Learning objectives

• Determine the relationships among Regulations S-X and S-K, the Financial Reporting Releases (FRRs), the Accounting and Auditing Enforcement Releases (AAERs), the Staff Accounting Bulletins (SABs), the Staff Legal Bulletins (SLBs), and other sources of research information applicable to public companies.
• Identify reporting issues for early resolution.
• Identify how to use the SEC’s rules and regulations and other technical resources to solve reporting problems.

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Introduction

Upon entering the public reporting arena, accountants are exposed to new rules and requirements that often are foreign to them. The most obvious difference is the legal format of the SEC’s rules and regulations concerning financial disclosures, nonfinancial disclosures, and application of accounting principles. The extensive use of citations, footnotes, and other cross-referencing techniques makes researching issues difficult. The next sobering discovery is the number of different levels of rules, regulations, and interpretations. Finally, subtle and not-so-subtle differences between the SEC’s requirements and generally accepted accounting principles become apparent. A natural reaction is to question where to begin.

Once the initial shock wears off and the accountant becomes more familiar with the rules and their organization, the next hurdle becomes how to resolve problems that are not specifically addressed by the rules. Understanding the organization of the SEC and understanding which group within the SEC to approach for an interpretation makes this process less overwhelming. The SEC staff encourages registrants and their independent accountants to consult with them on complex issues and has an excellent reputation for helping resolve problems.

The SEC website includes the widely used SEC rules and regulations. The website is a good starting place for determining SEC reporting requirements.

The following provides links to actual examples of a Form S-1 and a Form 10-K filed with the SEC.

Smaller reporting company regulatory relief

The SEC’s published rules include scaled reporting requirements for issuers that are smaller reporting companies. Smaller reporting companies are discussed in greater detail in later chapters.

Emerging growth company regulatory relief

The Jumpstart Our Business Startups (JOBS) Act of 2012 created a new category of filers called emerging growth companies, which are entitled to certain reporting relief. Emerging growth companies are discussed in greater details in a later chapter. The scaled disclosure requirements or reporting relief for smaller reporting companies and EGC are not identical.

Knowledge check

1. After reviewing the form instructions to an SEC filing, what is the next step?
   1. Review the specific requirements of the various Regulation S-K and S-X items cited in the form.
   2. Identify the items that can be incorporated by reference.
   3. Request a “no action” letter from the SEC that provides the registrant with an exemption from the filing.
   4. Pay the SEC filing fees.

Qualifications of accountants (Rule 2-01 of Regulation S-X)

Regulation S-X, Rule 2-01 provides guidance to ensure that accountants are independent of their clients and qualified to perform the audit. The rules include the following topics:

• Employment by an audit client of former employees of the independent accounting firm
• Nonattest services by the independent accountant
• Rotation of audit partners
• Audit committee approval for all audit and nonaudit services
• Compensation of audit partners from nonaudit, review, or attest services

Accountants’ reports (Rule 2-02 of Regulation S-X)

The form and content of accountants’ reports are prescribed by Rule 2-02 of Regulation S-X (that is, 17 CFR 210.2-02).

In situations in which other independent accountants have audited the financial statements of any branch or consolidated subsidiary of the registrant, Rule 2-05 of Regulation S-X sets forth the reporting requirements. Auditing Standard (AS) 1205, Part of Audit Performed by Other Independent Auditors, requires disclosures in accountants’ reports that exceed the requirements of Rule 2-05. Therefore, that statement should govern the form of accountants’ reports when another auditor performs part of the audit.

When part of an audit is performed by an accountant other than the principal accountant and the principal accountant’s report refers to that other accountant’s report, or when the prior period’s financial statements are audited by a predecessor accountant, the separate report of the other accountant must be included in the filing. Such separate reports are not required to be included in annual reports to stockholders.

The SEC generally will not accept opinions that are qualified for scope or fairness of presentation. If the auditor issues such an opinion in accordance with PCAOB auditing standards, the SEC does not consider the filing to be complete.

The SEC will accept a standard “going concern” explanatory paragraph if prepared in conformity with AS 2415, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. Such a filing must contain full and fair disclosure of the registrant’s financial difficulties and the plans to overcome them. Accounting principles dictate when management needs to make going concern disclosures or present the financial statements on the liquidation basis of accounting. The auditor needs to make an independent assessment of the going concern conclusion and the appropriateness of the disclosures.

The SEC implemented Section 404 of the Sarbanes-Oxley Act by issuing rules that require management to evaluate and report on the effectiveness of a company’s internal controls in each annual report. They also require accelerated filers to engage their auditor to audit the internal controls and to provide an auditor’s attestation report in each annual report. Accordingly, Rule 2-02(f) of Regulation S-X requires auditors of accelerated filers who issue a report on a registrant’s financial statements included in an annual report that contains an assessment by management of the effectiveness of the registrant’s internal control over financial reporting to also issue a report attesting to the effectiveness of the internal controls. Rule 2-02(f) also specifies the technical requirements for the auditor’s attestation report. The attestation report may be separate from the accountants’ report.

Any filings made via EDGAR include a typed signature of the accountant. The registrant is required to keep a manually signed copy of the accountants’ report in its files for five years after the filing of the related document.

PCAOB auditing standards

Paragraph .08(d) of AS 3101, Reports on Audited Financial Statements (AICPA, PCAOB Standards and Related Rules), directs auditors to refer to the “standards of the Public Company Accounting Oversight Board (United States)” in lieu of references to generally accepted auditing standards (GAAS) in audit reports relating to financial statements of issuers. AS 3101 is applicable to both to U.S. and non-U.S. firms.

In October 2017, the SEC approved the PCAOB’s new auditor reporting standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, as adopted by the PCAOB in June 2017. The SEC also approved related amendments to certain other PCAOB standards and redesignated paragraphs that address departures from the auditor’s unqualified opinion and other reporting circumstances as addressed by AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances. All provisions other than those related to critical audit matters (CAMs) are effective for audits for fiscal years ending on or after December 15, 2017. Provisions related to CAMs are effective for audits for fiscal years ending on or after June 30, 2019, for large accelerated filers, and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply. The standard generally applies to audits conducted under PCAOB standards. Communication of CAMs is not required for audits of emerging growth companies, brokers and dealers, investment companies other than business development companies, and employee stock purchase, savings, and similar plans. Auditors of these entities may choose to voluntarily include CAMs in the auditor’s report. The other requirements of the final standard apply to these audits.

