Regulation S-X financial disclosures and what you should know has been saved
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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.
About guarantees of debt and collateralizations
SEC registrants may issue a variety of debt or debt-like 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 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:
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:
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: Guarantees and Collateralizations — SEC Reporting Considerations.
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John Wilde
Partner | National Office Accounting & Reporting Services
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