A Roadmap to SEC Reporting Considerations for Guarantees and Collateralizations. September 2020

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Publications in Deloitte’s Roadmap Series

Business Combinations

Business Combinations — SEC Reporting Considerations Carve-Out Transactions

Comparing IFRS Standards and U.S. GAAP

Consolidation — Identifying a Controlling Financial Interest Contingencies and Loss Recoveries

Contracts on an Entity’s Own Equity Convertible Debt

Current Expected Credit Losses

Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity

Earnings per Share

Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures

Equity Method Investees — SEC Reporting Considerations Fair Value Measurements and Disclosures

Foreign Currency Transactions and Translations

Guarantees and Collateralizations — SEC Reporting Considerations Income Taxes

Initial Public Offerings Leases

Noncontrolling Interests

Non-GAAP Financial Measures and Metrics Revenue Recognition

SEC Comment Letter Considerations, Including Industry Insights Segment Reporting

Contents

Preface vi Contacts vii Chapter 1 — Introduction 1 1.1 Overview 1 1.2  Effective Date and Transition 2 Chapter 2 — Guaranteed Debt Securities 3 2.1 Overview 3 2.2 Eligibility Conditions for Providing Alternative Disclosures 4 2.2.1 Parent Company Financial Statements Condition 4 2.2.2 Consolidated Subsidiary Condition 5 2.2.3 Debt or Debt-Like Securities Condition 5 2.2.4 Eligible Issuer and Guarantor Structures Condition 5 2.3 Alternative Disclosure Requirements 7 2.3.1 Alternative Nonfinancial Disclosures 7 2.3.2 Alternative Financial Disclosures 8 2.3.2.1 Level of Detail 8 2.3.2.2 Basis of Presentation 9 2.3.2.3 Periods to Present 12 2.3.2.4 Changes to the Obligor Group’s Alternative Financial Disclosures 13 2.3.3 Omission of Financial Disclosure 15 2.3.4 Where Disclosure Is Required 15 2.3.5 Recently Acquired Subsidiary Issuers or Guarantors 16 2.3.6 Ongoing Reporting Obligation 17 2.4 Application to Various Types of Issuers 17 2.4.1 Foreign Private Issuers 17 2.4.2 Smaller Reporting Companies 17 2.4.3 Regulation A 18 2.4.4 Asset-Backed Issuers 18

Chapter 3 — Affiliates Whose Securities Collateralize Securities Registered or

Being Registered 19 3.1 Overview 19 3.2 Alternative Disclosure Requirements 20 3.2.1 Alternative Nonfinancial Disclosures 20 3.2.2 Alternative Financial Disclosures 20 3.2.2.1 Level of Detail 20 3.2.2.2 Basis of Presentation 21 3.2.2.3 Omission of Alternative Financial Disclosure 21 3.2.3 Periods to Present 22 3.2.3.1 Annual Reports 22 3.2.3.2 Quarterly Reports 22 3.2.3.3 Registration Statements 22 3.2.4 Where Disclosure Is Required 23 3.2.5 Recently Acquired Affiliates Whose Securities Are Pledged as Collateral 23 3.3 Grandfathering for Collateralized Securities 24 3.4 Application to Various Types of Issuers 25 3.4.1 Foreign Private Issuers 25 3.4.2 Smaller Reporting Companies 25 3.4.3 Regulation A 25

Appendix A — Selected Regulation S-X Rules 26 Appendix B — Regulation S-X, Rule 13-01, Disclosure Checklist 31 Appendix C — Regulation S-X, Rule 13-01, Comprehensive Disclosure Example for

Guaranteed Debt Securities 34 Appendix D — Titles of Standards and Other Literature 37 Appendix E — Abbreviations 39

Preface

September 2020

To the clients, friends, and people of Deloitte:

We are pleased to present A Roadmap to SEC Reporting Considerations for Guarantees and

Collateralizations. This Roadmap is intended to help readers navigate some of the questions that may

arise in the application of the SEC’s March 2020 final rule1 _{that amends the disclosure requirements}

related to certain registered securities under SEC Regulation S-X, Rules 3-10 and 3-16.2 _{As noted in}

the final rule, the amendments to Rules 3-10 and 3-16 are intended to “make the disclosures easier to understand, and reduce the costs and burdens to registrants.” The final rule is generally effective for registration statements filed on or after January 4, 2021, and periodic reports for periods ending on or after January 4, 2021. However, early application is permitted.

This Roadmap combines the SEC’s reporting requirements for registrants that issue securities that are guaranteed or collateralized by one or more affiliates (“guaranteed or collateralized securities”) with Deloitte’s interpretations and examples in a comprehensive, reader-friendly format. It has been developed for readers who have been following the development of the final rule as well as readers who may be working through the reporting requirements for guaranteed or collateralized securities for the first time. That is, this publication may function as either a quick resource for those who have specific questions or an all-encompassing guide for those who are building up their knowledge base.

Appendix B includes a disclosure checklist for the alternative disclosures for guaranteed securities, and Appendix C includes a comprehensive example of such disclosures.

Subscribers to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the Roadmap from the Roadmap Series page on DART. If a “Summary of Changes Since Issuance” displays, subscribers can view those changes by clicking the related links or by opening the “active” version of the Roadmap.

We encourage you to use this Roadmap as a guide throughout your application of the disclosure requirements for guaranteed or collateralized securities. However, the Roadmap is not a substitute for consultation with Deloitte professionals on complex transactions.

We hope you find this publication to be a valuable resource. Please contact us with any questions or suggestions for future improvements.

