radio-button

Perspectives

Regulation S-X financial disclosures and what you should know

On the Radar: SEC reporting for guarantees of debt

When SEC registrants offer credit enhancement arrangements under which subsidiaries of that registrant guarantee the debt; the registrants pledge the stock of their affiliates as collateral; or a subsidiary of the registrant (rather than the registrant) issues debt or debt-like securities, there are certain SEC reporting implications that must be considered. To ensure that you can take full advantage of the cost-of-capital advantages associated with these structures and enhancements, familiarize yourself with these complexities surrounding SEC disclosure requirements first.

${column-img-description}

On the Radar series

High-level summaries of emerging issues and trends related to the accounting and financial reporting topics addressed in our Roadmap series, bringing the latest developments into focus.

About guarantees of debt and collateralizations

SEC registrants may issue a variety of securities to finance their operations. In certain cases, a registrant may offer credit enhancement arrangements under which (1) subsidiaries of the registrant guarantee the debt or debt-like securities or (2) the registrant pledges the stock of its affiliates as collateral. In addition, for various reasons, a subsidiary of the registrant (rather than the registrant) may issue debt or debt-like securities. While these structures or credit enhancement arrangements may be beneficial from a cost-of-capital perspective, registrants should consider the SEC reporting implications under SEC Regulation S-X, Rules 3-10, 3-16, 13-01, and 13-02, and related complexities.

Guarantees of debt or debt-like securities that are registered under the Securities Act of 1933 are considered securities themselves under that legislation. Therefore, such guarantees, in addition to offerings of the guaranteed debt or debt-like securities, must be registered with the SEC unless they are exempt from registration. Once a company registers them, an SEC reporting obligation is established for each subsidiary issuer or guarantor under which the following (not all-inclusive) must be provided separately:

  • Full annual financial statements prepared in accordance with applicable accounting standards and audited in accordance with PCAOB standards
  • An annual assessment of internal control over financial reporting
  • Quarterly reporting of condensed financial information
  • MD&A
On the Radar: SEC reporting considerations for guarantees and collateralizations

Alternative types of disclosures

Given how burdensome these requirements can be, the SEC typically permits registrants to provide alternative nonfinancial and financial disclosures as follows in their financial statements or MD&A as a form of relief in certain circumstances:

  • A description of the issuers and guarantors
  • The terms and conditions of the guarantees, including whether a subsidiary guarantee is not full and unconditional or joint and several
  • Factors that may affect payments to holders of the guaranteed securities, including, but not limited to:
    • The structure of and relationship between issuers, guarantors, and nonguarantors
    • Restrictions on dividends
    • Limitations on enforceability of the guarantees
    • The rights of noncontrolling interests

Summarized financial information of the issuer and guarantors consisting of the following line items, together with a brief description of the basis of presentation:

  • Current and noncurrent assets
  • Current and noncurrent liabilities
  • Redeemable preferred stock (if applicable)
  • Noncontrolling interests (if applicable)
  • Net sales or gross revenues
  • Gross profit (or costs and expenses related to net sales or gross revenues)
  • Income (loss) from continuing operations
  • Net income (loss)
  • Net income (loss) attributable to the entity

Guarantees of debt structures

It is significantly less costly and burdensome for a registrant to provide these alternative disclosures than comply with separate SEC reporting obligations for each subsidiary issuer and guarantor. Thus, before issuing securities, a registrant should determine whether it qualifies for such relief on the basis of the contemplated legal structure and consult with SEC legal counsel as appropriate. A registrant is eligible to provide alternative disclosures if its securities are issued or fully and unconditionally guaranteed by a parent company registrant, all issuers and guarantors are consolidated subsidiaries of the parent company, the securities are debt or debt-like, and one of the following guarantee structures is used:

The parent company registrant issues (or co-issues on a joint-and-several basis with one or more of its consolidated subsidiaries) securities, and any guarantees are provided by one or more consolidated subsidiaries.

A consolidated subsidiary issues (or co-issues with one or more other consolidated subsidiaries of the parent company registrant) the securities, and the securities are fully and unconditionally guaranteed by the registrant/parent company.

A registrant whose debt or debt-like securities meet these requirements may provide alternative disclosures in lieu of separate financial statements for the subsidiary issuers or guarantors. Note that while such alternative disclosure requirements apply only to publicly registered securities with these features, investors in private placement debt securities with similar guarantee structures may expect companies to disclose similar information.

A registrant that issues securities that are collateralized by the stock of an affiliate must also provide certain financial and nonfinancial disclosures about the affiliates whose stock collateralizes the securities. This includes summarized financial information about such affiliates and certain other nonfinancial disclosures.

Continue your guarantees and collateralizations learning

For a comprehensive discussion of the disclosure requirements for both guaranteed and collateralized securities, see Deloitte’s Roadmap SEC reporting considerations for guarantees and collateralizations.

  

Read the full roadmap
long winding road

Subscribe to the Deloitte Roadmap Series

The Roadmap series provides comprehensive, easy-to-understand guides on applying FASB and SEC accounting and financial reporting requirements.

Explore the Roadmap library in the Deloitte Accounting Research Tool (DART), and subscribe to receive new publications via email.

Subscribe

Let's talk!

Guidance on the SEC requirements for acquisitions

On the Radar: Business acquisitions—SEC reporting considerations

SEC comment letter industry insights and trends

On the Radar:  SEC Comment Letter Considerations