

For more information about the presentation of summarized income statement information for interim periods, see Section 1.1.4.

In the example below, the revenue component of the income test is considered, as required under the final rule.See Section B.2 for a version of the example for registrants that will continue to apply the current requirements.

Example • Registrant A owns a 40 percent equity method investment in Company B. Company B would be required to file quarterly financial information if it were a registrant. • Both A and B have calendar year-ends. • As of December 31, 20X9, B was not significant to A; therefore, separate financial statements under Regulation S-X, Rule 3-09, and summarized financial information under Regulation S-X, Rule 4-08(g), were not required. • As of June 30, 20Y0, A reports the following in its quarterly financial statements: o Total consolidated assets of A as of June 30, 20Y0, of $2 million. o Total consolidated assets of A as of December 31, 20X9, of $2.2 million. o Investment in B as of June 30, 20Y0 = $0.5 million. o Investment in B as of December 31, 20X9 = $0.4 million. o Pretax income from continuing operations of A for the six months ending June 30, 20Y0 (including equity in earnings of B) = $700.

6 For more information about which SEC filings require separate financial statements or summarized financial information, seeSection 1.1.1. 7 Note that when performing the investment test, the registrant must use the year-end balance sheet included in the quarterly report, rather than the year-end balance sheet included in the Form 10-K, since the balance sheet may have changed from year-end. Such a change may occur when there has been a change in the quarterly period to appropriately reflect a retrospective application related to an event that has occurred after the balance sheet date (e.g., to reflect a change in accounting principle).

35 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example (continued)

o Registrant A’s interest in the pretax income from continuing operations of B for the six months ending June 30, 20Y0 = $100. o Revenue of A for the six months ending June 30, 20Y0 = $3 million. o Registrant A’s interest in the revenue of B for the six months ending June 30, 20Y0 = $0.65 million. Note that the amounts recorded as revenue and pretax income from continuing operations of B are computed in accordance with the guidance in Section 2.4.

On the basis of the results of the year-to-date interim-period income test, B is not significant to A at the 20 percent level: • $100 ÷ $700 = 14 percent of pretax income from continuing operations. • $0.65 million ÷ $3 million = 22 percent of revenue. • Both components must be met for the test to indicate significance. Company B is not significant to A at the 20 percent level on the basis of the investment test as of December 31, 20X9 ($0.4 million ÷ $2.2 million = 18%).

Company B is significant to A at the 20 percent level on the basis of the results of the investment test as of June 30, 20Y0 ($0.5 million ÷ $2 million = 25%).

Registrant A must include summarized income statement information of B in its interim financial statements included in the Form 10-Q. Such information would be provided for the year-to-date period ended June 30, 20Y0, as well as the comparative prior year-to-date period.

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 The guidance in this Q&A is relevant for registrants that apply the final rule. See Section B.3 for a version of the Q&A for registrants that will continue to apply the current requirements through 2020.

When determining the significance of equity method investees in accordance with Regulation S-X, Rule 4-08(g), a registrant must perform the following three tests (as described in Regulation S-X, Rule 1-02(w)): the investment test, the asset test, and the income test (including both the income component and revenue component). When evaluating significance, the registrant must use U.S. GAAP amounts.

Under Rule 4-08(g)(ii), these tests are applied both individually to each equity method investee and in the aggregate for any combination of equity method investees. If the results of any of the significant-subsidiary tests exceed 10 percent, the registrant must provide summarized financial information in accordance with Rule 4-08(g). For income test purposes, both the revenue and income components must exceed 10 percent to be deemed significant. If the equity method investees are significant in the aggregate, the summarized financial information must include all equity method investees.

Question When testing two or more equity method investees under Rule 4-08(g), may the registrant aggregate equity method investees reporting losses with those reporting income when performing the income component of the income test?

36 Chapter 2 — Measuring Significance

Answer Under the final rule, in the determination of the income component for the income test, Regulation S-X, Rule 1-02(w)(1)(iii)(B)(3), states, in part:

Entities reporting losses must not be aggregated with entities reporting income where the test involves combined entities, as in the case of determining whether summarized financial data must be presented.

Accordingly, a registrant must separately combine the pretax income from continuing operations of all equity method investees reporting income and the pretax loss from continuing operations of all equity method investees reporting losses.

Example • Registrant R is filing its Form 10-K for 20X0. • Registrant R has investments in Company A, Company B, Company C, and Company D, all of which are accounted for under the equity method. • For its fiscal year ended December 31, 20X0, R had consolidated pretax income from continuing operations (including equity in pretax income or losses from continuing operations of equity method investees) of $2,000 and revenue of $10 million. • For its fiscal year ended December 31, 20X0, R’s proportionate share of pretax income/(losses) from continuing operations for each company was as follows: o Company A — $50. o Company B — $100. o Company C — ($50). o Company D — ($200). • Assume that the revenue component exceeds 10 percent in the aggregate. • No other amounts are recorded in R’s income statement in connection with its investments in A, B, C, and D.8 Income Component Individual Basis

Pretax Income Company A: $50 ÷ $2,000 = 2.5 percent Company B: $100 ÷ $2,000 = 5.0 percent Company C: $509 ÷ $2,05010 = 2.4 percent Company D: $20011 ÷ $2,20012 = 9.1 percent

8 See Section 2.4.3 for guidance on determining whether any adjustments to the numerator are required for other amounts related to the equity method investee that are recorded directly by the registrant (such as impairment charges and preferred stock dividends). 9 If either the registrant or the equity method investee incurred a pretax loss from continuing operations in the fiscal year used to perform the income test, the registrant should use the absolute value of this loss when performing the income test. See Section 2.4.5 for further discussion about performing the income test when the registrant or the equity method investee has a loss in the fiscal year. 10 Under the final rule, Regulation S-X, Rule 1-02(w)(1)(iii)(B)(1), states: “If a net loss from continuing operations before income taxes . . . attributable to the controlling interest has been incurred by either the registrant and its subsidiaries consolidated or the tested subsidiary, but not both, exclude the equity in the income or loss from continuing operations before income taxes . . . of the tested subsidiary attributable to the controlling interest from such income or loss of the registrant and its subsidiaries consolidated for purposes of the computation.” 11 See footnote 9. 12 See footnote 10.

37 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example (continued)

Aggregate Basis • Companies A and B: $150 ÷ $2,000 = 7.5 percent. • Companies C and D: $25013 ÷ $2,25014 = 11.1 percent. Although no investee individually meets the 10 percent threshold, because the significance of C and D in the aggregate exceeds 10 percent and revenue of A, B, C, and D exceeds 10 percent, R’s financial statements must include summarized financial information in accordance with Rule 4-08(g). Note that the summarized information must cover all equity investees (i.e., A, B, C, and D).

See Section 1.1.4 for further discussion of the form and content of such information, including how to present combined summarized financial information.

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

Question Is a registrant required to aggregate two or more entities accounted for under the equity method when it performs the significance tests under Regulation S-X,Rule 3-09, to determine whether separate financial statements are necessary?

Answer Generally, no. Although Regulation S-X, Rule 4-08(g), requires equity method investees to be tested for significance both individually and as part of an aggregated group, Rule 3-09 does not include similar guidance. In addition, whereas Regulation S-X, Rule 3-05(a)(3), requires a registrant to treat related acquired businesses15 as a single business combination when performing the significance calculations, Rule 3-09 contains no guidance on “related” entities that would require aggregation.

On the basis of informal discussions with the SEC staff, we understand that in very rare circumstances, the staff may require a registrant to assess individual entities in the aggregate under Rule 3-09.

Note that this answer is provided solely in the context of assessing the need for separate financial statements under Rule 3-09. As noted above, Rule 4-08(g) requires a registrant to consider each equity method investee individually and all equity method investees in the aggregate when determining whether summarized financial information is necessary.16

13 See footnote 9. 14 See footnote 10. 15 Under Rule 3-05(a)(3), acquired businesses are considered related if (1) “[t]hey are under common control or management,” (2) the “acquisition of one business is conditional on the acquisition of each other business,” or (3) “[e]ach acquisition is conditioned on a single common event.” 16 See Section 2.1.4 for more information on testing two or more equity method investees for significance under Rule 4-08(g).

38 Chapter 2 — Measuring Significance

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 ASC 250 may require that certain changes, such as the reporting of a discontinued operation under ASC 205-20 or a change in accounting principle, including accounting changes resulting from the adoption of a newly issued standard, be effected by retrospective application. Collectively, these changes are referred to herein as “retrospective changes.”

As indicated in Topic 13 of the FRM, in certain circumstances (e.g., when filing a new registration or proxy statement), a registrant may be required to file updated financial statements that reflect the retrospective adjustment for periods before adoption of the change. Such updated financial statements may be filed in a Form 8-K or included or incorporated into a registration statement.

Regulation S-X, Rules 3-09 and 4-08(g), require SEC registrants to evaluate the significance of an equity method investee (the “investee”) in accordance with the tests in Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test, as applicable), to determine whether registrants are required to provide the investee’s financial statements under Regulation S-X, Rule 3-09, summarized financial information under Rule 4-08(g), or both.17 Registrants need to consider whether certain retrospective changes that are reflected in the financial statements included in a particular filing, such as a Form 8-K as noted above or in the subsequent Form 10-K, may affect the significance calculations under Rules 3-09 and 4-08(g).

Question Under what circumstances is a registrant required to remeasure the significance of an equity method investee in conjunction with a filing that includes or incorporates financial statements of the registrant that give effect to a retrospective change?

Answer The requirement to remeasure significance depends on the type of filing and the nature of the retrospective change.

New or Amended Registration Statement Under Rules 3-09 and 4-08(g), the significance tests are performed annually in connection with the filing of a Form 10-K (i.e., at the end of the registrant’s fiscal year). Therefore, and as discussed in paragraph 2410.8 of the FRM, significance is not remeasured when updated financial statements that reflect retrospective adjustments are filed in a Form 8-K (or are included or incorporated in a registration statement).18

Form 10-K When the registrant files its next Form 10-K reflecting a retrospective change, it must consider whether it should update its prior significance calculations using its retrospectively adjusted financial statements. As a result of a retrospective change, a previously insignificant equity method investee may become significant, and a registrant may be required to file the investee’s

17 See Section 2.1.1 for further information. 18 This differs for the requirement to remeasure significance when a registrant files a Form 10-K/A for the correction of an error. In such instances, a registrant should measure significance under Rules 3-09 and 4-08(g) using the corrected information in the Form 10-K/A.

39 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

financial statements, disclose summarized information of the equity method investee, or both in the Form 10-K. Paragraph 2410.8 of the FRM indicates that the requirements differ depending on whether the retrospective change is a result of a change in accounting principle or a discontinued operation.

Change in Accounting Principle The registrant is not required to recalculate the significance of an equity method investee under Rules 3-09 and 4-08(g) for periods earlier than the one during which the change in accounting principle occurred. Therefore, for periods before the date of initial adoption of a new accounting principle, registrants are allowed to continue to measure significance of their equity method investees by using results from their preadoption financial statements.

Discontinued Operation If a registrant reports a discontinued operation in its next Form 10-K, the registrant should be mindful that significance under Rules 3-09 and 4-08(g) should be measured for each annual period presented in the financial statements on the basis of amounts that were retrospectively adjusted for the discontinued operation.

Example

Registrant A is preparing to file its Form 10-K for the fiscal year ended December 31, 20Y0. The financial statements will be retrospectively adjusted for all periods presented as a result of a material event that occurred on November 30, 20Y0. Historically, A has not been required to provide separate financial statements for Equity Method Investment C because C has not met the significance thresholds.