Sincerely,

Contacts

If you have questions about the information in this publication, please contact any of the following Deloitte professionals:

Kathleen Malone Managing Director Deloitte & Touche LLP +1 203 761 3770 [email protected]

Doug Rand Managing Director Deloitte & Touche LLP +1 202 220 2754 [email protected]

John Wilde Partner

Deloitte & Touche LLP +1 415 783 6613 [email protected]

Chapter 1 — Introduction

1.1 Overview

On March 2, 2020, the SEC issued a final rule (the “rule”) that revises the disclosure requirements for certain registered securities under Regulation S-X, Rules 3-10 and 3-16, and introduces Regulation S-X, Rules 13-01 and 13-02. The rule is based on the premise that investors in guaranteed debt or collateralized securities rely on the consolidated financial statements of the registrant as their primary source of financial information.

Debt or preferred stock that is registered under the Securities Act of 1933 (the “Securities Act”) may be guaranteed by one or more affiliates of the issuer. Guarantees of registered securities are considered securities themselves under the Securities Act. As a result, both the guaranteed securities and the guarantees of those securities must be registered with the SEC unless they are exempt from registration. Further, a registrant may pledge the capital stock of one or more affiliates as collateral for debt or preferred stock registered under the Securities Act. In the event of a default, the debt holder may enforce the collateral provisions and, as a result, become a holder of the affiliate’s equity. To ensure that investors receive relevant financial information about (1) guarantors and issuers of guaranteed securities and (2) affiliates whose securities collateralize debt or preferred stock, Regulation S-X requires registrants to disclose certain information about those entities. However, although

registration of guaranteed securities under the Securities Act can result in requirements for both the issuer of the guaranteed security and the guarantor of the security to file periodic reports (i.e., Form 10-K and Form 10-Q) in accordance with Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), the SEC has typically provided relief from these requirements for subsidiary issuers and guarantors. The amendments to Rule 3-10 allow registrants to provide alternative nonfinancial disclosures and alternative financial disclosures (collectively, the “alternative disclosures”) in lieu of such separate financial statements when certain criteria have been met.

While Rule 3-10 outlines the eligibility conditions that must be met for a registrant to qualify for alternative disclosures, the specific disclosure requirements are set forth in Rule 13-01. Disclosure requirements for smaller reporting companies (SRCs) can be found in Regulation S-X, Rule 8-01, Note 3. Rule 13-02 requires the registrant to provide “summarized financial information” and other narrative disclosures, to the extent material, of each affiliate whose securities collateralize the securities that are registered or being registered.

Note that if a registered security contains both a guarantee by one or more subsidiaries and a pledge of affiliates’ equity, the registrant must consider the disclosure requirements in both Rules 13-01 and 13-02 because (1) the guarantee and pledge constitute separate credit enhancements and (2) the disclosure requirements for each may be different. As a result, the alternative disclosures required for compliance with Rule 13-01 may differ from those required by Rule 13-02, even if the affiliates whose equity is pledged as collateral and the subsidiaries that guarantee the security are the same entities.

1.2  Effective Date and Transition

The SEC reporting requirements set forth in the rule are effective as follows:

•

Periodic reports — The rule applies to annual reports on Form 10-K or Form 20-F for fiscal years

ending after January 4, 2021, and quarterly reports on Form 10-Q for quarterly periods ending after January 4, 2021.

For example, a calendar-year-end registrant is required to first comply with the rule in its quarterly report on Form 10-Q for the quarter ending March 31, 2021.

•

Registration statements — The rule applies to:

o Securities Act registration statements first filed on or after January 4, 2021.

o Any post-effective amendment to a Securities Act registration statement filed on or after

January 4, 2021, that either includes a registrant’s latest audited financial statement in the registration statement or updates the prospectus for interim information under Section 10(a)(3) of the Securities Act.

o Any Exchange Act registration statement that is first filed on or after January 4, 2021.

For example, if, on April 29, 2021, a calendar-year-end registrant files a post-effective amendment to an existing registration statement that includes financial statements for the year-ended December 31, 2020, the registrant must comply with the rule in that post-effective amendment.

A registrant can voluntarily comply with the rule before January 4, 2021. Once the registrant voluntarily complies in a periodic report or registration statement, it must apply the rule in all future filings.1 _For

example, if a calendar-year-end registrant applies the rule in a registration statement that is declared effective on November 30, 2020, the registrant must comply with the rule in its annual report on Form 10-K for the year ended December 31, 2020.

As discussed in further detail in Section 3.3, a registrant may continue to apply Rule 3-16 to registered collateralized securities that were issued before January 4, 2021, in certain circumstances.

Chapter 2 — Guaranteed Debt Securities

2.1 Overview

To improve the credit quality and security provided to debtholders, registrants or their subsidiaries may elect to issue debt securities that include guarantees of payment by the registrant or other subsidiaries. If the issuer fails to make a payment on the debt security, the guarantors may be obliged to make the payment. Under the Securities Act, guarantees of securities are considered to be securities themselves. Therefore, all offerings of guaranteed securities, as well as the guarantees of such securities, must be registered with the SEC unless they are exempt from registration, and registrants may be required to provide separate financial statements for each subsidiary issuer or guarantor, which must comply with all issuer reporting obligations (e.g., PCAOB audit, MD&A, and internal control over financial reporting (ICFR) assessments).

However, Regulation S-X, Rule 3-10, contains certain conditions under which a registrant may provide alternative disclosures, described in Regulation S-X, Rule 13-01, in lieu of full financial statements. Depending on the facts and circumstances, a registrant may be required to file one of the following:

•

The financial statements of each subsidiary issuer or subsidiary guarantor.