In May 2016, the SEC approved the PCAOB’s adopted Rule 3210, Amendments, and Rule 3211, Auditor Reporting of Certain Audit Participants, which require audit firms, beginning January 31, 2017, to file a new PCAOB Form AP, “Auditor Reporting of Certain Audit Participants,” within a specified number of days after the first time an audit report for each of the firm’s issuer clients is included in a document filed with the SEC. For further discussion, please see chapter 10, “PCAOB Standard-Setting and Other Activities.”

The SEC issued an interpretive release that clarified the following:

• References in SEC rules (such as Regulation S-X Rule 2-02) and staff guidance and in the federal securities laws to GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any applicable rules of the SEC. The SEC codified this interpretation in Release No. 34-49708. (Further clarification was included in the amendments to the S-X rules in the Disclosure Update and Simplification (Release No. 33-10532) issued in August 2018).
• The PCAOB has specifically provided that its rules do not supersede the SEC’s rules. Therefore, registered public accounting firms must comply with the more restrictive of the SEC’s or the PCAOB’s rules (for example, with respect to the SEC’s independence rules, which are more restrictive than the PCAOB’s independence rules).

Retention of audit and review records (Rule 2-06 of Regulation S-X)

Rule 2-06 of Regulation S-X requires that for a period of seven years after an accountant concludes an audit or review of an issuer’s financial statements, the accountant must retain records relevant to the audit or review, including working papers and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records) that (1) are created, sent, or received in connection with the audit or review, and (2) contain conclusions, opinions, analyses, or financial data related to the audit or review.

The rule defines working papers as documentation of auditing or review procedures applied, evidence obtained, and conclusions reached by the accountant in the audit or review engagement, as required by standards established or adopted by the SEC or by the PCAOB. Memoranda, correspondence, communications, other documents, and records (including electronic records) must be retained whether they support the auditor’s final conclusions regarding the audit or review, or contain information or data, relating to a significant matter, that is inconsistent with the auditor’s final conclusions regarding that matter or the audit or review. Significance of a matter is determined based on an objective analysis of the facts and circumstances. Such documents and records include, but are not limited to, those documenting a consultation on or resolution of differences in professional judgment.

PCAOB AS 1215, Audit Documentation, requires that the auditor document the procedures performed, evidence obtained, and the conclusions reached so that an experienced auditor (for example, a member of the PCAOB inspection staff) can understand the auditor’s work.

Communication with audit committees (Rule 2-07 of Regulation S-X)

Rule 2-07 of Regulation S-X requires a registered public accounting firm that performs an audit for a public company, prior to the filing of the audit report with the SEC, to discuss with the audit committee of the issuer

• all critical accounting policies and practices to be used;
• all alternative treatments within GAAP related to material items that have been discussed with management, including ramifications of the use of such alternative disclosures and treatments; and the treatment preferred by the accounting firm; and
• other material written communications between the accounting firm and management, such as any management letter or schedule of unadjusted differences.

The first two items may be reported orally or in writing. These requirements largely codify current requirements under GAAS for auditors of public companies to discuss matters with management and audit committees.

With respect to critical accounting policies, in the commentary in the release, the SEC advised accountants and companies to refer to FRR 60, Cautionary Advice Regarding Disclosure about Critical Accounting Policies, to determine the types of matters that should be communicated to audit committees. The SEC expects these discussions to cover the following aspects of accounting policies and estimates that meet the criteria in FRR 60:

• Whether those matters are considered critical
• How current or future events affect those determinations
• The auditor’s assessment of management’s disclosures
• Any significant modifications of those disclosures that the auditor proposed but management did not make

The SEC intends for the communications regarding alternative accounting treatments to (1) cover both general accounting policies and the accounting for specific transactions and (2) address recognition, measurement, and disclosure considerations. The rules specifically require the communications to cover (1) the ramifications of alternative disclosures and accounting treatments and (2) the treatment preferred by the accounting firm. In the release, the SEC outlines a number of points it believes auditors should cover in these communications.

Examples of other written communications that the SEC expects would be considered material and provided to audit committees include

• management letters and other reports of observations and recommendations on internal controls;
• engagement letters;
• representation letters;
• independence letters; and
• material adjustments and reclassifications proposed and recorded and a schedule of unadjusted audit differences, if any.

Because of the requirement for these communications to occur before the auditor’s report is filed, these communications must occur during the annual audit; however, the SEC expects they will occur more frequently (for example, on a real-time basis, as quarterly reports are filed).

The communication requirements apply only to “issuers.” Thus, these communications are required only for audit reports filed after the date a company files an initial registration statement. After that date, if a company does not have an audit committee, the auditor must communicate these matters to the full board of directors.

The PCAOB’s ethics and independence rules require specific written and oral communications between a registered firm and its public company audit client’s audit committee regarding allowable tax services.

General financial statement requirements (Regulation S-X)

The following financial statement rules must be followed by companies that do not qualify as smaller reporting companies. Smaller reporting companies have the option to follow the financial statement requirements under Rules 8-01 to 8-08 of Regulation S-X (rather than rules 3-01 to 3-20 of Regulation S-X).¹ Rules 8-01 to 8-08 of Regulation S-X are discussed in detail in a later chapter.

Rules 3-01 to 3-20 of Regulation S-X establishes the following uniform instructions governing the periods to be covered for financial statements included in most registration statements, periodic reports filed with the SEC, and annual reports to stockholders furnished pursuant to the proxy rules:

1. Audited balance sheets as of the end of the last two fiscal years.
2. Audited statements of income and cash flows for each of the last three fiscal years. Changes in stockholders’ equity for each of the last three years may be presented in a note or separate statement.
3. Comprehensive income must be shown for each year that an income statement is shown but may be reported below the total for net income in a statement that reports the results of operations, in a separate statement of comprehensive income that begins with net income.

Additionally, for registration statements and transactional proxies, these rules generally require, in specified circumstances described as follows, unaudited interim financial statements for a current period along with financial statements for the comparable period of the prior year. It also allows audited statements of income, stockholders’ equity, and cash flows for a period of 9 to 12 months to substitute for 1 (and only 1) of the required fiscal-year periods in certain specified circumstances or when permitted by the staff.