Impact on Prior-Period Evaluation of Significance When Material Event Is a Discontinued Operation Registrant A disposed of Component B on November 30, 20Y0. While preparing its Form 10-K for the year ended December 31, 20Y0, which retrospectively reflects B as a discontinued operation for all periods presented, A determines that C is now significant to each of the three years ended December 31, 20Y0, as a result of the retrospective presentation of discontinued operations. Registrant A must file C’s audited financial statements as of December 31, 20Y0, and 20X9 and for the three years ended December 31, 20Y0.

Impact on Prior-Period Evaluation of Significance When Material Event Is a Retrospective Change in Accounting Policy Registrant A adopts a new accounting principle on a retrospective basis. Registrant A is not required to remeasure significance for the fiscal years ended December 31, 20X9, and December 31, 20X8, on the basis of the retrospectively adjusted financial statements.

Discontinued Operation Exception to Form 10-K Requirements in the Year of Disposal Separate financial statements under Rule 3-09 and summarized information under Rule 4-08(g) for a disposed investee may not be required in the Form 10-K for the year of disposal if certain conditions are met. See paragraph 2410.8 of the FRM.

40 Chapter 2 — Measuring Significance

2.2 Investment Test 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 The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating the significance of equity method investees, the registrant must use U.S. GAAP amounts.19

To determine whether separate financial statements are required under Regulation S-X, Rule 3-09, for equity method investees, the registrant must only perform two tests, the investment test and the income test. The test that results in the highest significance level will be used to determine the separate financial statement reporting requirements.

Question How should a registrant perform the investment test to determine the significance of an equity method investee for purposes of the separate annual financial statement requirements of Rule 3-09?

Answer Rule 1-02(w)(1)(i)(C) states, in part, that an equity method investee is significant when “the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed 10 percent of the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year” (emphasis added).

As noted in paragraph 2405.3 of the FRM, the significance thresholds in Rule 1-02(w) differ for Rule 3-09 purposes. In accordance with Rule 3-09(b), the registrant should substitute the 10 percent in Rule 1-02(w) with 20 percent when determining whether separate financial statements are required. If the results of any of the applicable significance tests, including the investment test, exceed 20 percent, the registrant must provide separate financial statements of the equity method investee in accordance with Rule 3-09. For more guidance on significance thresholds, see Section 2.1.2.

Note that on the basis of informal discussions with the SEC staff, we understand that if the registrant’s investment balance in an equity method investee is a negative amount, the absolute value of the investment should be used to calculate significance under the investment test.

Changing Lanes The final rule introduced the use of aggregate worldwide market value as the denominator in the investment test when certain conditions are met. The use of the aggregate worldwide market value only applies in the computation of the significance of business acquisitions and dispositions. In the calculation of the investment test under Rules 3-09, 4-08(g), and 10-01(b), the use of total assets of the registrant was retained for the denominator.

19 Foreign private issuers should refer to Section 6350 and paragraph 2015.3 of the FRM as well as SEC Final Rule Release No. 33-8879. This guidance indicates that issuers should use amounts determined under IFRS Standards, as issued by the IASB, in performing the significance tests required by Rule 3-09 when the issuer’s financial statements are prepared in accordance with such IFRS Standards.

41 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example • Registrant A is filing its Form 10-K for 20X0. • Registrant A owns a 40 percent equity method investment in Company B. • On December 31, 20X0, A had total consolidated assets of $100 million. • On December 31, 20X0, A’s carrying value of its investment in B was $18 million. • As of December 31, 20X0, A had advanced B $7 million. Company B is 25 percent significant to A ([$18 million + $7 million] ÷ $100 million = 25%).

For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

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 The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating the significance of equity method investees, the registrant must use U.S. GAAP amounts.20

Under Regulation S-X, Rule 4-08(g), all three tests are used to determine whether summarized financial information is required. The test that results in the highest significance level will be used to determine whether summarized financial information must be presented.

Question How should a registrant perform the investment test when calculating the significance of equity method investees to determine whether summarized financial information is required under Rule 4-08(g)?

Answer Under the final rule, Rule 1-02(w)(1)(i)(C) states, in part, that an equity method investee is significant when “the registrant’s and its othersubsidiaries’ investments in and advances to the tested subsidiary exceed 10 percent of the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year” (emphasis added).

For equity method investees, if the results of any of the significant-subsidiary tests, including the investment test, exceed 10 percent, a registrant must provide summarized financial information in accordance with Rule 4-08(g). For further guidance on significance thresholds, see Section 2.1.2.

Under Rule 4-08(g), the investment test is performed both individually for each equity method investee and in the aggregate for all equity method investees. If the significance of an equity method investee, individually or as part of an aggregated group, is more than 10 percent, the registrant’s financial statements must include summarized financial information for all equity method investees. For a discussion of whether such information may be aggregated for presentation purposes, see Section 1.1.4.

20 See footnote 19.

42 Chapter 2 — Measuring Significance

Note that on the basis of informal discussions with the SEC staff, we understand that if the registrant’s investment balance in an equity method investee is a negative amount, the absolute value of the investment should be used to calculate significance under the investment test.

See paragraph 2420.7 of the FRM and Section 2.1.3 for information about use of the investment test to determine whether summarized income statement information may be required for interim periods.

Example • Registrant A is filing its Form 10-K for 20X0. • Registrant A owns an interest in the following equity method investees: o 20 percent of Company B. o 25 percent of Company C. o 30 percent of Company D. • On December 31, 20X0, A had total consolidated assets of $100 million. • On December 31, 20X0, A’s carrying values of its investments in and advances to its equity method investees were as follows: o Investment in B is $5 million — individual significance is 5 percent ($5 million ÷ $100 million). o Investment in C is $2 million — individual significance is 2 percent ($2 million ÷ $100 million). o Investment in D is $4 million — individual significance is 4 percent ($4 million ÷ $100 million). Although individually, none of the equity method investees exceed the 10 percent significance threshold, A must provide summarized financial information for all of its equity method investees pursuant to Rule 4-08(g) because they exceed 10 percent significance in the aggregate ([$5 million + $2 million + $4 million] ÷ $100 million = 11%). Registrant A may present summarized financial information of B, C, and D separately or on a combined basis (in most circumstances).

2.3 Asset Test 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 The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating the significance of equity method investees, the registrant must use U.S. GAAP amounts.21

Under Regulation S-X, Rule 4-08(g), all three tests are used to determine whether summarized financial information is required. The test that results in the highest significance level will be used to determine whether summarized financial information must be presented.

Question How should a registrant perform the asset test when calculating the significance of equity method investees to determine whether summarized financial information is required under Rule 4-08(g)?

21 See footnote 19.

43 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Answer Under the final rule, Rule 1-02(w)(1)(ii) states that an equity method investee is significant when the following condition is met:

[T]he registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total assets . . . exceeds 10 percent of such total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

For equity method investees, if the results of any of the significant-subsidiary tests, including the asset test, exceed 10 percent, a registrant must provide summarized financial information in accordance with Rule 4-08(g). For further guidance on significance thresholds, seeSection 2.1.2.

Under Rule 4-08(g), the asset test is performed both individually for each equity method investee and in the aggregate for all equity method investees. If the significance of an equity method investee, individually or as part of an aggregated group, is more than 10 percent, the registrant’s financial statements must include summarized financial information for all equity method investees. For information about whether such information may be aggregated for presentation purposes, see Section 1.1.4.

Example 1 — Individual Equity Method Investee • Registrant A owns a 40 percent equity investment in Company B as of December 31, 20X0. • As of December 31, 20X0, A had total consolidated assets of $50 million. • As of December 31, 20X0, B had total consolidated assets of $20 million. • The asset test calculation is as follows: o Registrant A’s proportionate share of B’s total consolidated assets = $8 million ($20 million × 40%). o Registrant A’s total consolidated assets = $50 million. o Significance = 16 percent. Since the results of the asset test exceed the 10 percent threshold, A must provide summarized financial information for B under Rule 4-08(g).

Example 2 — Multiple Equity Method Investees • Registrant A owns a 30 percent equity method investment in Company B and a 40 percent equity method investment in Company C as of December 31, 20X0. • As of December 31, 20X0, A had total consolidated assets of $100 million. • As of December 31, 20X0, B had total consolidated assets of $14 million. • As of December 31, 20X0, C had total consolidated assets of $18 million. • The asset test calculation for B is as follows: o Registrant A’s proportionate share of B’s consolidated total assets = $4.2 million ($14 million × 30%). o Registrant A’s total consolidated assets = $100 million. o Significance = 4.2 percent. • The asset test calculation for C is as follows: o Registrant A’s proportionate share of C’s consolidated total assets = $7.2 million ($18 million × 40%). o Registrant A’s total consolidated assets = $100 million. o Significance = 7.2 percent.

44 Chapter 2 — Measuring Significance

Example 2 — Multiple Equity Method Investees (continued)

Individually, B and C are not significant to A at the 10 percent level. However, under Rule 4-08(g), A must also perform the asset test in the aggregate for all equity method investees as follows: • Registrant A’s proportionate share of B’s and C’s consolidated total assets = $11.4 million ($4.2 million + $7.2 million). • Registrant A’s total consolidated assets = $100 million. • Significance = 11.4 percent. Since the aggregate test results exceed the 10 percent threshold, summarized financial information for both B and C must be provided in a footnote to A’s financial statements. Registrant A may present summarized financial information of B and C separately or on a combined basis (in most circumstances).

For further guidance on combining summarized financial information for multiple entities, see Section 1.1.4.

2.4 Income Test 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 The guidance in this Q&A is relevant for registrants that apply the final rule. See Section B.4 for a version of the Q&A for registrants that will continue to apply the current requirements through 2020.

The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating the significance of equity method investees, the registrant must use U.S. GAAP amounts.22

To determine whether separate financial statements are required under Regulation S-X, Rule 3-09, for equity method investees, the registrant must only perform two tests: the investment test and the income test. The test that results in the highest significance level will be used to determine the separate financial statement reporting requirements.

Question How should a registrant perform the income test to determine the significance of an equity method investee for purposes of the separate annual financial statement requirements of Rule 3-09?

Answer The final rule amended the income test, which now consists of two components: the income component and the revenue component. A registrant must consider both components, if applicable, when evaluating significance, and use the lower of the two components in determining whether the income test indicates significance. Under the final rule’s amendments

22 See footnote 19.

45 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

to Rule 1-02(w)(1)(iii)(A), an equity method investee is significant when both of the following conditions are met:

(1) The absolute value of the registrant’s and its other subsidiaries’ equity in the tested subsidiary’s consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests exceeds 10 percent of the absolute value of such income or loss of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; and (2) The registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total revenue from continuing operations . . . exceeds 10 percent of such total revenue of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. This component does not apply if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years. [Emphasis added]

See also the additional computation-related guidance in Rule 1-02(w)(1)(iii)(B).

In accordance with Rule 3-09(a), the registrant should substitute 20 percent for the 10 percent in Rule 1-02(w) to determine whether separate financial statements are required. If the results of any of the applicable significant subsidiary tests, including the income test, exceed 20 percent, the registrant must provide separate financial statements of the equity method investee in accordance with Rule 3-09.

For guidance on determining the registrant’s and its other subsidiaries’ equity in the income from continuing operations, before income taxes attributable to the controlling interests of the subsidiary, see Section 2.4.3.