•

Alternative disclosures that include (1) alternative nonfinancial disclosures (see Section 2.3.1) and (2) alternative financial disclosures (see Section 2.3.2) about the issuer(s) and guarantors(s). In certain limited circumstances, the alternative financial disclosures may be omitted (see

Section 2.3.3).

The guidance on presenting alternative disclosures is structured as follows:

•

Rule 3-10 outlines the eligibility requirements for providing alternative disclosures in lieu of the separate financial statements of each subsidiary issuer or subsidiary guarantor.

•

Rule 13-01(a) identifies the alternative disclosures required in lieu of separate financial statements.

•

Rule 13-01(b) specifies the required locations of such alternative disclosures.

A registrant should consider the alternative disclosure requirements of Rule 13-01 if it registers debt that is guaranteed by one or more of its subsidiaries or if one of the registrant’s subsidiaries registers debt that is guaranteed by the parent company. Such disclosures should be included in (1) the initial registration statement that registers the debt and related guarantees, (2) annual reports on Form 10-K or Form 20-F, and (3) quarterly reports on Form 10-Q.

Note that if a registrant provides full financial statements for a subsidiary issuer or guarantor, the registrant should present the same periods as those presented for the parent company for both annual and interim periods. If the registrant provides alternative financial disclosures, only the most recent

Rules 3-10 and 13-01 also apply to guaranteed preferred securities that are registered or being

registered if they have payment terms that are substantially similar to debt, but Rules 3-10 and 13-01 do not apply to exempt offerings, private securities (i.e., bank debt or other private financings), or to publicly registered debt of the registrant that does not include guarantor features. However, if debt securities are offered under an exempt offering that includes registration rights, the registrant must comply with the alternative disclosure requirements of Rules 3-10 and 13-01 at the time it files a registration statement and in subsequent periodic reports. Although such disclosures are not required in an exempt offering, they may help investors in unregistered securities understand the guarantor structure.

2.2 Eligibility Conditions for Providing Alternative Disclosures

Rule 3-10 allows registrants to provide alternative disclosures, as outlined in Rule 13-01, in lieu of separate audited financial statements of subsidiary issuers and guarantors if the following eligibility conditions are met:

•

The security must be issued or guaranteed by a parent company.

•

All issuers and guarantors must be consolidated subsidiaries of the parent company.

•

The security must be “debt or debt-like.“

•

The security must have one of two eligible structures.

The eligibility conditions are discussed in greater detail below; the content of the alternative disclosures is discussed in Section 2.3.

2.2.1 Parent Company Financial Statements Condition

As a starting point for eligibility, the parent company must (1) be an issuer or guarantor of the security, (2) be an Exchange Act reporting company or be in the process of filing a registration statement under the Securities Act, and (3) have filed consolidated financial statements. The alternative disclosures outlined in Rule 13-01 are predicated on the understanding that investors in guaranteed debt rely primarily on the consolidated financial statements of the parent company; therefore, these conditions ensure that the parent company will be providing consolidated financial statements in accordance with the Exchange Act.

Example 2-1

Registrant A is an Exchange Act reporting company that files consolidated financial statements on Forms 10-K and 10-Q. Issuer B, a subsidiary of A, issues debt securities that are guaranteed by A. Registrant A qualifies for the parent company condition because it (1) is a guarantor of the securities, (2) is an Exchange Act reporting company, and (3) files consolidated financial statements.

Example 2-2

Assume the same facts as in Example 1, except that Registrant A does not guarantee the securities of Issuer B. In this case, the parent company condition is not met and B may not rely on the alternative disclosures outlined in Rule 13-01.

2.2.2 Consolidated Subsidiary Condition

Another condition under Rule 3-10 is that the subsidiary issuer(s) or guarantor(s) must be a consolidated subsidiary of the parent company under the relevant accounting standards. In making this assessment, registrants should consider ASC 810 (foreign private issuers (FPIs) that report in accordance with IFRS®

Standards should consider IFRS 10). If the relevant standard requires the parent company to consolidate the issuer or guarantor, the consolidated subsidiary condition is met. Whether a guarantor or issuer is consolidated depends solely on the relevant accounting standards and not the legal form or ownership interest. For example, issuers and guarantors need not be 100 percent owned by the parent and may have noncontrolling interests. Alternatively, there may be circumstances in which a company that is 100 percent owned is not consolidated (e.g., the subsidiary is in bankruptcy or subject to foreign exchange restrictions). The consolidated subsidiary condition is important because the alternative disclosures outlined in Rule 13-01 are predicated on the understanding that investors in guaranteed debt rely primarily on the consolidated financial statements of the parent company. If a guarantor or issuer is not consolidated into the parent’s financial statements, such statements may be less relevant to the evaluation of the guarantee.

2.2.3 Debt or Debt-Like Securities Condition

Under Rule 3-10, the guaranteed security must also be debt or debt-like. The substance, rather than the form, of a security determines whether it is debt or debt-like. This condition is met if the guaranteed security has the following characteristics:

(i) The issuer has a contractual obligation to pay a fixed sum at a fixed time; and

(ii) Where the obligation to make such payments is cumulative, a set amount of interest must be paid.

The term “set amount of interest” is not intended to imply that the obligation must be fixed. Floating, adjustable, or indexed securities will meet that condition as long as the amount of interest can be calculated on the basis of objective measures (e.g., the secured overnight financing rate) or other factors that are not determined by the issuer. In addition to fixed and variable-rate debt, other securities similar to debt may also qualify as being debt or debt-like. For example, trust preferred securities often include periodic fixed or variable interest payments that are cumulative in nature and thus may meet this condition. The determination of whether a security is debt or debt-like under Rule 3-10 may differ from the determination of whether the security should be classified as debt or equity in accordance with U.S. GAAP or IFRS Standards, as applicable. Since this is a legal determination, a company should consider consulting with SEC legal counsel to determine whether securities are debt or debt-like.