Rules 3-01 and 3-02

Rules 3-01 and 3-02 of Regulation S-X contain special provisions relating to the age of financial statements and the nature of interim financial statements included in registration and proxy statements (that is, filings other than Form 10-K), as follows.

Financial statements of businesses acquired or to be acquired (Rule 3-05 of Regulation S-X)

Under Rule 3-05 of Regulation S-X, the financial statements of a significant business acquired (generally during the latest year or interim period presented) may be required in a registration statement or proxy (Form 8-K has similar requirements, which are discussed later in the course). In addition, if the aggregate significance of all individually insignificant acquisitions exceeds 50%, financial statements for the mathematical majority of these acquired businesses may be required in a registration statement or proxy (Form 8-K does not require reporting or financial statement information for insignificant acquisitions). Form 10-K does not call for acquired business financial statements. Rule 3-05 also may require presentation of financial statements of significant businesses whose purchase is probable in a registration statement or proxy (Form 8-K does not require financial statements of probable acquisitions; Form 10-K does not call for acquired business financial statements). For purposes of this rule, the term purchase includes the purchase of an interest in a business accounted for by the equity method.

The rules for the tests for significance, the definition of a business, and the periods to be covered by the financial statements that are required in Form 8-K are discussed later in the course (Item 2.01 of Form 8- K), as are the rules governing the requirements for acquiree financial statements in proxies. The rules governing the requirements for acquiree financial statements in registration statements are discussed in the following section.

Consolidated financial statements (Rule 3A-02 of Regulation S-X)

Rule 3A-02 requires a registrant to file consolidated financial statements that clearly exhibit the financial position and results of operations of the registrant and its subsidiaries. Among the factors that the registrant should consider in determining the most meaningful presentation is majority ownership.

Although Rule 3A-02 indicates that registrants must look to both their percentage ownership of an entity and to “the existence of a parent-subsidiary relationship by means other than record ownership of voting stock,” circumstances in which a corporate subsidiary that is majority owned is not consolidated are rare, except when specifically called for by accounting literature, such as FASB Accounting Standards Codification (ASC) 810, Consolidation.

Note: FASB ASC 810-10-15-10 (a)(1) indicates that “a majority owned subsidiary shall not be consolidated if control does not rest with the majority owner” (for example, if the subsidiary is in legal reorganization or in bankruptcy, and so on); however, SEC staff indicated that although the SEC is inclined to believe that bankruptcy is indicative of the fact that control does not rest with the majority owner, it does not object to the continued consolidation of a subsidiary during bankruptcy if the parent company determines that any loss of control would be temporary given the facts and circumstances.

FASB ASC 235-10-50-1 and ASC 810-10-50 require disclosure of the principles followed in consolidating the financial statements and in determining the entities included in consolidation in the notes to the financial statements. If there has been a change in the entities included in the consolidation or in their fiscal year-ends, such changes should also be disclosed.

FASB ASC 810-10-45-12 states that for differing fiscal year-ends between parent and subsidiary, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period. The registrant must disclose the closing date of the subsidiary, and the effect of intervening events that materially affect the financial position or results of operation. Where fiscal years differ by more than about three months, statements of the subsidiary should be adjusted to a period that more nearly corresponds with the fiscal period of the parent.

Chronological order and footnote referencing

The SEC has no preference about the chronological order (that is, left to right or right to left) used in presenting the financial statements, but the same order must be used consistently throughout the filing, including numerical data in narrative sections.

The financial statements are not required to be referenced to applicable notes unless it is necessary for an effective presentation.

Additional disclosures required by Regulation S-X (Rules 4-08, 5-02, 5-03, and 5-04 of Regulation S-X)

Regulation S-X requires certain significant disclosures to the financial statements not required by GAAP. The following is a summary of the most common additional requirements (exclusive of those relating to specialized industries). Certain of these additional requirements are discussed in more detail later in the course, but if amounts involved are immaterial, disclosures may be omitted.

• Assets subject to lien (Rule 4-08(b)). Disclose the nature and approximate amount of assets mortgaged, pledged, or subject to liens and identify the related obligation.
• Defaults (Rule 4-08(c)). Disclose the facts and amounts concerning any default in principal, interest, sinking fund, or redemption requirement, or any breach of a covenant that existed as of the most recent balance-sheet date and has not been subsequently cured. If a waiver has been obtained, state the amount involved and the period of the waiver.
• Restrictions on the payment of dividends (Rule 4-08(e)). Describe significant restrictions on the payment of dividends by the registrant and the amount of retained earnings or net income restricted or free of restrictions. Additionally, the amount of consolidated retained earnings representing the undistributed earnings of 50%-or-less-owned equity method investees must be disclosed.

  Disclosure may also be required of restrictions on the ability of subsidiaries to transfer funds to the parent, and in some cases separate parent-company-only financial information may be required when material.

• Financial information of unconsolidated subsidiaries and 50%-or-less-owned equity method investees (Rules 4-08(g) and 3-09). This requirement is discussed in detail later in this chapter.
• Income tax expense (Rule 4-08(h)). In addition to the GAAP disclosures requirements specific to public entities registrants,

• • the components of income before income tax expense as either domestic or foreign if the foreign amount equals or exceeds 5% of total income before income tax expense, and
  • the components of the income tax expense (that is, current and deferred) stating separately the amounts applicable to U.S. federal, foreign and other income taxes, if foreign or other income taxes equal or exceed 5% of the tax expense component.

• Related-party transactions (Rule 4-08(k)). Disclose related-party balances on the face of the balance sheet, income statement, statement of comprehensive income and statement of cash flows (in addition to the footnote disclosures required by FASB ASC 850, Related Party Transactions).
• Accounts and notes receivable (Rule 5-02.3). Separately disclose amounts receivable from (1) customers (trade), (2) related parties, (3) underwriters, promoters, employees other than related parties, and (4) others. Separate disclosure of notes receivable is required if they exceed 10% of aggregate receivables. If receivables include amounts due under long-term contracts, additional disclosure regarding billed and unbilled amounts is required.
• Inventories (Rule 5-02.6). Disclose the major classes of inventory (for example, finished goods, work- in-process, raw materials), the basis for carrying inventories, and the method of determining costs. Disclose the nature of the elements of cost (for example, tooling or general and administrative costs) included in inventory. If any general and administrative costs are charged to inventory, disclose the amount of those costs incurred in each period and the amount remaining in inventory.