Because Rule 3-09 was written before the codified guidance in ASC 825-10, the SEC staff has provided guidance in the FRM for registrants that have elected the fair value option for investments that otherwise qualify for the equity method of accounting.23 Paragraph 2435.2 of the FRM states that “the staff believes that the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s income statement rather than the registrant’s equity in the earnings of the investee computed as if the equity method had been applied.”

However, if a registrant believes that the application of this guidance to equity method investees results in a requirement to provide more information than is necessary to reasonably inform investors, the registrant may consider preclearing this issue with the SEC staff. See paragraph 2435.2 of the FRM for more information.

For further guidance on significance thresholds, seeSection 2.1.2.

23 As noted in paragraph 2400.4 of the FRM, “A registrant that accounts for an equity method investment using fair value in accordance with SFAS 159, Fair Value Option for Financial Assets and Liabilities [ASC 825] must disclose the information required by APB Opinion 18, paragraph 20d [ASC 323-10-50-3(c)] (i.e., summarized financial information or separate financial statements).” See alsoparagraph 2435.3 of the FRM for information about the potential need to include a quantitative and qualitative analysis in MD&A when an investee accounted for under the fair value option is material to an understanding of results of operations, financial position, or cash flows.

46 Chapter 2 — Measuring Significance

Example 1 • Registrant A is filing its Form 10-K for 20Y0. • Registrant A owns a 40 percent equity method investment in Company B. • For its fiscal year ended December 31, 20Y0, A had consolidated revenue of $100 million and consolidated pretax income from continuing operations (including equity earnings of B) of $10 million. • For its fiscal year ended December 31, 20Y0, B had revenue of $90 million and pretax income from continuing operations of $8 million. • Registrant A’s 40 percent share of B’s revenue for the year ended December 31, 20X9, is $36 million ($90 million × 40%). • Registrant A’s 40 percent share of B’s pretax income from continuing operations for the year ended December 31, 20Y0, is $3.2 million ($8 million × 40%). No other amounts are recorded in A’s income statement in connection with its investment in B.24 Since the results of the income test exceed 20 percent, B is significant under Rule 3-09. The revenue component is 36 percent significance ($36 million ÷ $100 million = 36%), and the income component is 32 percent significance ($3.2 million ÷ $10 million = 32%). For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

Example 2

Assume the same facts as in Example 1, except that Company B had revenue of $45 million. Therefore, A’s 40 percent share of B’s revenue for the year ended December 31, 20Y0, is $18 million ($45 million × 40%).

Since the results of the income test do not exceed 20 percent, B is not significant under Rule 3-09. The revenue component is 18 percent significance ($18 million ÷ $100 million = 18%), and the income component is 32 percent significance ($3.2 million ÷ $10 million = 32%).Both components must be met for the test to indicate significance. For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

Example 3

Assume the same facts as in Example 1, except that Company B had revenue only for the year ended December 31, 20Y0, and none for the year ended December 31, 20X9. Because B did not have material revenue in each of the two most recently completed fiscal years, the revenue component is not applicable. Assume also that A determined that it is not required to use income averaging (see Section 2.4.4).

Since B is significant at the 32 percent level for the income component of the income test ($3.2 million ÷ $10 million = 32%), B is significant under Rule 3-09. For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

24 See Section 2.4.3 for information about determining the numerator of the income test (or the registrant’s proportionate share of the equity method investee’s income or loss).

47 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

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 The guidance in this Q&A is relevant for registrants that apply the final rule. See Section B.5 for a version of the Q&A for registrants that will continue to apply the current requirements through 2020.

The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating significance of equity method investees, the registrant must use U.S. GAAP amounts.25

Under Regulation S-X, Rule 4-08(g), all three tests are used to determine whether summarized financial information is required. The test that results in the highest significance level will be used to determine whether summarized financial information must be presented.

Question How should a registrant perform the income test when calculating the significance of equity method investees to determine whether summarized financial information is required under Rule 4-08(g)?

Answer The final rule amends the income test, which now consists of two components: the income component and the revenue component. A registrant must consider both components, if applicable, when evaluating significance, and use the lower of the two components in determining whether the income test indicates significance. Under the final rule’s amendments to Rule 1-02(w)(1)(iii)(A), an equity method investee is significant when both of the following conditions are met:

(1) The absolute value of the registrant’s and its other subsidiaries’ equity in the tested subsidiary’s consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests exceeds 10 percent of the absolute value of such income or loss of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; and (2) The registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total revenue from continuing operations . . . exceeds 10 percent of such total revenue of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. This component does not apply if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years. [Emphasis added]

See also the additional computation-related guidance in Rule 1-02(w)(1)(iii)(B).

The income test is a two-pronged test that is based on pretax income and revenue. A registrant evaluates significance on the basis of the lower of the two measurement methods (i.e., pretax income or revenue).

25 See footnote 19.

48 Chapter 2 — Measuring Significance

For equity method investees, if the results of any of the significant-subsidiary tests, including the income test, exceed 10 percent, the registrant must provide summarized financial information in accordance with Rule 4-08(g). For more information about significance thresholds, see Section 2.1.2.

See Section 2.4.3 for guidance on determining the registrant’s and its other subsidiaries’ equity in the income from continuing operations before income taxes attributable to the controlling interests of the subsidiary.

Under Rule 4-08(g), the income test is performed both individually for each equity method investee and in the aggregate for all equity method investees. If the equity method investees are significant in the aggregate, the summarized financial information must include all equity method investees, in accordance with Rule 4-08(g). For information about whether such information may be aggregated for presentation purposes, see Section 1.1.4.

Because Rule 4-08(g) was written before the codified guidance in ASC 825-10, the SEC staff has provided guidance in the FRM for registrants that have elected the fair value option for investments that otherwise qualify for the equity method of accounting.26 Paragraph 2435.2 of the FRM states, in part, that “the staff believes that the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s income statement rather than the registrant’s equity in the earnings of the investee computed as if the equity method had been applied.”

However, if a registrant believes that the application of this guidance to equity method investees results in a requirement to provide more information than is necessary to reasonably inform investors, the registrant may consider preclearing this issue with the SEC staff. See paragraph 2435.2 of the FRM for more information.

For information about the income test for interim periods, see Section 2.1.3.

Example 1 • Registrant A is filing its Form 10-K for 20Y0. • Registrant A has a 20 percent equity method investment in Company B. • For its fiscal year ended December 31, 20Y0, A had consolidated revenue of $100 million and consolidated pretax income from continuing operations (including equity earnings of B) of $10 million. • For its fiscal year ended December 31, 20Y0, B had revenue of $90 million and pretax income from continuing operations of $8 million. • Registrant A’s 20 percent share of B’s revenue for the year ended December 31, 20X9, is $18 million ($90 million × 20%). • Registrant A’s 20 percent share of B’s pretax income from continuing operations for the year ended December 31, 20Y0, is $1.6 million ($8 million × 20%). No other amounts are recorded in A’s income statement in connection with its investment in B.27 Since B is significant at the 16 percent level for the income component ($1.6 million ÷ $10 million = 16%) and 18 percent level for the revenue component, A’s financial statements must include summarized financial information of B.

26 See footnote 23. 27 See Section 2.4.3 for guidance about determining the numerator of the income test (or the registrant’s proportionate share of the equity method investee’s income or loss).

49 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example 2

Assume the same facts as in Example 1, except that Company B had revenue of $45 million. Therefore, A’s 20 percent share of B’s revenue for the year ended December 31, 20Y0, is $9 million ($45 million × 20%).

Since the results of the income test do not exceed 10 percent, B is not significant under Rule 4-08(g). The revenue component is 9 percent significance ($9 million ÷ $100 million = 9%), and the income component is 16 percent significance ($1.6 million ÷ $10 million = 16%).Both components must be met for the test to indicate significance. For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

Example 3

Assume the same facts as in Example 1, except that Company B had revenue only for the year ended December 31, 20Y0, and none for the year ended December 31, 20X9. Because entity B did not have material revenue in each of the two most recently completed fiscal years, the revenue component is not applicable. Assume also that A determined that it is not required to use income averaging (see Section 2.4.4).

Since B is significant at the 16 percent level for the income component of the income test ($1.6 million ÷ $10 million = 16%), B is significant under Rule 4-08(g). For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

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 The guidance in this Q&A is relevant for registrants that apply the final rule. See Section B.6 for a version of the Q&A for registrants that will continue to apply the current requirements through 2020.

Registrants should apply the guidance in Regulation S-X, Rule 1-02(w), when measuring the significance of equity method investees under Regulation S-X,Rules 3-09 and 4-08(g). The three significance tests in Rule 1-02(w) are the investment test, the asset test, and the income test. Under the income test, as described in the final rule, the absolute value of the registrant’s “equity in the tested subsidiary’s consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests” is compared with the absolute value of “such income or loss of the registrant and its subsidiaries consolidated for the most recently completed fiscal year.”

Since the equity in an equity method investee’s pretax income or loss from continuing operations may not be presented or disclosed in a registrant’s financial statements, the registrant may have to calculate the amount to be used in the numerator in the income test.

Question How does a registrant determine its share of the pretax income (loss) from continuing operations of an equity method investee for purposes of the numerator in the income component of the income test?

50 Chapter 2 — Measuring Significance

Answer We refer to “income or loss from continuing operations before income taxes . . . attributable to the controlling interests” as pretax income from continuing operations.

Paragraph 2410.3 of the FRM states, in part:

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.

When the investor’s basis in the net assets of the investee is determined, differences may result from fair value allocations assigned to the investee’s assets and liabilities (e.g., “equity method ”) upon initial acquisition of the equity method investment or when additional interests have been acquired.28

Paragraph 2410.3 of the FRM also notes that the denominator of the income component of the income test should not be adjusted to exclude items related to the equity method investee that directly affect net income of the registrant, such as “impairment charges [related to nonbasis differences] at the investor level, gains/losses from stock sales by the registrant; dilution gains/ losses from stock sales by the investee, preferred dividends.”

In addition, as noted in paragraph 2410.6 of the FRM, a registrant should not eliminate intercompany transactions when determining the significance of an equity method investee, since the equity method investee is not consolidated.

See paragraph 2410.7 of the FRM regarding calculating significance when the investee and registrant have different year-ends or when the registrant records the investee’s income (loss) on the basis of a lag of one quarter or less.

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 The guidance in this Q&A is relevant for registrants that apply the final rule. See Section B.7 for a version of the Q&A for registrants that will continue to apply the current requirements through 2020.

Generally, a registrant’s pretax income from continuing operations in the annual financial statements for the most recently completed audited fiscal year (e.g., the financial statements filed in the registrant’s current-year Form 10-K) is used to perform the income component of the income test. Sometimes, however, an average of the registrant’s pretax income from continuing operations for five fiscal years must be used.

28 In addition, note 2 to paragraph 2410.3 of the FRM indicates that in the numerator of the income test, a registrant should (1) not annualize its proportionate share of the investee’s income or loss and (2) use the amount only for the period during which it has significant influence over the investee (i.e., in a year when significant influence is either attained or lost). For example, in calculating the numerator during the year of acquisition of an equity method investment, a registrant would only use its proportionate share of the pretax income from continuing operations of the equity method investment for the portion of the year in which it held the equity method investment (e.g., from the date of acquisition to the end of the fiscal year). Similarly, during a year of disposition of an equity method investment, a registrant would calculate the numerator for the portion of the year in which it held the equity investment before disposition (e.g., the beginning of the fiscal year through date of disposition).

51 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Question When must a registrant use an average of its pretax income from continuing operations to perform the income component of the income test, and how should the test be performed?