2.2.4 Eligible Issuer and Guarantor Structures Condition

Finally, Rule 3-10 requires the guarantor structure to meet one of the following eligibility requirements: 1. The parent company issues or co-issues (on a joint and several basis with one or more of

its consolidated subsidiaries) securities that are guaranteed by one or more consolidated subsidiaries.

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

The first eligible structure is one in which the parent company issues debt guaranteed by its

consolidated subsidiaries. In this case, the security may be co-issued with a consolidated subsidiary, and all guarantors must be consolidated subsidiaries. Any co-issuance must be on a joint and several basis; however, the guarantees do not need to be full and unconditional (as described further below).

Example 2-3

Registrant A, an Exchange Act reporting company, issues debt securities guaranteed by three of its

consolidated subsidiaries. This structure qualifies for alternative disclosure under Rule 3-10 because the parent company is issuing debt guaranteed by consolidated subsidiaries.

Example 2-4

Registrant A, an Exchange Act reporting company, co-issues debt securities with consolidated Subsidiary B on a joint and several basis. Subsequently, B files for bankruptcy and A determines that it should no longer consolidate B. Upon bankruptcy, this structure no longer qualifies for alternative disclosure under Rule 3-10 because the parent company no longer consolidates the co-issuer of the debt.

Example 2-5

Registrant A, an Exchange Act reporting company, co-issues debt securities with consolidated Subsidiary B on a joint and several basis, and such securities are guaranteed by consolidated Subsidiary C. This structure qualifies for alternative disclosure under Rule 3-10 because the parent company is co-issuing debt with a consolidated subsidiary and the debt is guaranteed by a consolidated subsidiary.

The second eligible structure is one in which a consolidated subsidiary of the parent company issues debt guaranteed by the parent company on a full and unconditional basis. The debt may also be guaranteed by other consolidated subsidiaries of the parent company; the guarantees by such

subsidiaries may be, but are not required to be, full and unconditional. Note that a guarantee is full and unconditional if (1) the guarantor has an immediate obligation to make a scheduled payment that the issuer of the guaranteed security fails to make and (2) investors in the guaranteed security could bring legal action against the guarantor for payment of all amounts due.

Example 2-6

Issuer B, an equity method investee of Registrant A, an Exchange Act reporting company, issues debt securities that are fully and unconditionally guaranteed by A. This structure does not qualify for alternative disclosure under Rule 3-10 because the issuer is not a consolidated subsidiary of the parent company.

Example 2-7

Issuer B, which is a consolidated subsidiary of Registrant A, an Exchange Act reporting company, issues debt securities that are fully and unconditionally guaranteed by A and also guaranteed by three other consolidated subsidiaries of A. This structure qualifies for alternative disclosure under Rule 3-10 because (1) the issuer is a consolidated subsidiary of the parent company, (2) the parent company has fully and unconditionally guaranteed the securities, and (3) the other remaining guarantors are consolidated subsidiaries of A.

Example 2-8

Issuer B and Issuer C, which are both consolidated subsidiaries of Registrant A, an Exchange Act reporting company, co-issue debt securities that are fully and unconditionally guaranteed by A. This structure qualifies for alternative disclosure under Rule 3-10 because the issuers are consolidated subsidiaries of the parent company and the parent company has fully and unconditionally guaranteed the securities.

2.3 Alternative Disclosure Requirements

If a registrant or one of its consolidated subsidiaries has issued guaranteed registered securities, it is presumed that an investor in those securities relies on the registrant‘s consolidated financial statements as the primary source of information. Therefore, under Rule 13-01, a registrant is permitted to provide alternative disclosures in lieu of separate financial statements for any guarantors of the registered securities. Such alternative disclosures, which include both financial and nonfinancial disclosures about the issuer(s) and guarantor(s) (discussed below), may be provided in the registrant’s periodic filings (e.g., Forms 10-K and 10-Q) or registration statements if the eligibility conditions discussed in Section 2.2

have been met. In conjunction with the registrant’s consolidated financial statements, these alternative disclosures are intended to give investors sufficient information to evaluate the guarantees.

2.3.1 Alternative Nonfinancial Disclosures

In addition to providing certain alternative financial disclosures (see discussion in Section 2.3.2), a registrant that presents the alternative disclosures permitted by Rule 13-01 must provide alternative nonfinancial disclosures. To the extent material, such disclosures must include a description of:

•

The issuer(s) and guarantor(s) of the security.

•

The terms and conditions of the guarantee(s), how the issuer(s) and guarantor(s) are structured, and other factors that may affect payments to holders of the guaranteed securities. For

example, when there is a guarantee, investors have a claim on the assets of the guarantor subsidiaries in the event of a default. It is important for the investors to understand the factors that affect structural subordination so that they can assess whether any individual subsidiary guarantor can make payment under the guarantee. Therefore, the registrant should disclose whether the guarantee is structurally subordinate to other liabilities of the guarantors. In addition, a subsidiary guarantee may include customary release provisions (e.g., a subsidiary may be released from a guarantee if it is sold or sells all of its assets or is declared “unrestricted” for covenant purposes). Such customary release provisions may warrant narrative disclosure.

•

Other factors that may affect payments to holders of the guaranteed security, such as contractual or statutory restrictions on dividends, guarantee enforceability, and the rights of noncontrolling interest holders. For example, a guarantee may be limited by certain laws such as those pertaining to bankruptcy, insolvency, fraudulent conveyance and transfer, reorganization, and moratorium. Such limitations should be disclosed to the extent they are material to

investors.