  If the LIFO method used does not allow for a particular assignment of a LIFO reserve to the individual classes of inventory, those classes may be stated under another method (for example, FIFO), with the excess of the total of those amounts over total LIFO cost shown as a single deduction. Additionally, companies using LIFO should disclose the excess of current or replacement cost over LIFO cost. Additional views of the SEC on LIFO practices follow.

  In Topic 5-L, LIFO Inventory Practices (formerly SAB No. 58), the SEC staff has stated that the advisory conclusions recommended in the issues paper are generally consistent with conclusions previously expressed by the SEC. Registrants are advised to compare current LIFO practices with those in the AICPA issues paper and be prepared to justify practices that differ from those recommended.

  As a result of several enforcement cases, the SEC focused on what it considered to be certain inappropriate LIFO accounting and disclosure practices. Some of the SEC’s views in this area are expressed in its Financial Reporting Release (FRR) Section 205. Specifically, SEC objects to supplemental disclosures of FIFO earnings when there is an inference that the FIFO, rather than the LIFO, amounts are the “real” earnings of the company. The SEC’s concerns are lessened when the supplemental disclosures (1) clearly state that LIFO results in a better matching of costs and revenues, (1) indicate why they are furnished, (3) include information to enable the reader to understand the quality of the data, and (4) avoid confusing terminology (for example, terms such as “LIFO reserve” or “LIFO adjustment” may be misunderstood). If the supplemental FIFO disclosures are made in order to provide information to compare with non-LIFO companies, they should be presented in the notes or in the MD&A rather than included in financial highlights, press releases, or president’s letters.

• Other current assets (Rule 5-02.8). State separately, in the balance sheet or a note, any amount in excess of 5% of total current assets.
• Property, plant, and equipment (Rule 5-02.13 and .14). State the basis of valuation and disclose separately the amount of accumulated depreciation. The SEC staff also requires registrants to disclose the amount of depreciation expense for each period presented (in accordance with FASB ASC 360-10-50-1), and to include estimated service lives when describing methods used for computing depreciation.
• Intangible assets (Rule 5-02.15 and .16) and other assets (Rule 5-02.17). State separately any amount in excess of 5% of total assets and the basis for determining the amount; explain any significant additions or deletions; and disclose the amounts of accumulated amortization.
• Accounts and notes payable (Rule 5-02.19). State separately amounts payable to (1) banks for borrowings, (2) factors or other institutions for borrowings, (3) holders of commercial paper, (4) trade creditors, (5) related parties (6) underwriters, promoters, and employees, other than related parties, and (7) others. Items (1), (2), and (3) may be presented either on the balance sheet or in the notes thereto. Disclose the amounts and terms (including commitment fees and conditions under which the lines may be withdrawn) of unused lines of credit for short-term financing. The amounts of lines of credit supporting commercial paper borrowings must be identified separately. Disclose the weighted average interest rate on short-term borrowings outstanding as of the date of each balance sheet presented.
• Other current liabilities (Rule 5-02.20). State separately any amount in excess of 5% of total current liabilities.
• Long-term debt (Rule 5-02.22). Disclose (1) the general character of each issue or type of obligation including the interest rate, (2) dates of maturity, (3) contingencies related to payment of interest or principal, (4) priority of the issue, and (5) convertible features or conditions. Disclose the amounts and terms (including commitment fees and conditions under which they may be withdrawn) of unused commitments for long-term financing.
• Other liabilities (Rule 5-02.24). State separately any amount in excess of 5% of total liabilities.
• Deferred credits (Rule 5-02.26). State separately in the balance sheet the amounts of deferred income taxes, deferred tax credits, and material items of deferred income.
• Stockholders’ equity (Rules 5-02.28, .29, .30, .31). Clearly differentiate the amounts of capital stock, paid-in capital and retained earnings and disclose all changes in each of the foregoing items and changes in the number of shares of stock for each income statement presented. For all equity securities, disclose the title of each issue, par or stated value per share, number of shares authorized, and the number of shares issued or outstanding. Show the dollar amount of any shares subscribed but unissued, and show the deduction for subscriptions receivable.
• Redeemable preferred stock (Rule 5-02.28). The presentation and disclosure requirements for preferred stocks or other equity securities having certain redemption features are as follows:

  Rules 5-02.27, .28, .29, .30, and .31 require that amounts relating to equity securities should be separately classified as (a) preferred stock with redemption requirements (that is, “redeemable preferred stock”), (b) preferred stock without mandatory redemption requirements, (c) common stock, (d) other stockholders’ equity, and (e) noncontrolling interests.

  Rule 5-02.28 defines redeemable preferred stock as any class of stock (not just preferred) that (a) the issuer undertakes to redeem at a fixed or determinable price on a fixed or determinable date or dates, (b) is redeemable at the option of the holder, or (c) has conditions for redemption that are not solely within the control of the issuer, such as provisions for redemption out of future earnings (the SEC staff believes that all of the events that could trigger redemption should be evaluated separately and that the possibility that any triggering event that is not solely within the control of the issuer could occur — without regard to probability — would fall into the category of redeemable preferred). Redeemable preferred stock or another type of stock with the same characteristics may not be included under the general heading of “stockholders’ equity” or combined with other stockholders’ equity captions, such as additional paid-in capital and retained earnings.

  The rule also requires registrants to provide a general description of each issue of redeemable preferred stock, including its redemption terms, the combined aggregate amounts of expected redemption requirements each year for the next five years, and other significant features similar to those for long-term debt.

  The SEC’s rules were written before FASB ASC 480-10, Distinguishing liabilities from Equity, which requires the redeemable security to be classified as a liability, that guidance takes precedence over the SEC’s guidance for classification as mezzanine equity.

  The rules do not address any change in the calculation of debt/equity ratios for the purpose of making materiality computations to determine whether an item requires disclosure or for determining compliance with existing loan agreements, but when ratios or other data involving amounts attributable to stockholders’ equity are presented, such ratios or other data should be accompanied by an explanation of the calculation. If the amounts of redeemable preferred stock are material and the ratios presented are calculated treating the redeemable preferred stock as equity, the ratios should also be presented as if the redeemable preferred stock were classified as debt.

  According to SAB Topic 3-C, when preferred stock is issued for less than its mandatory redemption value, the stated value should be increased periodically by accreting the difference, using the interest method, between stated value and the redemption value. The periodic accretions should be included with cash dividend requirements of preferred stock in computing income applicable to common stock.