Answer Under the final rule, Rule 1-02(w)(1)(iii)(B)(2) states:

Compute the test using the average described herein if the revenue component in paragraph (w)(1)(iii)(A)(2) of this section does not apply and the absolute value of the registrant’s and its subsidiaries’ consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests for the most recent fiscal year is at least 10 percent lower than the average of the absolute value of such amounts for each of its last five fiscal years.

Accordingly, a registrant should first determine whether the revenue component applies. If both the registrant and the subsidiary have material revenue in each of the two most recently completed fiscal years, the registrant would not be able to apply income averaging. If either the registrant or the subsidiary does not have material revenue for each of the two most recently completed fiscal years, income averaging should be applied. The final rule does not provide specific thresholds for determining whether the registrant and subsidiary had material revenue. We believe that registrants will need to exercise judgment when assessing, both quantitatively and qualitatively, whether the registrant and subsidiary had material revenue.

When the revenue component does not apply, a registrant should calculate its average income to determine whether average income should be used in the denominator of its income test.

Under the final rule, registrants are required to use absolute values for periods in which a pretax loss was incurred to calculate average income for the last five fiscal years. That is, if a registrant reports a pretax loss from continuing operations in any year within the five-year period, the loss years should be assigned their absolute values when the numerator for this average is calculated. The denominator should remain at 5. Next, the registrant should determine whether income for its most recently completed fiscal year, or the absolute value of its loss (if a loss is reported), is more than 10 percent lower than the registrant’s five-year average income. If the registrant’s income or the absolute value of its loss is at least 10 percent lower than its five-year average income, the registrant should use its average income in the denominator of the income test.

However, income averaging only applies to a registrant. Therefore, the rule cannot be used to average pretax income from continuing operations of an equity method investee.

As noted in paragraph 2410.5 of the FRM, the equity income or loss of the equity method investee should be included in the registrant’s income in the determination of whether the registrant may apply income averaging.

52 Chapter 2 — Measuring Significance

Example • Registrant A owns a 40 percent equity method investment in Company B. • Registrant A has a December 31 fiscal year-end and is filing its Form 10-K for 20Y0. • Company B is not a registrant and has a December 31 fiscal year-end. • Company B did not generate revenue for the year ended December 31, 20X9 or 20Y0, and therefore, the revenue component does not apply. • Registrant A’s pretax income from continuing operations for the previous five years is as follows: o 20X6 — $4 million. o 20X7 — $6 million. o 20X8 — $5 million. o 20X9 — ($1 million). o 20Y0 — $1 million. • Registrant A’s equity in B’s pretax loss from continuing operations for the year ended December 31, 20Y0, was $0.8 million. • Registrant A’s average pretax income from continuing operations for this five-year period is calculated as follows:

20X6 $ 4 million

20X7 6 million

20X8 5 million

20X9 1 million*

20Y0 1 million

17 million

÷ 5

Registrant A’s average pretax income from continuing operations $ 3.4 million

* Loss years are assigned their absolute value.

Because A’s current-year income of $1 million is lower, by 10 percent or more, than A’s average income for the last five fiscal years of $3.4 million,29 A must use its five-year average income when performing the income component of the income test.

29 The $3.4 million may need to be adjusted in certain situations, as discussed in paragraph 2410.5 of the FRM. If the registrant qualifies to use income averaging and either the registrant or the tested equity method investee, but not both, incurs a loss during any of the years averaged, the equity in income or loss of the equity method investee should be excluded from the registrant’s pretax income or loss in the determination of average income. See Regulation S-X, Rule 1-02(w)(1)(iii)(B)(1).

53 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

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 Other than minor wording changes resulting from the final rule (i.e., the term “income component” under the final rule is consistent with the computation of the income test under current requirements), the guidance in this Q&A is relevant for registrants that apply either the current requirements or the final rule.

Question How should a registrant perform the income component of the income test if either the registrant or the tested equity method investee has incurred a pretax loss from continuing operations?

Answer If either a registrant or an equity method investee has incurred a pretax loss from continuing operations, the registrant should use the absolute value of this loss when performing the income component of the income test.30

As discussed in Section 2.4.3, a registrant that presents equity in earnings or losses of an equity investee, net of tax (in a manner consistent with Regulation S-X, Rule 5-03(b)(12)), generally must include this item, on a pretax basis, in pretax income or loss from continuing operations when performing the income test. However, Regulation S-X, Rule 1-02(w)(1)(iii)(B)(1), states that if either the registrant or the equity method investee, but not both, has incurred a loss in the year used to perform the income component, the registrant should exclude the equity in income or loss of the investee from the registrant’s pretax income or loss from continuing operations when performing the computation.31

Example 1 — Only the Registrant Has a Pretax Loss From Continuing Operations • Registrant A is filing its Form 10-K for 20X0. • Registrant A’s fiscal year-end is December 31, and A has no noncontrolling interests. • Registrant A owns a 40 percent equity method investment in Company B. • For the fiscal year ended December 31, 20X0, B had $10 million in pretax income from continuing operations. • Registrant A’s share of B’s pretax income from continuing operations is $4 million ($10 million × 40%). No other amounts are recorded in A’s income statement in connection with its investments in B.32 • Registrant A determined that it is not required to use income averaging.

30 See paragraph 2015.9 of the FRM. 31 A registrant may be required to use income averaging pursuant to paragraph 2015.8 of the FRM regardless of whether it reports income or loss in its most recent annual period. See Section 2.4.4 for more information about how a registrant should use average income when performing the income test. 32 See Section 2.4.3 for guidance on determining the numerator of the income test under Rule 3-09.

54 Chapter 2 — Measuring Significance

Example 1 — Only the Registrant Has a Pretax Loss From Continuing Operations (continued) • For the fiscal year ended December 31, 20X0, A presented the following in its income statement (in millions):

Loss from continuing operations before taxes $ (21.0)

Income tax benefit 3.0

Loss from continuing operations net of taxes (18.0)

Income from B (net of tax of $1.6) 2.4

Net loss $ (15.6)

• Registrant A’s pretax loss from continuing operations is calculated as follows:

Loss from continuing operations before taxes $ (21.0)

Income from B before taxes 4.0

Registrant A’s pretax loss from continuing operations $ (17.0)

Because the registrant incurred a pretax loss from continuing operations while B earned pretax income from continuing operations, A must apply the guidance from Rule 1-02(w)(1)(iii)(B)(1) and must exclude its share of B’s pretax income from continuing operations in determining the denominator used in the income component under Regulation S-X, Rule 3-09, as follows:

Registrant A’s pretax loss from continuing operations $ (17.0)

Income from B before taxes (4.0)

Denominator for income test $ (21.0)

Conversely, Rule 1-02(w)(1)(iii)(B)(1) would also apply if B incurred a pretax loss from continuing operations and A earned pretax income from continuing operations. • Using the absolute values, A performs the following calculations for the income component:33

Company B’s pretax income from continuing operations $ 4.0

Registrant A’s pretax loss from continuing operations, excluding its share of B’s pretax income from continuing operations 21.0

Significance 19%

• The income component of the income test resulted in a significance level of 19 percent. See Sections 1.1.2 and 2.1.2 for guidance on determining the appropriate reporting and disclosure requirements.

33 See footnote 31.

55 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Example 2 — Both the Registrant and the Equity Method Investee Have Pretax Losses From Continuing Operations • Registrant A is filing its Form 10-K for 20X0. • Registrant A’s fiscal year-end is December 31, and A has no noncontrolling interests. • Registrant A owns a 40 percent equity method investment in Company C. • For the fiscal year ended December 31, 20X0, C had a pretax loss from continuing operations of $20 million. • Registrant A’s share of C’s pretax loss from continuing operations is $8 million ($20 million × 40%). No other amounts are recorded in A’s income statement in connection with its investments in C.34 • Registrant A determined that it is not required to use income averaging. • For the fiscal year ended December 31, 20X0, A presented the following in its income statement (in millions):

Loss from continuing operations before taxes $ (24.0)

Income tax benefit 3.0

Loss from continuing operations net of taxes (21.0)

Loss from C (net of tax benefit of $2) (6.0)

Net loss $ (27.0)

• Registrant A’s pretax loss from continuing operations is calculated as follows (in millions):

Loss from continuing operations before taxes $ (24.0)

Loss from C before taxes (8.0)

$ (32.0)

Since both the registrant and the equity method investee incurred a loss, A’s share of C’s pretax loss from continuing operations should not be excluded from A’s pretax loss from continuing operations when the significance test is performed. • Using the absolute values, A performs the income test calculation as follows:35

Company C’s pretax loss from continuing operations $ 8.0

Registrant A’s pretax loss from continuing operations 32.0

Significance 25%

• The income component of the income test resulted in a significance level of 25 percent. See Sections 1.1.2 and 2.1.2 for guidance on determining the appropriate reporting and disclosure requirements.

34 See Section 2.4.1 for guidance on performing the income test for equity method investees under Rule 3-09. 35 See footnote 31.

56 Chapter 2 — Measuring Significance

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 Other than minor wording changes resulting from the final rule (i.e., the term “income component” under the final rule is consistent with the computation of the income test under current requirements), the guidance in this Q&A is relevant for registrants that apply either the current requirements or the final rule.

Sometimes, a registrant is a successor to a predecessor company or presents financial statements that include predecessor and successor results. Examples include (1) adoption of fresh-start accounting after emergence from bankruptcy, (2) use of pushdown accounting to reflect a change in basis because of an acquisition of the company, or (3) acquisition, by a shell company, of another entity that is deemed to be the shell company’s predecessor. In these situations, a registrant may not have a full year of income statement data reflecting the successor results. For example, if pushdown accounting was applied, the period before the change in basis represents the predecessor period and the period after the change in basis represents the successor period. Note that the periods before the change and after the change in basis are separately presented because of their lack of comparability.

Question How should the income component of the income test be performed with respect to an equity method investment when a registrant’s audited financial statements for its recently completed fiscal year include predecessor and successor operations?

Answer This issue was addressed at the June 2006 AICPA SEC Regulations Committee joint meeting with the SEC staff, at which the SEC staff indicated that only the successor registrant period should be used in the application of the income test. Registrants that wish to use pro forma results for the full year were encouraged to consider preclearing this approach with the SEC staff.

57 Appendix A — Regulation S-X, Rules 1-02(w), 1-02(bb), 3-09, 4-08(g), 8-03, and 10-01(b)(1)

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 financial statements or financial information requirements for equity method investments under Regulation S-X, Rules 3-09 and 4-08(g). In accordance with the final rule’s amendments to the income test, significance is calculated by using the lower of a measure that is based on (1) income from continuing operations before taxes or (2) revenue, if certain conditions are met. In addition, if income averaging is applicable, registrants use “absolute values” rather than “zero” for any loss years to calculate their average net income for the past five fiscal years. The final rule must be adopted for fiscal years beginning after December 31, 2020; however, early application is permitted.

The text of Rules 1-02(w) and 3-09(a), as amended by the final rule, is reproduced below. (Note that the final rule did not affect Rule 1-02(bb), Rule 3-09(b)–(d), Rule 4-08(g), Rule 8-03, or Rule 10-01(b)(1).)

SEC Regulation S-X, Rule 1-02(w)

§210.1-02 — Definitions of Terms Used in Regulation S-X (17 CFR Part 210). . . . (w) Significant subsidiary.