Beyond the requirements outlined above, registrants must disclose the specific facts and circumstances related to each guarantor if such information would be material to investors and would help them understand the sufficiency of the guarantee. Registrants must provide additional information, to the extent necessary, to ensure that their disclosures are not misleading. The alternative nonfinancial disclosures provided should make the accompanying alternative financial disclosures easier to interpret.

When an alternative nonfinancial disclosure applies to one or more, but not all, issuer(s) and

guarantor(s), the registrant is required to provide, to the extent material, separate alternative financial disclosures (as discussed in Section 2.3.2) regarding the issuers and guarantors to which the unique alternative nonfinancial disclosure applies. This may be the case if one subsidiary guarantor has limitations or restrictions on the extent of its guarantee but others do not.

Example 2-9

Registrant A issues $100 million in registered debt securities that are guaranteed by three subsidiaries. Subsidiary B’s guarantee is limited to $10 million, whereas Subsidiary C’s and Subsidiary D’s guarantees are full and unconditional. In this scenario, A may be required to disclose the limitations on B’s guarantee (i.e., provide separate alternative nonfinancial disclosures specific to B) and present (1) separate alternative financial disclosures for B and (2) combined alternative financial disclosures for A, C, and D.

In addition, the identity of the issuer(s) and guarantor(s) must also be listed in an exhibit to the registration statement or periodic filing. If the entities that are required to be disclosed are the same as those disclosed in the previous period, the parent company can link to the exhibit in an earlier filing rather than filing the exhibit again.

Example 2-10

Company A, a domestic registrant, may provide an exhibit such as the following: Exhibit 22

List of Issuers and Guarantors

The following consolidated subsidiaries of Company A are issuers or guarantors of registered debentures that bear interest at 5% and mature in 20X4:

Entity Role Company A Guarantor Subsidiary B Issuer Subsidiary C Guarantor Subsidiary D Guarantor Subsidiary E Guarantor Subsidiary F Guarantor

2.3.2 Alternative Financial Disclosures

The alternative disclosures required by Rule 13-01 include alternative financial disclosures about issuers and guarantors that will help investors in registered offerings make informed investment decisions about guaranteed debt securities. However, as discussed in Section 2.3.3, in certain circumstances, alternative financial disclosures may be omitted.

and provide an accompanying note that briefly describes the basis of presentation (see Section 2.3.2.2 below). The summarized financial information must include, at a minimum, the following:

•

Current and noncurrent assets.

•

Current and noncurrent liabilities.

•

Redeemable preferred stock.

•

Noncontrolling interests.

•

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.

Rule 13-01(a)(4) also requires registrants to present separate line items for “amounts due from, amounts due to, and transactions with [nonguarantor] subsidiaries.” Similarly, balances and transactions with other related parties (i.e., related party transactions reported in the registrant’s consolidated financial statements) should also be presented in separate line items. Registrants are not required to disclose supplemental cash flow information about subsidiary issuers or guarantors.

Further, to comply with Rule 13-01(a)(6), registrants must present additional line items to disclose any other financial information about a guarantor “that would be material for investors to evaluate the sufficiency of the guarantee.” To comply with Rule 13-01(a)(7), registrants should provide any additional disclosures necessary to ensure that the alternative financial disclosures presented are not misleading.

Example 2-11

Registrant A issues registered debt that is guaranteed by Subsidiary B. Substantially all of the noncurrent assets of A (the issuer) and B (the guarantor) consist of goodwill. Registrant A will need to present goodwill separately from other noncurrent assets if such disclosure would be material to the investors’ evaluation of the sufficiency of the guarantees (e.g., if current assets would not be sufficient to satisfy the guarantee).

2.3.2.2 Basis of Presentation

The alternative financial disclosures of the issuer(s) and guarantor(s) may be presented in a registrant’s periodic filings or registration statement (see Section 2.3.2.1) on a combined basis, with transactions between the issuer(s) and guarantor(s) (hereafter referred to as the “obligor group”) eliminated in combination. However, the registrant does not need to provide separate columns for each issuer and guarantor or to show associated eliminations; only the combined amounts must be disclosed. While presentation on a combined basis is permitted, there could be circumstances in which separate financial disclosures about certain issuers and guarantors is required. For example, if factors that may affect payment to investors in the guaranteed securities are different for certain issuers or guarantors, registrants may need to present alternative financial disclosures for those issuers and guarantors separately. This may also be the case if some guarantees are not full and unconditional but others are.

Example 2-12

Registrant A issues $100 million in registered debt securities that are guaranteed by three subsidiaries. Subsidiary B’s guarantee is limited to $10 million, whereas Subsidiary C’s and Subsidiary D’s guarantees are full and unconditional. In this scenario, Registrant A may be required to disclose the limitations on B’s guarantee and provide (1) separate alternative financial disclosures for B and (2) combined alternative financial disclosures for A, C, and D.

Rule 13-01 allows registrants to provide narrative disclosures rather than the alternative financial disclosures of the issuer(s) and guarantor(s) that have unique fact patterns (e.g., Subsidiary A in Example 2-12) when the narrative disclosures about such entities “can be easily explained and understood.” For example, if the entities with unique fact patterns represent a similar percentage of each line item, narrative disclosure may be appropriate. However, if such entities constitute varying proportions of each line item, narrative disclosure is unlikely to be sufficient.

Example 2-13

Registrant A has contractual (or statutory) restrictions that apply to Subsidiary B, one of its subsidiary

guarantors. Subsidiary B represents roughly the same percentage of every line item in the combined alternative financial disclosures of the obligor group. In this situation, A may describe the restrictions that apply to B and disclose that B represents approximately 5 percent of each line item presented in the combined alternative financial disclosures.

