What to consider as an equity method investee

Identification of operating segments

SEC registrants may have equity method investments, including those accounted for under the fair value option or hypothetical liquidation basis. In their filings with the SEC, they are required to provide financial information about any significant equity method investees. Therefore, such registrants must consider whether to provide financial information about such investee in any report filed with the SEC that includes their own financial statements.

Level of significance

The amount of information a registrant must present about an investee depends on the level of the investee’s significance level. To determine the significance level, a registrant performs the applicable tests (as indicated below) for each equity method investee individually and, in certain cases, for all such investees in the aggregate:

• The investment test
• The asset test
• The income test

The test that results in the highest significance level will be used to establish the financial reporting requirements. A registrant may use the following table to determine which information must be presented:

Other Considerations

In March 2023, the FASB issued ASU 2023-02, which expands the applicability of the proportional amortization method (PAM) to investments that would otherwise be accounted for under the equity method of accounting. Registrants that have material investments and have elected the accounting policy choice to apply PAM may consider consulting with their audit and legal professionals and reaching out to the SEC to discuss their fact patterns.

In addition to ASU 2023-02 as well as the requirements discussed above, a registrant should consider the following:

• If it reports a discontinued operation retrospectively, the registrant will need to reevaluate the significance of its equity method investees for all periods
• It may wish to ask the SEC for a waiver if an equity method investee becomes significant because of unusual circumstances
• Smaller reporting companies have different reporting requirements related to significant equity method investments
• The separate financial statements of a significant equity method investee may be included in the annual report filed by the registrant or in an amendment to the annual report depending on a number of considerations, including the equity method investee’s year-end and filing status and whether the investee is a foreign business
• When applying the income test to equity method investees for which a registrant has elected the fair value option in accordance with ASC 825-10-15-4, the registrant should calculate the income and revenue components as follows:
  • Income component — Determine by using the change in fair value of the investee reflected in the registrant’s income statement
  • Revenue component — Determine by using the registrant’s proportionate share of the investee’s revenue (i.e., the registrant’s ownership interest in the investee multiplied by the investee’s revenue)

Continue your SEC reporting considerations for equity method investees learning

Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees provides comprehensive guidance on this topic. For guidance on the US GAAP requirements related to equity method investees, see Deloitte’s Roadmap Equity Method Investments and Joint Ventures.