(1) The term significant subsidiary means a subsidiary, including its subsidiaries, which meets any of the conditions in paragraph (w)(1)(i), (w)(1)(ii), or (w)(1)(iii) of this section; however if the registrant is a registered investment company or a business development company, the tested subsidiary meets any of the conditions in paragraph (w)(2) of this section instead of any of the conditions in this paragraph (w)(1). A registrant that files its financial statements in accordance with or provides a reconciliation to U.S. Generally Accepted Accounting Principles (U.S. GAAP) must use amounts determined under U.S. GAAP. A foreign private issuer that files its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB) must use amounts determined under IFRS-IASB.

(i) Investment test.

(A) For acquisitions, other than those described in paragraph(w)(1)(i)(B) of this section, and dispositions this test is met when the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed 10 percent of the aggregate worldwide market value of the registrant’s voting and non-voting common equity, or if the registrant has no such aggregate worldwide market value the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

58 Appendix A — Regulation S-X, Rules 1-02(w), 1-02(bb), 3-09, 4-08(g), 8-03, and 10-01(b)(1)

SEC Regulation S-X, Rule 1-02(w) (continued)

(1) For acquisitions, the “investments in” the tested subsidiary is the consideration transferred, adjusted to exclude the registrant’s and its other subsidiaries’ proportionate interest in the carrying value of assets transferred by the registrant and its subsidiaries consolidated to the tested subsidiary that will remain with the combined entity after the acquisition. It must include the fair value of contingent consideration if required to be recognized at fair value by the registrant at the acquisition date under U.S. GAAP or IFRS-IASB, as applicable; however if recognition at fair value is not required, it must include all contingent consideration, except contingent consideration for which the likelihood of payment is remote.

(2) For dispositions, the “investments in” the tested subsidiary is the fair value of the consideration, including contingent consideration, for the disposed subsidiary when comparing to the aggregate worldwide market value of the registrant’s voting and non-voting common equity, or, when the registrant has no such aggregate worldwide market value, the carrying value of the disposed subsidiary when comparing to total assets of the registrant.

(3) When determining the aggregate worldwide market value of the registrant’s voting and non-voting common equity, use the average of such aggregate worldwide market value calculated daily for the last five trading days of the registrant’s most recently completed month ending prior to the earlier of the registrant’s announcement date or agreement date of the acquisition or disposition.

(B) For a combination between entities or businesses under common control, this test is met when either the net book value of the tested subsidiary exceeds 10 percent of the registrant’s and its subsidiaries’ consolidated total assets or the number of common shares exchanged or to be exchanged by the registrant exceeds 10 percent of its total common shares outstanding at the date the combination is initiated.

(C) In all other cases, this test is met when the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed 10 percent of the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

(ii) Asset test. This test is met when the registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total assets . . . exceeds 10 percent of such total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

(iii) Income test.

(A) This test is met when:

(1) The absolute value of the registrant’s and its other subsidiaries’ equity in the tested subsidiary’s consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests exceeds 10 percent of the absolute value of such income or loss of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; and

(2) The registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total revenue from continuing operations . . . exceeds 10 percent of such total revenue of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. This paragraph (w)(1)(iii)(A)(2) does not apply if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years.

(B) When determining the income component in paragraph (w)(1)(iii)(A)(1) of this section:

(1) If a net loss from continuing operations before income taxes . . . attributable to the controlling interest has been incurred by either the registrant and its subsidiaries consolidated or the tested subsidiary, but not both, exclude the equity in the income or loss from continuing operations before income taxes . . . of the tested subsidiary attributable to the controlling interest from such income or loss of the registrant and its subsidiaries consolidated for purposes of the computation;

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SEC Regulation S-X, Rule 1-02(w) (continued)

(2) Compute the test using the average described in this paragraph (w)(1)(iii)(B)(2) if the revenue component in paragraph (w)(1)(iii)(A)(2) of this section does not apply and the absolute value of the registrant’s and its subsidiaries’ consolidated income or loss from continuing operations before income taxes . . . attributable to the controlling interests for the most recent fiscal year is at least 10 percent lower than the average of the absolute value of such amounts for each of its last five fiscal years; and

(3) Entities reporting losses must not be aggregated with entities reporting income where the test involves combined entities, as in the case of determining whether summarized financial data must be presented or whether the aggregate impact specified in §§210.3-05(b)(2)(iv) and 210.3-14(b)(2)(i)(C) is met, except when determining whether related businesses meet this test for purposes of §§210.3-05 and 210.8-04.

(2) For a registrant that is a registered investment company or a business development company, the term significant subsidiary means a subsidiary, including its subsidiaries, which meets any of the following conditions using amounts determined under U.S. GAAP and, if applicable, section 2(a)(41) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(41)):

(i) Investment test. The value of the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed 10 percent of the value of the total investments of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year; or

(ii) Income test. The absolute value of the sum of combined investment income from dividends, interest, and other income, the net realized gains and losses on investments, and the net change in unrealized gains and losses on investments from the tested subsidiary (except, for purposes of §210.6-11, the absolute value of the change in net assets resulting from operations of the tested subsidiary), for the most recently completed fiscal year exceeds:

(A) 80 percent of the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; or

(B) 10 percent of the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated for the most recently completed fiscal year and the investment test (paragraph (w)(2)(i) of this section) condition exceeds 5 percent. However, if the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated is at least 10 percent lower than the average of the absolute value of such amounts for each of its last five fiscal years, then the registrant may compute both conditions of the income test using the average of the absolute value of such amounts for the registrant and its subsidiaries consolidated for each of its last five fiscal years.

SEC Regulation S-X, Rule 1-02(bb)

§210.1-02 — Definitions of Terms Used in Regulation S-X (17 CFR Part 210). . . . (bb) Summarized financial information. (1) Except as provided in paragraph [(bb)(2)], summarized financial information referred to in this regulation shall mean the presentation of summarized information as to the assets, liabilities and results of operations of the entity for which the information is required. Summarized financial information shall include the following disclosures:

(i) Current assets, noncurrent assets, current liabilities, noncurrent liabilities, and, when applicable, redeemable preferred stocks (see §210.5-02.27) and noncontrolling interests (for specialized industries in which classified balance sheets are normally not presented, information shall be provided as to the nature and amount of the majority components of assets and liabilities);

(ii) 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 (for specialized industries, other information may be substituted for sales and related costs and expenses if necessary for a more meaningful presentation); and

(2) Summarized financial information for unconsolidated subsidiaries and 50 percent or less owned persons referred to in and required by §210.10-01(b) for interim periods shall include the information required by paragraph [(bb)(1)(ii)] of this section.

60 Appendix A — Regulation S-X, Rules 1-02(w), 1-02(bb), 3-09, 4-08(g), 8-03, and 10-01(b)(1)

SEC Regulation S-X, Rule 3-09

§210.3-09 — Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons. (a) If any of the conditions set forth in §210.1-02(w), substituting 20 percent for 10 percent in the tests used therein to determine a significant subsidiary, are met for a majority-owned subsidiary not consolidated by the registrant or by a subsidiary of the registrant, separate financial statements of such subsidiary must be filed. Similarly, if either the first or third condition set forth in §210.1-02(w)(1), substituting 20 percent for 10 percent, is met by a 50 percent or less owned person accounted for by the equity method either by the registrant or a subsidiary of the registrant, separate financial statements of such 50 percent or less owned person must be filed.

(b) Insofar as practicable, the separate financial statements required by this section shall be as of the same dates and for the same periods as the audited consolidated financial statements required by §§210.3-01 and 3-02. However, these separate financial statements are required to be audited only for those fiscal years in which either the first or third condition set forth in §210.1-02(w), substituting 20 percent for 10 percent, is met. For purposes of a filing on Form 10-K (§249.310 of this chapter):

(1) If the registrant is an accelerated filer (as defined in §240.12b-2 of this chapter) but the 50 percent or less owned person is not an accelerated filer, the required financial statements may be filed as an amendment to the report within 90 days, or within six months if the 50 percent or less owned person is a foreign business, after the end of the registrant’s fiscal year.

(2) If the fiscal year of any 50 percent or less owned person ends within theregistrant’s number of filing days before the date of the filing, or if the fiscal year ends after the date of the filing, the required financial statements may be filed as an amendment to the report within thesubsidiary’s number of filing days, or within six months if the 50 percent or less owned person is a foreign business, after the end of such subsidiary’s or person’s fiscal year.

(3) The term registrant’s number of filing days means:

(i) 60 days (75 days for fiscal years ending before December 15, 2006) if the registrant is a large accelerated filer;

(ii) 75 days if the registrant is an accelerated filer; and

(iii) 90 days for all other registrants.

(4) The term subsidiary’s number of filing daysmeans:

(i) 60 days (75 days for fiscal years ending before December 15, 2006) if the 50 percent or less owned person is a large accelerated filer;

(ii) 75 days if the 50 percent or less owned person is an accelerated filer; and

(iii) 90 days for all other 50 percent or less owned persons.

(c) Notwithstanding the requirements for separate financial statements in paragraph (a) of this section, where financial statements of two or more majority-owned subsidiaries not consolidated are required, combined or consolidated statements of such subsidiaries may be filed subject to principles of inclusion and exclusion which clearly exhibit the financial position, cash flows and results of operations of the combined or consolidated group. Similarly, where financial statements of two or more 50 percent or less owned persons are required, combined or consolidated statements of such persons may be filed subject to the same principles of inclusion or exclusion referred to above.

(d) If the 50 percent or less owned person is a foreign business, financial statements of the business meeting the requirements of Item 17 of Form 20-F (§249.220f of this chapter) will satisfy this section.

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SEC Regulation S-X, Rule 4-08(g)

§210.4-08 — General Notes to Financial Statements. . . . (g) Summarized financial information of subsidiaries not consolidated and 50 percent or less owned persons. (1) The summarized information as to assets, liabilities and results of operations as detailed in §210.1-02(bb) shall be presented in notes to the financial statements on an individual or group basis for:

(i) Subsidiaries not consolidated; or

(ii) For 50 percent or less owned persons accounted for by the equity method by the registrant or by a subsidiary of the registrant, if the criteria in §210.1-02(w) for a significant subsidiary are met:

(A) Individually by any subsidiary not consolidated or any 50% or less owned person; or

(B) On an aggregated basis by any combination of such subsidiaries and persons.

(2) Summarized financial information shall be presented insofar as is practicable as of the same dates and for the same periods as the audited consolidated financial statements provided and shall include the disclosures prescribed by §210.1-02(bb). Summarized information of subsidiaries not consolidated shall not be combined for disclosure purposes with the summarized information of 50 percent or less owned persons.

SEC Regulation S-X, Rule 8-03

§210.8-03 — Interim Financial Statements. Interim financial statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on Form 10-Q (§249.308(a) of this chapter) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the issuer states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements. Interim financial statements shall include a balance sheet as of the end of the issuer’s most recent fiscal quarter, a balance sheet as of the end of the preceding fiscal year, and statements of comprehensive income and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year.

(a) Condensed format. Interim financial statements may be condensed as follows:

(1) Balance sheets should include separate captions for each balance sheet component presented in the annual financial statements that represents 10% or more of total assets. Cash and retained earnings should be presented regardless of relative significance to total assets. Registrants that present a classified balance sheet in their annual financial statements should present totals for current assets and current liabilities.

(2) Statements of comprehensive income (or the statement of net income if comprehensive income is presented in two separate but consecutive financial statements) should include net sales or gross revenue, each cost and expense category presented in the annual financial statements that exceeds 20% of sales or gross revenues, provision for income taxes, and discontinued operations. (Financial institutions should substitute net interest income for sales for purposes of determining items to be disclosed.)