When presenting the alternative financial disclosures, a registrant should exclude the financial information of nonguarantor subsidiaries because (1) such subsidiaries are not obligated to make payments related to guaranteed securities and (2) the obligor group’s equity investment in nonguarantor subsidiaries may be subordinate to other obligations of those subsidiaries. Moreover, the alternative financial disclosures of the obligor group should exclude investments in nonguarantor subsidiaries (i.e., investments in subsidiaries and equity in the earnings of subsidiaries and related tax effects). However, as discussed in Section 2.3.2.1, the registrant would separately disclose the obligor group’s transactions and balances with the nonguarantors if such transactions are unrelated to the group’s investment in the nonguarantors, as shown in the example below.

Income Statements Three Months Ended March 31, 20Y0 Twelve Months Ended December 31, 20X9 Revenues $ 1,000 $ 4,000 Revenues from sales to nonguarantor subsidiaries 50 200 Gross profit 200 800 Income from continuing operations 100 400

Balance Sheets (as of)

March 31, 20Y0 December 31, 20X9

Current assets $ 50 $ 75 Receivables from sales to nonguarantor subsidiaries 25 30 Noncurrent assets 200 200 Current liabilities 25 30 Noncurrent liabilities 150 175 Redeemable preferred stock 40 40 Noncontrolling interests 5 5

As previously mentioned, registrants that qualify for alternative disclosures must include a brief

description of the basis of presentation associated with each of the required financial disclosures. Such a description should include the form and content of the disclosures and enhance the understandability of the financial information provided. Among other items, the description of the basis of presentation should disclose that:

•

The alternative financial disclosures include information about the issuer(s) and guarantor(s).

•

The alternative financial disclosures are presented on a combined basis, with balances and transactions between the issuer(s) and guarantor(s) eliminated.

•

The information related to the investments of the issuer(s) and guarantor(s) in nonissuer and nonguarantor subsidiaries has been excluded.

•

The balances and transactions with nonissuer and nonguarantor subsidiaries have been separately presented.

•

The balances and transactions with other related parties have been separately presented. For periodic filings, a registrant must assess the guarantor structure as of each reporting date (i.e., annual and interim periods) to determine whether any changes in the structure (e.g., the addition or removal of guarantor subsidiaries) affect the alternative financial disclosures presented (see Section 2.3.2.4 for further information). The SEC staff has informally indicated that for an initial registration statement (e.g., an IPO filed on Form S-1) or a registration statement filed by an existing SEC reporting entity that was not previously required to present alternative financial disclosures (e.g., an entity registering public debt on Form S-4 or S-3), the registrant should evaluate the guarantor structure as of the initial filing date of the registration statement to determine the requirements. See Section 2.3.2.3.3

for further discussion of information to be included in a registration statement.

If a registrant or its subsidiaries have issued multiple securities that have different issuers and

guarantors, the registrant or subsidiaries should consider whether the alternative financial disclosures of the obligor group would be the same, in all material respects, for each guaranteed security. If not, the registrant may need to provide several different sets of alternative financial disclosures to reflect the obligor group of each guaranteed security.

2.3.2.3 Periods to Present

A registrant is only required to present alternative financial disclosures for the most recent annual period and the most recent year-to-date interim period, as applicable. In no circumstance would a registrant be required to provide comparative income statement information or quarter-to-date income statement information (i.e., to match the income statement presentation in Form 10-Q for the second or third quarter).

2.3.2.3.1 Annual Reports

Alternative financial disclosures must be presented in annual reports on Form 10-K or Form 20-F as follows:

•

Balance sheet information — As of the most recent year-end.

•

Income statement information — For the most recent year.

For example, a registrant with a December 31 fiscal year-end is required to include balance sheet information as of December 31, 2021, and income statement information for the year ended December 31, 2021, in its December 31, 2021, Form 10-K. Comparative prior-year periods are not required.

2.3.2.3.2 Quarterly Reports

Alternative financial disclosures must be presented in quarterly reports on Form 10-Q as follows:

•

Balance sheet information — As of the most recent interim period and the prior year-end, which

is consistent with the periods presented in the parent company’s consolidated balance sheet.

•

Income statement information — For the current year-to-date interim period. Comparative

prior-year interim periods are not required.

For example, a registrant with a December 31 fiscal year-end is required to include balance sheet information as of June 30, 2021, and December 31, 2020, and income statement information for the six months ended June 30, 2021, in its June 30, 2021, Form 10-Q.

2.3.2.3.3 Registration Statements

Alternative financial disclosures must be presented in an entity’s registration statement for the issuance of guaranteed securities as follows:

•

Balance sheet information — As of the end of the most recently completed fiscal year-end and

interim period included in the registration statement.

•

Income statement information — For the most recently completed year and the current

year-to-date interim period included in the filing. Comparative prior-year interim and annual periods are not required.

For example, if a registrant with a December 31 fiscal year-end files a registration statement after the June 30, 2021, Form 10-Q has been filed, it is required to include (1) balance sheet information as of June 30, 2021, and December 31, 2020, and (2) income statement information for the six months ended June 30, 2021, and the year ended December 31, 2020.1

2.3.2.4 Changes to the Obligor Group’s Alternative Financial Disclosures

The alternative financial disclosure of the obligor group may need to be adjusted for retrospective changes that affect the registrant’s financial statements (e.g., the adoption of new accounting standards or the reporting of discontinued operations) or changes in the guarantor structure. The need for retrospective adjustment depends on the periods presented:

•

Annual reports — Since annual reports only include disclosure of the most recent year, prior

periods are not presented and thus do not need to be retrospectively adjusted.

