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 addition to the requirements discussed above, a registrant should consider the following:

• 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—Use the change in fair value of the investee reflected in the registrant’s income test.
  • Revenue component—Compare the registrant’s proportionate share of the investee’s revenue with the registrant’s revenue.
• If the registrant reports a discontinued operation retrospectively, it will need to reevaluate the significance of its equity method investees for all periods.
• The registrant 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.
• When filed with the SEC, the separate financial statements of a significant equity method investee should take into consideration PBE adoption dates for certain ASUs (e.g., ASU 2023-09 and ASU 2024-03).