(3) Cash flow statements should include cash flows from operating, investing and financing activities as well as cash at the beginning and end of each period and the increase or decrease in such balance.

(4) Additional line items may be presented to facilitate the usefulness of the interim financial statements, including their comparability with annual financial statements.

(5) Provide the information required by §210.3-04 for the current and comparative year-to-date periods, with subtotals for each interim period.

62 SEC Regulation S-X, Rule 8-03 (continued)

(b) Disclosure required and additional instructions as to content —

(1) Footnotes. Footnote and other disclosures should be provided as needed for fair presentation and to ensure that the financial statements are not misleading.

(2) [Reserved]

(3) Significant equity investees. Sales, gross profit, net income (loss) from continuing operations, net income, and net income attributable to the investee must be disclosed for equity investees that constitute 20 percent or more of a registrant’s consolidated assets, equity or income from continuing operations attributable to the registrant.

(4) [Reserved]

(5) Material accounting changes. The registrant’s independent accountant must provide a letter in the first Form 10-Q (§249.308a of this chapter) filed after the change indicating whether or not the change is to a preferable method. Disclosure must be provided of any retroactive change to prior period financial statements, including the effect of any such change on income and income per share.

(6) Financial statements of and disclosures about guarantors and issuers of guaranteed securities. The requirements of §210.3-10 are applicable to financial statements for a subsidiary of a smaller reporting company that issues securities guaranteed by the smaller reporting company or guarantees securities issued by the smaller reporting company. Disclosures about guarantors and issuers of guaranteed securities registered or being registered must be presented as required by §210.13-01.

(7) Disclosures about affiliates whose securities collateralize an issuance. Disclosures about a smaller reporting company’s affiliates whose securities collateralize any class of securities registered or being registered and the related collateral arrangement must be presented as required by §210.13-02.

Instruction 1 to §210.8-03. Where §§210.8-01 through 210.8-08 (Article 8 of this part) are applicable to a Form 10-Q (§249.308a of this chapter) and the interim period is more than one quarter, statements of comprehensive income must also be provided for the most recent interim quarter and the comparable quarter of the preceding fiscal year.

Instruction 2 to §210.8-03: Interim financial statements must include all adjustments that, in the opinion of management, are necessary in order to make the financial statements not misleading. An affirmative statement that the financial statements have been so adjusted must be included with the interim financial statements.

SEC Regulation S-X, Rule 10-01(b)(1)

§210.10-01 — Interim Financial Statements. . . . (b) Other instructions as to content. The following additional instructions shall be applicable for purposes of preparing interim financial statements:

(1) Summarized statement of comprehensive income information shall be given separately as to each subsidiary not consolidated or 50 percent or less owned persons or as to each group of such subsidiaries or fifty percent or less owned persons for which separate individual or group statements would otherwise be required for annual periods. Such summarized information, however, need not be furnished for any such unconsolidated subsidiary or person which would not be required pursuant to §240.13a-13 or §240.15d-13 of this chapter to file quarterly financial information with the Commission if it were a registrant.

63 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

B.1 Overview On May 20, 2020, the SEC issued a final rule that amends the significance tests under Regulation S-X, Rule 1-02(w). The final rule is effective for fiscal years beginning after December 31, 2020; however, early application is permitted. Under the final rule’s amendments to the income test, significance is calculated by using the lower of a measure that is based on (1) income from continuing operations before taxes or (2) revenue, if certain conditions are met. In addition, if income averaging is applicable, registrants use “absolute values” rather than “zero” for any loss years to calculate their average net income for the past five fiscal years.

Since application of the final rule is expected to be beneficial to most registrants, it is assumed that its amendments will be applied early by companies that are subject to the financial statement or financial information requirements for equity method investments under Regulation S-X, Rule 3-09, Rule 4-08(g), or Rule 10-01(b)(1). Accordingly, Chapter 2 of this Roadmap reflects the final rule’s requirements. The sections below contain versions of the relevant Q&As or examples from Chapter 2 that reflect the requirements before the adoption of the final rule. Note that unless otherwise indicated, since only certain aspects of the significance tests in Rule 1-02(w) were affected by the final rule, the guidance in this Roadmap is relevant to registrants that apply either the current requirements or the final rule. This appendix provides guidance for registrants that will continue to apply the current requirements through 2020.

64 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

B.2 Determining When Summarized Income Statement Information Is Required in Interim Financial Statements — Before Application of Final Rule

Q&A Regulation S-X: Rule 10-01(b)-1 The example illustrates the computation of the income test before application of the final rule. See Section 2.1.3 for an example that illustrates the requirements after the final rule is applied.

Example • Registrant A owns a 40 percent equity method investment in Company B. Company B would be required to file quarterly financial information if it were a registrant. • Both A and B have calendar year-ends. • As of December 31, 20X9, B was not significant to A; therefore, separate financial statements under Regulation S-X, Rule 3-09, and summarized financial information under Regulation S-X, Rule 4-08(g), were not required. • As of June 30, 20Y0, A reports the following in its quarterly financial statements: o Total consolidated assets of A as of June 30, 20Y0, of $2 million. o Total consolidated assets of A as of December 31, 20X9, of $2.2 million. o Investment in B as of June 30, 20Y0 = $0.5 million. o Investment in B as of December 31, 20X9 = $0.4 million. o Pretax income from continuing operations of A for the six months ending June 30, 20Y0 (including equity in earnings of B) = $700. o Registrant A’s interest in the pretax income from continuing operations of B for the six months ending June 30, 20Y0 = $100. Note that the amount recorded as pretax income from continuing operations of B is computed in accordance with the guidance in Section B.6.

On the basis of the results of the year-to-date interim-period income test, B is not significant to A at the 20 percent level ($100 ÷ $700 = 14%)

Company B is not significant to A at the 20 percent level on the basis of the investment test as of December 31, 20X9 ($0.4 million ÷ $2.2 million = 18%).

Company B is significant to A at the 20 percent level on the basis of the results of the investment test as of June 30, 20Y0 ($0.5 million ÷ $2 million = 25%). Registrant A must include summarized income statement information of B in its interim financial statements included in the Form 10-Q. Such information would be provided for the year-to-date period ended June 30, 20Y0, as well as the comparative prior year-to-date period.

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B.3 Testing Two or More Equity Method Investees for Significance Under Regulation S-X, Rule 4-08(g) — Before Application of Final Rule Q&A Regulation S-X: Rule 4-08(g)-6 See Section 2.1.4 for a version of this Q&A in which the final rule’s requirements are applied.

When determining the significance of equity method investees in accordance with Regulation S-X, Rule 4-08(g), a registrant must perform the following three tests (as described in Regulation S-X, Rule 1-02(w)): the investment test, the asset test, and the income test. When evaluating significance, the registrant must use U.S. GAAP amounts.

Under Rule 4-08(g)(ii), these tests are applied both individually to each equity method investee and in the aggregate for any combination of equity method investees. If the results of any of the significant-subsidiary tests exceed 10 percent, the registrant must provide summarized financial information in accordance with Rule 4-08(g). If the equity method investees are significant in the aggregate, the summarized financial information must include all equity method investees.

Question When testing two or more equity method investees under Rule 4-08(g), may the registrant aggregate equity method investees reporting losses with those reporting income when performing the income test?

Answer No. Item 3 of Computational Note 1 to Paragraph (w)(3) of Regulation S-X, Rule 1-02(w), states: Where the test involves combined entities, as in the case of determining whether summarized financial data should be presented, entities reporting losses shall not be aggregated with entities reporting income.

Accordingly, a registrant must separately combine the pretax income from continuing operations of all equity method investees reporting income and the pretax loss from continuing operations of all equity method investees reporting losses.

66 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

Example • Registrant R is filing its Form 10-K for 20X0. • Registrant R has investments in Company A, Company B, Company C, and Company D, all of which are accounted for under the equity method. • For its fiscal year ended December 31, 20X0, R had consolidated pretax income from continuing operations (including equity in pretax income or losses from continuing operations of equity method investees) of $2,000. • For its fiscal year ended December 31, 20X0, R’s proportionate share of pretax income/(losses) from continuing operations for each company was as follows: o Company A — $50. o Company B — $100. o Company C — ($50). o Company D — ($200). • No other amounts are recorded in R’s income statement in connection with its investments in A, B, C, and D.1 Income Tests Individual Basis • Company A: $50 ÷ $2,000 = 2.5 percent. • Company B: $100 ÷ $2,000 = 5.0 percent. • Company C: $502 ÷ $2,0503 = 2.4 percent. • Company D: $2004 ÷ $2,2005 = 9.0 percent. Aggregate Basis • Companies A and B: $150 ÷ $2,000 = 7.5 percent. • Companies C and D: $2506 ÷ $2,2507 = 11.1 percent. Although no investee individually meets the 10 percent threshold, because the significance of C and D in the aggregate exceeds 10 percent, R’s financial statements must include summarized financial information in accordance with Rule 4-08(g). Note that the summarized information must cover all equity investees (i.e., A, B, C, and D), not just the investees that are significant.

See Section 1.1.4 for further discussion of the form and content of such information, including how to present combined summarized financial information.

1 See Section 2.4.3 for guidance on determining whether any adjustments to the numerator are required for other amounts related to the equity method investee that are recorded directly by the registrant (such as impairment charges and preferred stock dividends). 2 If either the registrant or the equity method investee incurred a pretax loss from continuing operations in the fiscal year used to perform the income test, the registrant should use the absolute value of this loss when performing the income test. See Section 2.4.5 for further discussion about performing the income test when the registrant or the equity method investee has a loss in the fiscal year. 3 Item 1 of Computational Note 1 to Paragraph (w)(3) of Regulation S-X, Rule 1-02(w), states: “When a loss exclusive of amounts attributable to any noncontrolling interests has been incurred by either the parent and its subsidiaries consolidated or the tested subsidiary, but not both, the equity in the income or loss of the tested subsidiary exclusive of amounts attributable to any noncontrolling interests should be excluded from such income of the registrant and its subsidiaries consolidated for purposes of the computation.” 4 See footnote 2. 5 See footnote 3. 6 See footnote 2. 7 See footnote 3.

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B.4 Performing the Income Test for Equity Method Investees Under Regulation S-X, Rule 3-09 — Before Application of Final Rule Q&A Regulation S-X: Rule 3-09(a)-6 See Section 2.4.1 for a version of this Q&A in which the final rule’s requirements are applied.

The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating the significance of equity method investees, the registrant must use U.S. GAAP amounts.8

To determine whether separate financial statements are required under Regulation S-X, Rule 3-09, for equity method investees, the registrant must only perform two tests, the investment test and the income test. The test that results in the highest significance level will be used to determine the separate financial statement reporting requirements.

Question How should a registrant perform the income test to determine the significance of an equity method investee for purposes of the separate annual financial statement requirements of Rule 3-09?

Answer Rule 1-02(w)(3) states that an equity method investee is significant when the following condition is met: The registrant’s and its other subsidiaries’ equity in the income from continuing operations before income taxes of the subsidiary exclusive of amounts attributable to any noncontrolling interests exceeds 10 percent of such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. [Emphasis added]

See also Computational Note 1 to Paragraph (w)(3) of Rule 1-02(w).

In accordance with Rule 3-09(a), the registrant should substitute 20 percent for the 10 percent in Rule 1-02(w) to determine whether separate financial statements are required. If the results of any of the applicable significant subsidiary tests, including the income test, exceed 20 percent, the registrant must provide separate financial statements of the equity method investee in accordance with Rule 3-09.