  Although Rule 5-02.28 and the related FRR Section 211 speak to preferred stocks that require redemption, the SEC staff believes that the rule also provides analogous guidance for other equity instruments including, for example, common stock and derivative instruments that are classified as equity pursuant to FASB ASC 815-40, Contracts in Entity’s Own Equity. The SEC’s views on this matter (including identification of such redeemable securities) are available in FASB ASC 480-10-S99.

• Net sales and gross revenues (Rule 5-03.1). State separately each of the following components that exceed 10% of total sales and revenues: (1) net sales of tangible products, (2) operating revenues of public utilities or others, (3) income from rentals, (4) revenues from services, and (5) other revenues. Disclose the amount of excise tax if total sales and revenues include excise taxes greater than 1% of the total.
• Costs and expenses related to sales and revenues (Rule 5-03.2). State costs and expenses separately for each revenue component required to be disclosed under Rule 5-03.1.
• Other income statement items (Rules 5-03.4 through .20). State separately or disclose in a note, bad debt expense, interest expense, dividend income, interest income, minority interest, and equity earnings.

Financial information regarding unconsolidated subsidiaries and 50%-or-less-owned equity method investees (Rules 4-08(g) or 3-09 of Regulation S-X)

Note: As U.S. GAAP requires consolidation by a parent of all of its subsidiaries, the discussion in this section relates to 50%-or-less-owned equity method investees.

Depending on significance, Regulation S-X might require the presentation of

• Note disclosure of summarized financial statement information for unconsolidated subsidiaries and 50%-or-less-owned equity method investees (Rule 4-08(g)).
• Separate financial statements for one or more unconsolidated subsidiaries or 50%-or-less-owned equity method investees (Rule 3-09).

Summarized financial statement information about assets, liabilities, and results of operations of unconsolidated subsidiaries and 50%-or-less-owned equity method investees is required to be included as a footnote to a registrant’s annual financial statements when any one of the significant subsidiary tests of Rule 1-02(w) is met on an individual or aggregate basis in any fiscal year presented by the registrant (see Rule 4-08(g)):

• Investment test. The amount of the registrant’s and its other subsidiaries’ investments in and advances to such subsidiaries or equity-method investees exceeds 10% of the total assets of the parent and its consolidated subsidiaries as shown in the consolidated balance sheet at the end of the most recent fiscal year.
• Asset test. The amount of the registrant’s and its other subsidiaries’ proportionate share of the total assets (after intercompany eliminations) of such subsidiaries and other companies exceeds 10% of the total assets of the parent and its consolidated subsidiaries as shown in the consolidated balance sheet at the end of the most recent fiscal year.
• Income test. 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, exceeds 10% of such income of the parent and its consolidated subsidiaries for the most recent fiscal year. If such consolidated income is at least 10% lower than the average of such income for the last 5 fiscal years, then the average income may be substituted in the determination. Loss years should be assigned a value of zero in computing the numerator for this average, but the denominator should be “5.” Note: The SEC allows income average over 5 years even if the registrant had a pretax loss in the most recent fiscal year.

  The SEC staff has provided interpretive guidance on these tests; specifically, that “put together transactions” should perform the income test by using absolute values when some of the related businesses report losses and others report income and that businesses under common control or management should perform the income test by combining income and loss.

The SEC has issued guidance concerning application of the income test as it applies to equity investees. The staff believes the numerator should be calculated based on the registrant’s proportionate share of the investee’s pretax income as reflected in its separate financial statements, adjusted for any basis differences. In determining the basis differences that should be included for this test, the registrant should consider FASB ASC 323-10-35-34 and FASB ASC 323-10-35-32A. Although not an exclusive list, items affecting net income of the registrant that should be excluded from the test are: impairment charges at the investor level, gains and losses from stock sales by the registrant; dilution gains and losses from stock sales by the investee, preferred dividends. Section 2400 of the FRM addresses implementation issues related to the significance tests for equity investees.

The summarized information should include the following (Rule 1-02(bb)):

• For financial position. Current and noncurrent assets and liabilities, redeemable preferred stock, and noncontrolling interests. In the case of specialized industries, for which classified balance sheets ordinarily are not presented, the major components of assets and liabilities should be shown.
• For results of operations. Gross revenues or net sales, gross profit, income (loss) from continuing operations and cumulative effect of accounting changes, and net income (loss) attributable to the entity. In the case of specialized industries, other information may be substituted for sales and related costs and expenses, if necessary, for a more meaningful presentation.

The summarized data are required for the same periods as the audited consolidated financial statements (insofar as it is practicable). The data should not be labeled “unaudited.” In presenting the data, if the significant subsidiary test is met, the summarized information should be provided for all such companies; requests to omit some entities on the basis of materiality (that is, less than 10%) will not be routinely granted by the SEC.

In addition to the requirement for footnote disclosure of summarized financial information, Rule 3-09 requires separate financial statements for any 50%-or-less-owned equity method investee based on the Rule 1-02(w) significance tests using 20% instead of 10%. Separate financial statements are required for any investee that individually meets either the investment or income test in Rule 1-02(w) for any of the registrant’s fiscal years required to be presented in the filing. These separate statements should cover, insofar as is practicable, the same periods as the audited consolidated financial statements, and should be audited for those periods in which the 20% test is met.

Rule 3-09(b) of Regulation S-X provides that if the registrant is an accelerated filer as defined in the rules but the 50%-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 6 months if the 50%-or-less-owned person is a foreign business, after the end of the registrant’s fiscal year.

Combined financial statements may be presented when two or more equity investees meet the 20% test. Combined financial statements generally are appropriate only for entities under common control or common management, and then only for periods in which that condition existed.

Rule 3-09 of Regulation S-X Rule does not require separate interim financial statements. Instead, when interim summarized income statement information is required, the information required by S-X 10- 01(b)(1) should be provided for any equity investee that is 20% or more significant using the same tests of significance that are used for Rule 3-09 (based on cumulative year-to-date information). Rule 3-09 does not apply to smaller reporting companies.