•

Quarterly reports — Since quarterly reports only include disclosure of income statement

information for the most recent year-to-date interim period, prior periods do not have to be retrospectively adjusted. However, since quarterly reports require disclosure of balance sheet information as of the most recent interim period-end and the most recent year-end, a registrant may need to retrospectively adjust the most recent year-end balances.

•

Registration statements for guaranteed securities — Since registration statements require the

disclosure of (1) balance sheet information as of the end of the most recently completed fiscal year-end and interim period and (2) income statement information for the most recently completed year and the current year-to-date interim period, the year-end balance sheet information and annual income statement information may need to be retrospectively adjusted.

2.3.2.4.1 Retrospective Changes Affecting the Registrant’s Financial Statements

A registrant may retrospectively adjust its consolidated financial statements for a variety of reasons, including, but not limited to, the adoption of new accounting standards or the reporting of discontinued operations. When such an adjustment occurs, the registrant must consider the effect of such changes on the alternative financial disclosures of the obligor group. If the retrospective adjustment affects the obligor group’s balances, the registrant should reflect the retrospective changes in the alternative financial disclosures at the same time that it reflects such changes in the consolidated financial statements.

Example 2-14

Registrant A, an Exchange Act reporting company with a calendar year-end, guarantees the registered debt of Subsidiary Issuer B. The guarantor structure qualifies for alternative disclosures in lieu of B’s full financial statements (see Section 2.2). In A’s Form 10-Q for the quarter ended March 31, 20X8, A provides alternative financial disclosures for itself and B on a combined basis (the obligor group) as of and for the quarter ended March 31, 20X8, and as of December 31, 20X7. During the quarter ended March 31, 20X8, A adopts a new accounting standard retrospectively, which results in adjustments to net income, total assets, and equity for the current and prior periods. The alternative financial disclosures of the obligor group included in Form 10-Q should reflect the adoption of the new accounting standard as of and for the quarter ended March 31, 20X8. In addition, the summarized balance sheet information as of December 31, 20X7, which was previously reported in A’s Form 10-K for the year ended December 31, 20X7, should be retrospectively revised for the impact of the new accounting standard. Further, if A files a new or amended registration statement before filing its Form 10-K for the year ended December 31, 20X8, it would also present the alternative financial disclosures for the year ended December 31, 20X7, retrospectively adjusted for the new accounting standard.

2.3.2.4.2 Change in Guarantor Structure

When a change in the guarantee structure occurs (e.g., a guarantor subsidiary is released from its obligation and becomes a nonguarantor), a registrant must determine whether and how that change affects its disclosures. We believe that changes made before the most recent balance sheet date should

changes that occur after the most recent balance sheet date, a registrant should consider disclosing such changes. In addition, the changes to the guarantor structure must be reflected in subsequent periodic filings that include financial information for the period in which the change occurred.

Example 2-15

Registrant A, an Exchange Act reporting company with a calendar year-end, guarantees the registered debt of Subsidiary Issuer B as of December 31, 20X7. No other subsidiaries guarantee B’s debt as of that date, and the guarantor structure qualifies for alternative disclosures in lieu of B’s full financial statements (see Section 2.2). Subsidiary C, a preexisting subsidiary owned and consolidated for all periods presented, is added to the guarantor structure as a subsidiary guarantor on July 21, 20X8. The new guarantor structure also meets the conditions for the alternative

disclosures (and thus A may omit the full financial statements of B and C). In its alternative financial disclosures in Form 10-Q for the quarter ended June 30, 20X8, A would reflect its own information with that of B on a combined basis; it would not include C’s information since C became a guarantor after the balance sheet date. However, Registrant A should consider disclosing the addition of C as a guarantor. Registrant A’s subsequent periodic reports and other applicable filings should retrospectively present the alternative financial disclosures (and alternative nonfinancial disclosures) in accordance with the new guarantor structure. Therefore, A would reflect in its alternative

financial disclosure in its Form 10-Q for the quarter ended September 30, 20X8, its own information combined with that of B and C for all periods presented, including the balance sheet information as of December 31, 20X7.

One notable exception to the retrospective treatment discussed above involves the disposal of a guarantor subsidiary that is released from its guarantee upon disposal. The highlights of the March 2013 CAQ SEC Regulations Committee joint meeting with the SEC staff state that a registrant can apply either of the following two presentation alternatives when changes to the group of subsidiary guarantors occur as a result of a disposal:

1. The alternative financial disclosures of the obligor group reflect the guarantor structure as of the

most recent balance sheet date included in the filing — “[A]ny subsidiary already disposed of

and no longer designated as a guarantor at the most recent balance sheet date should be retrospectively [excluded from the alternative financial disclosure of the obligor group]. A guarantor subsidiary not disposed of but that qualifies for discontinued operations treatment and that is still designated as a guarantor at the balance sheet date should remain in the [alternative financial disclosure of the obligor group] until the date of disposal . . . at which point the subsidiary would be retrospectively” excluded from the group’s alternative financial disclosure.

2. The disposed subsidiary remains in the alternative financial disclosures of the obligor group through

the date of disposal — The loss of guarantor status is not retrospectively applied “in order to

portray the operational history of the guarantor(s).”

The meeting highlights further indicate that the “staff will accept either approach [but] [r]egistrants should carefully consider which presentation is most appropriate in their facts and circumstances.” These presentation alternatives apply solely to the disposition of a guarantor and should not be applied to other changes in guarantor structure.