For guidance on determining the registrant’s and its other subsidiaries’ equity in the income from continuing operations, before income taxes and exclusive of amounts attributable to any noncontrolling interests of the subsidiary, see Section B.6.

8 Foreign private issuers should refer to Section 6350 and paragraph 2015.3 of the FRM as well as SEC Final Rule Release No. 33-8879. This guidance indicates that issuers should use amounts determined under IFRS Standards, as issued by the IASB, in performing the significance tests required by Rule 3-09 when the issuer’s financial statements are prepared in accordance with such IFRS Standards.

68 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

Because Rule 3-09 was written before the codified guidance in ASC 825-10, the SEC staff has provided guidance in the FRM for registrants that have elected the fair value option for investments that otherwise qualify for the equity method of accounting.9 Paragraph 2435.2 of the FRM states, in part, that “the staff believes that the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s income statement rather than the registrant’s equity in the earnings of the investee computed as if the equity method had been applied.”

However, if a registrant believes that the application of this guidance to equity method investees results in a requirement to provide more information than is necessary to reasonably inform investors, the registrant may consider preclearing this issue with the SEC staff. Seeparagraph 2435.2 of the FRM for more information.

For further guidance on significance thresholds, seeSection 2.1.2.

Example • Registrant A is filing its Form 10-K for 20X0. • Registrant A owns a 40 percent equity method investment in Company B. • For its fiscal year ended December 31, 20X0, A had consolidated pretax income from continuing operations (including equity earnings of B) of $10 million. • For its fiscal year ended December 31, 20X0, B had pretax income from continuing operations of $8 million. • Registrant A’s 40 percent share of B’s pretax income from continuing operations for the year ended December 31, 20X0, is $3.2 million ($8 million × 40%). No other amounts are recorded in A’s income statement in connection with its investment in B.10 Since the results of the income test exceed 20 percent, B is significant under Rule 3-09 ($3.2 million ÷ $10 million = 32%). For guidance on determining the appropriate reporting and disclosure requirements, see Sections 1.1.2 and 2.1.2.

B.5 Performing the Income Test for Equity Method Investees Under Regulation S-X, Rule 4-08(g) — Before Application of Final Rule Q&A Regulation S-X: Rule 4-08(g)-5 See Section 2.4.2 for a version of this Q&A in which the final rule’s requirements are applied.

The three significance tests in Regulation S-X,Rule 1-02(w), are the investment test, the asset test, and the income test. When evaluating significance of equity method investees, the registrant must use U.S. GAAP amounts.11

Under Regulation S-X, Rule 4-08(g), all three tests are used to determine whether summarized financial information is required. The test that results in the highest significance level will be used to determine whether summarized financial information must be presented.

9 As noted in paragraph 2400.4 of the FRM, “A registrant that accounts for an equity method investment using fair value in accordance with SFAS 159, Fair Value Option for Financial Assets and Liabilities [ASC 825] must disclose the information required by APB Opinion 18, paragraph 20d [ASC 323-10-50-3(c)] (i.e., summarized financial information or separate financial statements).” See alsoparagraph 2435.3 of the FRM for information about the potential need to include a quantitative and qualitative analysis in MD&A when an investee accounted for under the fair value option is material to an understanding of results of operations, financial position, or cash flows. 10 See Section 2.4.3 for information about determining the numerator of the income test (or the registrant’s proportionate share of the equity method investee’s income or loss). 11 See footnote 8.

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Question How should a registrant perform the income test when calculating the significance of equity method investees to determine whether summarized financial information is required under Rule 4-08(g)?

Answer Rule 1-02(w)(3) states that an equity method investee is significant when the following condition is met: The registrant’s and its other subsidiaries’ equity in the income from continuing operations before income taxes of the subsidiary exclusive of amounts attributable to any noncontrolling interests exceeds 10 percent of such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. [Emphasis added]

See also Computational Note 1 to Paragraph (w)(3) of Rule 1-02(w).

For equity method investees, if the results of any of the significant-subsidiary tests, including the income test, exceed 10 percent, the registrant must provide summarized financial information in accordance with Rule 4-08(g). For more information about significance thresholds, see Section 2.1.2.

See Section B.6 for guidance on determining the registrant’s and its other subsidiaries’ equity in the income from continuing operations before income taxes, exclusive of amounts attributable to any noncontrolling interests of the subsidiary.

Under Rule 4-08(g), the income test is performed both individually for each equity method investee and in the aggregate for all equity method investees. If the equity method investees are significant in the aggregate, the summarized financial information must include all equity method investees, in accordance with Rule 4-08(g). For information about whether such information may be aggregated for presentation purposes, see Section 1.1.4.

Because Rule 4-08(g) was written before the codified guidance in ASC 825-10, the SEC staff has provided guidance in the FRM for registrants that have elected the fair value option for investments that otherwise qualify for the equity method of accounting.12 Paragraph 2435.2 of the FRM states, in part, that “the staff believes that the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s income statement rather than the registrant’s equity in the earnings of the investee computed as if the equity method had been applied.”

However, if a registrant believes that the application of this guidance to equity method investees results in a requirement to provide more information than is necessary to reasonably inform investors, the registrant may consider preclearing this issue with the SEC staff. See paragraph 2435.2 of the FRM for more information.

For information about the income test for interim periods, see Section 2.1.3.

12 See footnote 9.

70 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

Example • Registrant A is filing its Form 10-K for 20X0. • Registrant A has a 20 percent equity method investment in Company B. • For its fiscal year ended December 31, 20X0, A had consolidated pretax income from continuing operations (including equity earnings of B) of $10 million. • For its fiscal year ended December 31, 20X0, B had pretax income from continuing operations of $8 million. • Registrant A’s 20 percent share of B’s pretax income from continuing operations for the year ended December 31, 20X0, is $1.6 million ($8 million × 20%). No other amounts are recorded in A’s income statement in connection with its investment in B.13 Since B is significant at the 16 percent level ($1.6 million ÷ $10 million = 16%), A’s financial statements must include summarized financial information of B.

B.6 Determining a Registrant’s Share of the Income or Loss of the Equity Method Investee — Before Application of Final Rule Q&A Regulation S-X: Rule 3-09(a)-7 See Section 2.4.3 for a version of this Q&A in which the final rule’s requirements are applied.

Registrants should apply the guidance in Regulation S-X, Rule 1-02(w), when measuring the significance of equity method investees under Regulation S-X,Rules 3-09 and 4-08(g). The three significance tests in Rule 1-02(w) are the investment test, the asset test, and the income test. The income test, described in Rule 1-02(w)(3), compares the registrant’s “equity in the income from continuing operations before income taxes of the subsidiary exclusive of amounts attributable to any noncontrolling interests” with “such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year.”

Since the equity in an equity method investee’s pretax income or loss from continuing operations may not be presented or disclosed in a registrant’s financial statements, the registrant may have to calculate the amount to be used in the numerator in the income test.

Question How does a registrant determine its share of the pretax income (loss) from continuing operations of an equity method investee for purposes of the numerator in the income test?

Answer We refer to “income from continuing operations before income taxes exclusive of [any] amounts attributable to any noncontrolling interests” as “pretax income from continuing operations.”14

13 See Section 2.4.3 for guidance about determining the numerator of the income test (or the registrant’s proportionate share of the equity method investee’s income or loss). 14 The SEC issued technical amendments to make the SEC reporting requirements consistent with ASC 805-10 and ASC 810-10. The technical amendments changed the description of pretax income from continuing operations in Rule 1-02(w)(3) to indicate that it is exclusive of any amounts attributable to the noncontrolling interest. However, pretax income from continuing operations is calculated in the same manner as it was before the technical amendments were issued.

71 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

Paragraph 2410.3 of the FRM states, in part: 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.

When the investor’s basis in the net assets of the investee is determined, differences may result from fair value allocations assigned to the investee’s assets and liabilities (e.g., “equity method goodwill”) upon initial acquisition of the equity method investment or when additional interests have been acquired.15

Paragraph 2410.3 of the FRM also notes that “[w]hile not an exclusive list, items impacting net income of the registrant that should be excluded from the test [i.e., not considered for purposes of calculating the registrant’s proportionate share of the investee’s income or loss16] are: [non- basis difference] 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.”

In addition, as noted in paragraph 2410.6 of the FRM, a registrant should not eliminate intercompany transactions when determining the significance of an equity method investee, since the equity method investee is not consolidated.

See paragraph 2410.7 of the FRM regarding calculating significance when the investee and registrant have different year-ends or when the registrant records the investee’s income (loss) on the basis of a lag of one quarter or less.

15 In addition, note 2 to paragraph 2410.3 of the FRM indicates that in the numerator of the income test, a registrant should (1) not annualize its proportionate share of the investee’s income or loss and (2) use the amount only for the period during which it has significant influence over the investee (i.e., in a year when significant influence is either attained or lost). For example, in calculating the numerator during the year of acquisition of an equity method investment, a registrant would only use its proportionate share of the pretax income from continuing operations of the equity method investment for the portion of the year in which it held the equity method investment (e.g., from the date of acquisition to the end of the fiscal year). Similarly, during a year of disposition of an equity method investment, a registrant would calculate the numerator for the portion of the year in which it held the equity investment before disposition (e.g., the beginning of the fiscal year through date of disposition). 16 Todd Hardiman, associate chief accountant in the SEC’s Division of Corporation Finance, discussed the SEC staff’s views on this topic at the 2010 AICPA Conference on Current SEC and PCAOB Developments. The slides used by Mr. Hardiman in his presentation are available on the SEC’s Web site. Those slides contain examples illustrating the difference between the staff’s historical practice (the “old” practice) and the new SEC staff interpretations (the “new” practice). Under the old practice, a registrant’s share of the investee’s pretax income from continuing operations may have been adjusted for other items such as impairment charges and certain gains and losses. Under the new method, the registrant’s share of the investee’s pretax income from continuing operations is adjusted only for basis differences.

72 Appendix B — Measuring Significance Before Application of the SEC’s May 2020 Final Rule

B.7 Using Average Income When Performing the Income Test — Before Application of Final Rule Q&A Regulation S-X: Rule 3-09(a)-8 See Section 2.4.4 for a version of this Q&A in which the final rule’s requirements are applied.

Generally, a registrant’s pretax income from continuing operations in the annual financial statements for the most recently completed audited fiscal year (e.g., the financial statements filed in the registrant’s current-year Form 10-K) is used to perform the income test. Sometimes, however, an average of the registrant’s pretax income from continuing operations for five fiscal years must be used.

Question When must a registrant use an average of its pretax income from continuing operations to perform the income test, and how should the test be performed?

Answer Item 2 of Computational Note 1 to Paragraph (w)(3) of Regulation S-X, Rule 1-02(w), states: If income of the registrant and its subsidiaries consolidated exclusive of amounts attributable to any noncontrolling interests for the most recent fiscal year is at least 10 percent lower than the average of the income for the last five fiscal years, such average income should be substituted for purposes of the computation. Any loss years should be omitted for purposes of computing average income.

Accordingly, a registrant should first calculate its average income to determine whether average income should be used in the denominator of its income test.

The SEC staff indicates inparagraph 2015.8 of the FRM that the computational note above is applicable regardless of whether a registrant reports income or a loss in the latest fiscal year. That paragraph further notes that if a registrant reports a pretax loss from continuing operations in any year within the five-year period, the loss years should be assigned a value of zero when the numerator for this average is calculated. The denominator should remain at 5. Next, the registrant should determine whether income for its most recently completed fiscal year, or the absolute value of its loss (if a loss is reported), is more than 10 percent lower than the registrant’s five-year average income. If the registrant’s income or the absolute value of its loss is at least 10 percent lower than its five-year average income, the registrant should use its average income in the denominator of the income test.