The inclusion of the separate financial statements required by Rule 3-09 does not necessarily eliminate the need to present summarized footnote information pursuant to Rule 4-08(g). Rule 4-08(g) requires summarized footnote information for 50%-or-less-owned equity method investees if the investee meets any of the three Rule 1-02(w) significance tests versus the two significance tests called for by Rule 3-09. If a registrant has numerous equity investees and separate financial statements were required for only one entity, summarized financial information for all equity investees, on an aggregate basis, would be required. In other words, the existence of one 20% entity for a registrant with numerous equity investees will automatically trigger the footnote disclosure of summarized information for all entities on an aggregate basis.

The SEC staff has offered a number of informal interpretations of the significant subsidiary test under Rules 1-02(w)(2) and 1-02(w)(3):

• Rule 1-02(w)(2) of Regulation S-X states that a subsidiary is significant if the parent’s (registrant’s) and its other subsidiaries’ proportionate share of the total assets (after intercompany eliminations) of the subsidiary exceeds 10% of consolidated assets.

  The following interpretations are directed to the phrase after intercompany eliminations (the term tested subsidiary as used in the following refers to the subsidiary being tested to determine whether it is a significant subsidiary).

• Receivables of the tested investee from members of the consolidated group should be eliminated before determining the consolidated group’s proportionate share of total assets of the tested subsidiary.
• Receivables from the tested investee should not be eliminated before determining the consolidated group’s proportionate share of total assets of the tested subsidiary.
• No adjustments would be made to consolidated assets included in the denominator of the fraction, because all appropriate intercompany eliminations are already made in consolidation.
• Although the phrase after intercompany eliminations is not used in Rule 1-02(w)(3), adjustments to income from continuing operations before income taxes for intercompany profits should be made to the entity being tested similar to those made in recording earnings of the entity in consolidation.
• Rule 1-02(w)(3) states that a subsidiary is significant if the parent’s and its other subsidiaries’ equity in the income from continuing operations before income taxes, of the subsidiary exceeds 10% of such income of the parent and its consolidated subsidiaries, provided that if such income of the parent and its consolidated subsidiaries is at least 10% lower than the average of such income for the last 5 fiscal years such average may be substituted in the determination.
• The alternative five-year average income substitution is applicable only to the parent and its consolidated subsidiaries, and is not applicable to the subsidiary being tested. In computing the five-year average income, loss years should be assigned a zero, and the denominator should be five.
• When there is a loss figure for one but not both sides of the equation in the computation of the income test, the equity in income or loss of the tested subsidiary should be excluded from the consolidated income of the registrant and its subsidiaries for purposes of the computation.

• Similarly, for purposes of the numerator used in the income test, the absolute values should be used when determining the aggregate significance of related businesses acquired where some of the businesses report losses and others report income. This guidance does not apply to businesses that are considered to be related because they are under common control or management. If the related businesses have been under common control or management for the period covered by the income test, the combined or net amount of the acquiree’s income should be used to compute significance.
• Additionally, when performing the income statement test on an aggregate basis, unconsolidated subsidiaries and 50%-or-less-owned equity method investees that report losses should not be aggregated with those reporting income.

Section 2015 of the SEC’s FRM addresses the basics of measuring significance and Section 2020 and 2025 provides implementation guidance for measuring significance. The manual is available at www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.

Guarantor financial statements (Rule 3-10 of Regulation S-X)

Debt or preferred stock registered under the Securities Act may be guaranteed by one or more of an issuer’s subsidiaries or its parent. Under the Securities Act of 1933, guarantees of securities are considered securities themselves. As a result, under the general rule (Rule 3-10(a)), every guarantor of a registered security and every issuer of a registered security that is guaranteed must file the financial statements required for a registrant by Regulation S-X. This means that a Securities Act registration statement must include both issuer and guarantor financial statements.

Under certain circumstances, modified financial information may be provided in lieu of separate guarantor and issuer financial statements. Specifically, modified information may be provided if the subsidiary issuer or subsidiary guarantor is 100% owned by its parent and the guarantee is full and unconditional. A subsidiary is 100% owned if all of its outstanding voting shares and any outstanding securities convertible into its voting shares (for example, stock options and convertible debt) are owned directly or indirectly by its parent company. A guarantee is full and unconditional when the payment obligations of the issuer and guarantor are essentially identical and the guarantor’s obligation is immediately triggered on the issuer’s failure to pay. For example, the amounts and payment schedules must be the same and there can be no requirement to first exhaust remedies against the issuer.

A registrant meeting the aforementioned criteria should disclose condensed consolidating information in a note to the financial statements with separate columns for the parent, subsidiary issuer, guarantor subsidiaries on a combined basis, any other subsidiaries on a combined basis, consolidating adjustments, and total consolidated amounts. Such information should be filed for the periods specified in Rules 3-01 and 3-02; that is, a consolidating balance sheet as of the end of each of the two most recent fiscal years and consolidating statements of operations and cash flows for each of the three fiscal years preceding the date of the most recent consolidating balance sheet. Consolidating interim financial statements should also be filed if consolidated interim statements are required. When preparing condensed consolidating information in accordance with Rule 3-10, registrants are required to follow the general guidance found in Rule 10-1 of Regulation S-X (the rules for presenting condensed interim financial statements). The SEC staff has clarified that registrants providing condensed financial information pursuant to Rule 3-10 should report comprehensive income as part of that information, consistent with the requirement to provide comprehensive income in condensed interim financial statements prepared in accordance with Rule 10-1.

The SEC staff has provided some insight in recent years into how Rule 3-10 should be interpreted and the rule applied through the following examples:

• Ownership should not be assessed solely in terms of voting control. If a contractual arrangement allows holders of nonvoting shares to appoint directors to the board of a subsidiary, the subsidiary would not be considered 100% owned. The staff clarified that “100% owned” is not the same as “wholly owned,” which under Regulation S-K is defined as substantially owned and used in the context of consolidation. To qualify for relief, the subsidiary must be 100% owned and disclosed as such.
• Similarly, full and unconditional should not be assessed solely in terms of the extent of the guarantee but also the duration. If a guarantee is not in place continuously throughout the life of the registered security (that is, a guarantor can “opt out” of the guarantee during the term of the debt) it would not be considered full and unconditional. The staff reminded registrants that failure to satisfy the criteria would require full registrant financial statements for all guarantors as well as separate Exchange Act reporting.
• Guarantees should be evaluated to determine whether they contain customary release provisions. The staff has determined that contracts covering high yield notes frequently allow the release of subsidiary guarantees before the notes are extinguished, and many of the contract provisions are so common that the staff considers them to be “customary.” The staff believes that such guarantees do not meet the definition of “full and unconditional” in Rule 3-10(h)(2) of Regulation S-X; however, the staff concluded that if the conditions under which a subsidiary may be released from a guarantee are limited to those the staff considers to be customary, it does not need to require registrants to provide the full separate guarantor financial statements required by Rule 3-10. Instead, condensed consolidating financial information is sufficient.