However, income averaging only applies to a registrant. Therefore, the rule cannot be used to average pretax income from continuing operations of an equity method investee.

As noted in paragraph 2410.5 of the FRM, the equity income or loss of the equity method investee should not be excluded from the registrant’s income in the determination of whether the registrant may apply income averaging.

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Example • Registrant A owns a 40 percent equity method investment in Company B. • Registrant A has a December 31 fiscal year-end and is filing its Form 10-K for 20Y0. • Company B is not a registrant and has a December 31 fiscal year-end. • Registrant A’s pretax income from continuing operations for the previous five years is as follows: o 20X6 — $4 million. o 20X7 — $6 million. o 20X8 — $5 million. o 20X9 — ($1 million). o 20Y0 — $1 million. • Registrant A’s equity in B’s pretax income from continuing operations for the year ended December 31, 20Y0, was $0.8 million. • Registrant A’s average pretax income from continuing operations for this five-year period is calculated as follows:

20X6 $ 4 million 20X7 6 million 20X8 5 million 20X9 —* 20Y0 1 million 16 million ÷ 5 Registrant A’s average pretax income from continuing operations $ 3.2 million

* Loss years are assigned a value of zero.

Because A’s current-year income of $1 million is lower, by 10 percent or more, than A’s average income for the last five fiscal years of $3.2 million,17 A must use its five-year average income when performing the income test.

17 The $3.2 million may need to be adjusted in certain situations, as discussed in paragraph 2410.5 of the FRM. If the registrant qualifies to use income averaging and either the registrant or the tested equity method investee, but not both, incurs a loss during any of the years averaged, the equity in income or loss of the equity method investee should be excluded from the registrant’s pretax income or loss in the determination of average income. (See Item 1 of Computational Note 1 to Paragraph (w)(3) of Regulation S-X, Rule 1-02(w).)

74 Appendix C — Titles of Standards and Other Literature

SEC Literature ASR No. 302 (FRC Section 213), “Separate Financial Statements” • FRC Section 213.03, “Unconsolidated Subsidiaries and 50 Percent or Less Owned Persons” o 213.03.b, “Discussion of Rules”

o 213.03.c, “Summarized Financial Information”

Final Rules No. 33-7118, Financial Statements of Significant Foreign Equity Investees and Acquired Foreign Businesses of Domestic Issuers and Financial Schedules

No. 33-8879, Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP

No. 33-8959, Foreign Issuer Reporting Enhancements

No. 33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities

No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses

No. 34-88365, Accelerated Filer and Large Accelerated Filer Definitions

FRM Topic 2, “Other Financial Statements Required”

Topic 4, “Independent ’ Involvement”

Topic 5, “Smaller Reporting Companies”

Topic 6, “Foreign Private Issuers & Foreign Businesses”

Topic 10, “Emerging Growth Companies”

Topic 13, “Effects of Subsequent Events on Financial Statements Required in Filings”

Regulation S-K Item 10(f), “Smaller Reporting Companies”

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Regulation S-X Rule 1-02, “Definitions of Terms Used in Regulation S-X (17 CFR Part 210)” • Rule 1-02(l), “Foreign Business” • Rule 1-02(w), “Significant Subsidiary” • Rule 1-02(x), “Subsidiary” • Rule 1-02(bb), “Summarized Financial Information” Rule 2-05, “Examination of Financial Statements by More Than One Accountant”

Rule 3-01, “Consolidated Balance Sheets”

Rule 3-02, “Consolidated Statements of Comprehensive Income and Cash Flows”

Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired”

Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons”

Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”

Rule 3-12, “Age of Financial Statements at Effective Date of Registration Statement or at Mailing Date of Proxy Statement”

Rule 3-13, “Filing of Other Financial Statements in Certain Cases”

Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered”

Rule 4-08, “General Notes to Financial Statements” • Rule 4-08(g), “Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons”

Rule 5-03, “Statements of Comprehensive Income”

Article 8, “Financial Statements of Smaller Reporting Companies”

Rule 8-03, “Interim Financial Statements” • Rule 8-03(b), “Disclosure Required and Additional Instructions as to Content” Rule 10-01, “Interim Financial Statements” • Rule 10-01(b), “Other Instructions as to Content” Article 12, “Form and Content of Schedules”

Rule 13-01, “Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”

Rule 13-02, “Affiliates Whose Securities Collateralize Securities Registered or Being Registered”

SAB Topic No. 6.K.4, “Accounting Series Release 302 — Separate Financial Statements Required by Regulation S-X: Application of Significant Subsidiary Test to Investees and Unconsolidated Subsidiaries”

76 Appendix C — Titles of Standards and Other Literature

Securities Exchange Act of 1934 Rule 12b-2, “Registration and Reporting; Definitions”

Rule 12b-25, “General Requirements as to Contents; Notification of Inability to Timely File All or Any Required Portion of a Form 10-K, 20-F, 11-K, N-CEN , N-CSR, 10-Q, or 10-D”

Rule 13a-13, “Reports of Issuers of Securities Registered Pursuant to Sections 12; Other Reports; Quarterly Reports on Form 10-Q”

Rule 15d-13, “Reports of Registrants Under the Securities Act of 1933; Quarterly Reports on Form 10-Q”

Section 3, “Definitions and Application of Title”

Section 12(b), “Registration Requirements for Securities; Procedure for Registration; Information”

Section 13, “Periodical and Other Reports”

Section 15, “Registration and Regulation of Brokers and Dealers”

AICPA Literature Clarified Statement on Auditing Standards AU-C Section 700, “Forming an Opinion and Reporting on Financial Statements”

FASB Literature ASC Topics ASC 205, Presentation of Financial Statements

ASC 250, Accounting Changes and Error Corrections

ASC 260, Earnings per Share

ASC 270, Interim Reporting

ASC 280, Segment Reporting

ASC 323, Investments — Equity Method and Joint Ventures

ASC 606, Revenue From Contracts With Customers

ASC 805, Business Combinations

ASC 810, Consolidation

ASC 825, Financial Instruments

ASC 842, Leases

ASUs ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates

77 Deloitte | A Roadmap to SEC Reporting Considerations for Equity Method Investees (2020)

PCAOB Literature Rule 1001, “Definitions of Terms Employed in Rules”

Superseded Literature Accounting Principles Board (APB) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”

FASB Statement No. 159, Fair Value Option for Financial Assets and Liabilities

78 Appendix D — Abbreviations

Abbreviation Description Abbreviation Description

AICPA American Institute of Certified GAAP generally accepted accounting Public Accountants principles

APB Accounting Principles Board GAAS generally accepted auditing Opinion standards

ASC FASB Accounting Standards IASB International Accounting Standards Codification Board

ASR SEC Accounting Series Release IFRS International Financial Reporting Standard ASU FASB Accounting Standards Update IPO initial public offering C&DI SEC Compliance and Disclosure Interpretation JOBS Act Jumpstart Our Business Startups Act CAQ Center for Audit Quality MD&A Management’s Discussion and CFR Code of Federal Regulations Analysis

EGC emerging growth company PBE public business entity

FASB Standards PCAOB Public Company Accounting Board Oversight Board

FAST Act Fixing America’s Surface SAB SEC Staff Accounting Bulletin Transportation Act SEC Securities and Exchange FRC SEC Financial Reporting Commission Codification SFAS Statement of Financial Accounting FRM SEC Division of Corporation Standards Finance’s Financial Reporting Manual SRC smaller reporting company

79 Appendix E — Changes Made in the 2020 Edition of This Roadmap

The table below summarizes the substantive changes made since publication of the 2019 edition of this Roadmap as a result of SEC activity and practice developments.

Section Title Description 1.1.2 Form and Content of Separate Financial Updated to reflect the issuance of ASU Statements of Equity Method Investees 2019-10. 1.1.3 Regulation S-X, Rule 3-09, and Lower-Tier Added discussion of the income component Equity Method Investees to the example. 1.1.4 Form and Content of Summarized Financial Updated to reflect the issuance of ASU Information of Equity Method Investees 2019-10. 1.2.1 Audit Requirements of Financial Statements Clarified that while periods for which an for Equity Method Investees investment is not significant need not be audited, if such periods were previously audited, professional standards may require an auditor to address those periods in the audit report. If such periods were not previously audited, the auditor may be required to state that in the report and that therefore the auditor assumes no responsibility for them. 1.3.2 Interaction of Regulation S-X, Rules 3-10 and Added Changing Lanes discussion to reflect 3-16, With Regulation S-X, Rule 3-09 the SEC’s 2020 final rule, which amended the disclosure requirements for certain registered securities. 1.3.3 Interaction Between U.S. GAAP and SEC Clarified that if a registrant has more than one Guidance With Respect to Providing Financial equity method investee and the aggregate Information Regarding Equity Method significance of all equity method investees Investees to the registrant exceeds 10 percent, summarized financial data under Rule 4-08(g) is required for the equity method investees for which separate financial statements are not provided. 1.5.1 Due Date of Financial Statements for Equity Updated the equity method investee table Method Investees to reflect the SEC’s 2020 final rule, which amended the definitions of accelerated and large accelerated filer. 2.1 Considerations Related to Measuring Added Changing Lanes discussion to reflect Significance the SEC’s 2020 final rule, which amended the significance test under Rule 1-02(w).

80 Appendix E — Changes Made in the 2020 Edition of This Roadmap

(Table continued)

Section Title Description 2.1.3 Determining When Summarized Income Updated the example to illustrate the Statement Information Is Required in Interim computation of the revenue component of Financial Statements the income test under the SEC’s 2020 final rule. 2.1.4 Testing Two or More Equity Method Investees Updated the Q&A and example to reflect the for Significance Under Regulation S-X, Rule SEC’s 2020 final rule. 4-08(g) 2.2.1 Performing the Investment Test for Equity Added Changing Lanes discussion to clarify Method Investees Under Regulation S-X, Rule that under the SEC’s 2020 final rule, the use 3-09 of aggregate worldwide market value as the denominator in the investment test only applies in the computation of significance of business acquisitions and dispositions. 2.4.1 Performing the Income Test for Equity Updated the Q&A and Example 1 to reflect Method Investees Under Regulation S-X, Rule the SEC’s 2020 final rule. Added Examples 3-09 2 and 3 to illustrate the computation of the revenue component of the income test under the final rule. 2.4.2 Performing the Income Test for Equity Updated the Q&A and example to reflect the Method Investees Under Regulation S-X, Rule SEC’s 2020 final rule. Added Examples 2 and 4-08(g) 3 to illustrate the computation of the revenue component of the income test under the final rule. 2.4.3 Determining a Registrant’s Share of the Updated the Q&A to reflect the SEC’s 2020 Income or Loss of the Equity Method Investee final rule. 2.4.4 Using Average Income When Performing the Updated the Q&A and example to reflect the Income Component of the Income Test SEC’s 2020 final rule. Appendix A Regulation S-X, Rules 1-02(w), 1-02(bb), 3-09, Updated the guidance on the significance 4-08(g), 8-03, and 10-01(b)(1) test under Rule 1-02(w) to reflect the requirements in the SEC’s 2020 final rule. Appendix B Measuring Significance Before Application of Added appendix with versions of Q&As and the SEC’s May 2020 Final Rule examples from Chapter 2 that reflect the requirements before application of the SEC’s 2020 final rule.

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