• • Paragraph 2510.5 of the FRM reflects this view, and that paragraph now contains the following list of customary release provisions:

• • • The subsidiary is sold or sells all of its assets.
    • The subsidiary is declared “unrestricted” for covenant purposes.
    • The subsidiary’s guarantee of other indebtedness is terminated or released.
    • The requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.
    • The rating on the parent’s debt securities is changed to investment grade.
    • The parent’s debt securities are converted or exchanged into equity securities.

If debt agreements contain other types of release provisions, the staff advises registrants to consider contacting the Office of Chief Counsel in the Division of Corporation Finance to discuss whether relief from the Rule 3-10 requirement to provide guarantor financial statements is available.

Affiliates whose securities collateralize a registered class of securities (Rule 3 -16 of Regulation S-X)

Under Rule 3-16 of Regulation S-X, affiliates whose securities constitute a substantial portion of the collateral for any class of securities registered or to be registered must file the financial statements that would be required if the subsidiary were a registrant. A separate filing need not be made if the subsidiary’s financial statements are otherwise separately included in the parent company registrant’s filing. The securities of an affiliate are considered a “substantial” portion of the collateral if the greater of the (a) aggregate principal amount, (b) par value, (c) book value as carried by the registrant, or (d) market value of the affiliate’s securities equals 20% or more of the principal amount of the securities registered or being registered.

Note: In late July 2018, the SEC proposed rule amendments to simplify and streamline the financial disclosures required in and subsequent to registered debt offerings. The proposal would amend Rule 3- 10 applicable to guarantors and issuers of guaranteed securities and Rule 3-16 applicable to affiliates whose securities collateralize a registrant’s securities. The proposed amendments to Rule 3-10 would continue to follow the approach of permitting issuers to omit separate financial statements of subsidiary issuers and guarantors when certain conditions are met, but the conditions and the required alternative disclosures would change. The proposed amendments to Rule 3-16 would replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and nonfinancial disclosures about the affiliate(s) and the collateral arrangement. The financial disclosures would consist of summarized financial information similar to that to be provided by issuers and guarantors of guaranteed securities. Comments on the proposal were due on December 3, 2018.

Regulation S-X schedules

Regulation S-X schedules are required in Forms 10, 10-K, S-1, S-4, and S-11. Although schedules are not required to be presented in Form S-3, they are part of filings on that form because that form requires the Form 10-K to be incorporated by reference. Smaller reporting companies are not required to file the Regulation S-X schedules. When required, the schedules must be filed at the same time the filing is made, except that the schedules required by Form 10-K can be filed as an amendment under cover of Form 10-K/A (the schedules may be filed by amendment within 30 days after the due date of Form 10-K). Each schedule has detailed instructions on what information is required. It is essential to understand these instructions and tie the schedules into the related items in the financial statements. The information required by any schedule may be included in the financial statements and related notes, in which case the schedule may be omitted.

The schedules to be filed under Rule 5-04 are as follows:

• Schedule I — Condensed financial information of registrant
• Schedule II — Valuation and qualifying accounts
• Schedule III — Real estate and accumulated depreciation
• Schedule IV — Mortgage loans on real estate
• Schedule V — Supplemental information concerning property-casualty insurance operations

Knowledge check

2. Where are the form and content of and requirements for financial statements included in filings with the SEC found?
   • Regulation S-T.
   • Regulation S-K.
   • Regulation S-X.
   • Regulation FD.
3. Which entities are governed by Regulation S-X Rules 5-01 to 5-04?
   • Insurance companies.
   • Registered investment companies.
   • Rules regarding general notes to the financial statements.
   • Commercial and industrial companies.
4. Which prescribes the form and content of accountants’ reports?
   • Rule 2-01 of Regulation S-X.
   • Rule 2-03 of Regulation S-X.
   • Rule 2-02 of Regulation S-X.
   • Rule 2-04 of Regulation S-X.
5. When part of an audit is performed by an accountant other than the principal accountant, when must the audit report of the other accountant be included in an SEC filing?
   • When the other accountant plays a significant role in the audit.
   • When the other accountant’s report is referred to in the principal accountant’s report.
   • Always, whether or not the other accountant’s report is referred to in the principal accountant’s report.
   • When, in the principal auditor’s professional judgment, the auditor believes the other accountant’s report cannot be relied upon.
6. The SEC will accept an auditor’s report with an explanatory paragraph that addresses
   • Scope limitation with respect to conducting an audit of financial statements.
   • Ability of the registrant to recover its investment in specified assets.
   • Reason for departure from GAAP.
   • Uncertainty of the registrant’s ability to continue as a going concern.
7. The financial statements to be included in an SEC filing must contain certain significant disclosures that are not required by GAAP, which are outlined in
   • Regulation S-X Rule 4-01.
   • Regulation S-X Rule 4-08.
   • Regulation S-X Rule 3-09.
   • Regulation S-X Rule 3-11.
8. If the investment in and advances to an equity investee of a registrant do not meet the 10% significance threshold of S-X rule 1-02(W)(1) for the most recent consolidated year-end balance sheet, but do meet the 10% significance for the prior year-end balance sheet, Regulation S-X Rule 4-08(g) requires
   • No information about the registrant’s equity investees, because the significance test was not met for the most recent year-end.
   • Summarized financial statement footnote information on all of the registrant’s unconsolidated subsidiaries and 50% or less owned equity method investees for all years presented in the financial statements.
   • Summarized financial statement footnote information on all of the registrant’s unconsolidated subsidiaries and 50% or less owned equity method investees for the latest year presented in the financial statements.
   • Summarized financial statement footnote information for the investee that meets the 10% significance threshold only, for all years presented in the financial statements.
9. Issuer A has registered debt securities that are guaranteed by one of its subsidiaries. The subsidiary is 100% owned by the issuer and the guarantee is full and unconditional. Under such circumstances, the issuer may include which in its periodic reports?
   • Summarized financial information for the parent company, guarantor subsidiary, and all other subsidiaries combined.
   • Condensed consolidating financial information for the parent company, guarantor subsidiary, and all other subsidiaries combined.
   • Summarized quarterly financial information for the parent company, guarantor subsidiary, and all other subsidiaries combined.
   • Summarized financial information for the guarantor subsidiary.
10. Under Regulation S-X Rule 5-04, Schedule II contains information concerning
    • Valuation and qualifying accounts.
    • Mortgage loans on real estate.
    • Condensed financial information of the registrant.
    • The summary compensation table for named executives.
11. The rules that set forth the requirements related to management’s discussion and analysis of financial condition and results of operations (MD&A) are contained in which regulation?
    • Regulation S-K.
    • Regulation S-X.
    • Regulation S-B.
    • Regulation M-A.
12. Regulation S-X schedules are not required to be presented in which form?
    • Form 10-K.
    • Form S-3.
    • Form S-4.
    • Form S-1.

Knowledge check

13. When questions arise in applying amendments to Regulation S-X, it is helpful to refer to the SEC’s guidance found in
    1. FRRs.
    2. AAERs.
    3. SLBs.
    4. SABs.

Knowledge check

14. SAB Topic 5DD expresses the SEC staff’s views regarding
    1. The accounting and disclosure for discontinued operations.
    2. Disclosure of the potential effect of accounting standards that have been issued but not yet adopted.
    3. The accounting for revenue recognition.
    4. The accounting for written loan commitments that are recorded at fair value.
15. In SAB Topic 1N, the SEC staff expressed its views that an issuer should quantify misstatements to evaluate materiality using which approach?
    1. The dual approach.
    2. The rollover approach.
    3. The iron curtain approach.
    4. Either the rollover approach or the iron curtain approach.

Consultation with the Office of the Chief Accountant

The staff has provided updated guidance for consultations with the Office of the Chief Accountant. “Guidance for Consulting on Matters with the Office of the Chief Accountant,” available on the SEC website at www.sec.gov/info/accountants/ocasubguidance.htm, outlines the recommended form and content of written correspondence. Such submission should include the following:

• Overview of the nature of the company’s business, together with condensed financial information including assets, stockholders’ equity, revenues, gross margin, pretax income, and other relevant measures
• Timing considerations such as pending filing deadlines or registration efforts
• Detailed information regarding the specific facts and circumstances giving rise to the accounting, financial reporting, or auditing question
• Specific accounting, financial reporting, or auditing questions raised
• The conclusions reached and the basis for such conclusions
• Outline of the possible alternative answers considered and rejected
• Analysis of the effect of current and future financial statements for the alternatives considered
• What you specifically intend to disclose about the proposed accounting and where it will be disclosed
• The audit committee’s views on the proposed accounting treatment
• Whether the company or its auditors are aware of any prior SEC staff position related to the issue
• The conclusion of the company’s auditor and whether the submission and the proposed accounting have been discussed with the auditor’s national office or other technical resource, and if so, when this discussion occurred
• A description of any current or previous discussions or correspondence with the Division of Enforcement, Division of Corporation Finance, or other Divisions or Offices regarding the issue(s) in the submission

In return, the SEC has committed to respond in a timely fashion and to involve high-level individuals (the Chief Accountant or Deputies) early in the process for direction or advice regarding the applicable thought processes and accounting literature. Face-to-face meetings will be encouraged in those cases where such meetings would accelerate the understanding and resolution of the accounting issue.

Interaction with the Division of Corporation Finance

The SEC’s Division of Corporation Finance (Corp Fin) staff published an overview of its filing review process on the SEC website. The overview provides a straightforward explanation of Corp Fin’s review process. It also discusses the process for registrants to request that the staff reconsider either issued comments or staff views (referred to as the reconsideration process). The overview also includes a listing of the industry-based Assistant Director Offices and the names of the individuals responsible for the reviews within each office. The overview is available on the SEC’s website at www.sec.gov/divisions/corpfin/cffilingreview.htm.

Discussion topics

1. A former accelerated filer now qualifies as a smaller reporting company. Transitioning registrants often do not take advantage of the scaled disclosure and reporting relief afforded to smaller reporting companies. Provide a registrant with an overview of the scaled disclosure and reporting options for smaller reporting companies and the pros and cons of implementing the scaled disclosures.

    

    

2. The SEC has prescribed certain rules and disclosures that go beyond the requirements of generally accepted accounting principles (GAAP). In particular, the SEC has focused on revenue recognition rules and disclosures due to the significance and complexity of the topic. Provide a registrant with an overview of the SEC disclosure requirements related to revenue recognition.

    

    

3. What is the principal difference between Regulation S-K and Regulation S-X?

    

    

4. The presentation and disclosure requirements for preferred stock or other equity instruments that have certain mandatory redemption features is an area in which the SEC disclosure requirements are different from that of GAAP. How should a registrant evaluate an instrument which has such an instrument with redemption provisions?

    

    

Financial statement requirements

5. Company A is a reporting company with a December 31 year-end. It is a non-accelerated filer. All required reports have been filed on a timely basis. For 20XB and 20XC, Company A reported net income before the cumulative effect of accounting changes.

   Company A plans to file a registration statement on March 1, 20XE. Audited financial statements for 20XD are not yet available. Company A expects to report a loss for 20XD. Can Company A file its registration statement without audited 20XD financial statements? Why or why not?

    

    

6. Under the accelerated filing deadlines, would the answer to question 1 be the same if (a) the company was a large accelerated filer, (b) the company expected to report income in the year 20XD, and (c) the registration statement was to be filed on February 28, 20XE?

    

    

7. Which Regulation S-X rule covers the age of financial statements presented at the effective date of a registration statement?

    

    

8. Which Regulation S-X article governs the form and content of financial statement schedules?

    

    

9. In a periodic filing, how many audited fiscal year-end consolidated balance sheets, income, and comprehensive income statements, cash flow statements, and statements of shareholders’ equity must be included?

    

    

Financial statement disclosures

10. What disclosures are required for a company that holds a 40% interest in another company with the following financial results:

• Investment (including advances) represents 30% of total assets.
• Investor’s proportionate share of the investee’s total assets is 10% of total assets.
• Investor’s proportionate share of the investee’s income from continuing operations before taxes is 10% of income from continuing operations before taxes.

Case studies: Rule 3-05 financial statement requirements