2.3.3 Omission of Financial Disclosure

Alternative disclosures are required to include the alternative financial disclosures to the extent material, which is highly dependent on the applicable facts and circumstances and not defined by any numerical thresholds. For example, a registrant can omit the alternative financial disclosures of the obligor group if its consolidated financial statements do not differ in any material respects from those of the group. However, in all circumstances, the alternative nonfinancial disclosures must be provided.

Rule 13-01(a)(4)(vi) outlines four scenarios in which financial information would not be material. If any one of those criteria are “true and disclosed,” the registrant may omit the financial disclosures. The four scenarios are as follows:

•

The alternative financial disclosures would not be materially different from the consolidated financial statements of the registrant (i.e., nonguarantors are insignificant).

•

The amounts presented in the alternative financial disclosures (which excludes investments in nonguarantors) would not be material (i.e., the issuers and guarantors do not have material independent assets, liabilities, or operations).

Connecting the Dots

Since the obligor group would report, at a minimum, the registered debt and related interest expense, registrants may not be able to disclose that the obligor group has no material assets, liabilities, or operations. We believe that, alternatively, a registrant

could disclose the amount of the registered debt and related interest expense along with a statement that the obligor group has no other material independent assets, liabilities, or operations.

•

A finance subsidiary2 _{issues a security that is fully and unconditionally guaranteed by the parent,}

and the security is not guaranteed by any other subsidiaries.

•

A finance subsidiary co-issues a security with the parent, and the security is not guaranteed by any other subsidiaries.

However, registrants that do not meet any of the criteria in these scenarios may nonetheless conclude, on the basis of their specific facts and circumstances, that disclosure of part or all of the financial information is not material. We encourage registrants that intend to omit part or all of the alternative financial disclosures on the basis of materiality, rather than the four nonexclusive scenarios above, to consult with their legal and accounting advisers.

A registrant that omits such financial disclosures must evaluate the appropriateness of this

determination as of each reporting date. If circumstances change, the registrant may be required to provide the obligor group’s alternative financial disclosures. For example, if a registrant relies on the fact that nonguarantor subsidiaries are insignificant as its basis for omitting the alternative financial disclosures and it subsequently acquires a material nonguarantor subsidiary, the registrant must

reassess its conclusion, and it may need to begin providing financial disclosures about the obligor group.

2.3.4 Where Disclosure Is Required

For periodic reporting on Form 10-K, Form 10-Q, or Form 20-F, a registrant may provide the required disclosures in either its MD&A or financial statements.

For registrations statements (i.e., Form S-3 or Form S-4) for the sale or registration of guaranteed securities, the disclosures may be presented in one of the following:

•

MD&A.

•

The financial statements.

•

The prospectus, placed immediately after “Risk Factors.” If there are no risk factors disclosed, the information may be presented immediately after the pricing information.

If a registrant chooses to include the disclosures in its financial statements, such disclosures would be subject to (1) audit (in the case of Forms 10-K and 20-F) or review (in the case of Form 10-Q) and (2) ICFR and XBRL tagging. However, if the registrant elects to include the disclosures outside its financial statements, the disclosures would be subject to disclosure controls and procedures but would not require XBRL tagging.

2.3.5 Recently Acquired Subsidiary Issuers or Guarantors

When filing a new registration statement in conjunction with the offer and sale of new guaranteed securities, a registrant needs to consider whether any information related to recently acquired businesses must be included in the registration statement.

If a registrant acquires a significant business3 _{after the most recent balance sheet date included in}

its consolidated financial statements and such an acquired business, or one or more of the acquired business’ subsidiaries, either issues or guarantees the securities to be issued, the registrant must provide the preacquisition alternative financial disclosures for the recently acquired subsidiaries in the registration statement. A registrant is required to provide the preacquisition alternative financial disclosures of the recently acquired guarantor subsidiary as of and for the most recent annual and interim periods only, even if preacquisition financial statements are required in accordance with Regulation S-X, Rule 3-05, for more than one year. However, once the acquisition has been reflected in the registrant’s balance sheet, the requirement for the preacquisition alternative financial disclosures of a recently acquired guarantor subsidiary in a registration statement no longer applies. Preacquisition alternative financial disclosures for recently acquired subsidiary issuers or guarantors are not required in Form 10-Q or Form 10-K.

Example 2-16

On July 1, 2021, Registrant A completes the acquisition of a significant business that has a December 31 fiscal year and plans to file a new registration statement on Form S-3 on September 25, 2021. The acquired business will guarantee the newly registered debt. The registration statement includes (or incorporates by reference) the financial statements of the acquired business under Rule 3-05. Furthermore, to comply with Rule 13-01, the registration statement must include preacquisition alternative financial disclosures of the newly acquired subsidiary (1) as of June 30, 2021, and December 31, 2020, (2) for the six months ended June 30, 2021, and (3) for the year ended December 31, 2020.

When a registrant is required to provide the preacquisition alternative financial disclosures of a recently acquired subsidiary issuer or guarantor, such disclosures must be consistent with the alternative financial disclosures presented for existing issuers and guarantors (see Section 2.3.2) and should reflect only the information of subsidiaries of the recently acquired business that issue or guarantee

In certain circumstances, a registrant may be required to provide alternative financial disclosures of the recently acquired issuer or guarantor subsidiaries in accordance with Rule 13-01 before providing the historical financial statements of the recently acquired business in accordance with Rule 3-05. Under Rule 3-05, a registrant is generally not required to include the financial statements of a recently acquired business in a registration statement that is filed or declared effective within 75 days of the consummation of the acquisition. Because Rule 13-01 does not include a similar provision for recent acquisitions, any registration statement filed after the consummation of an acquisition of a significant business but before the acquisition is reflected in the registrant’s financial statements must include the alternative financial disclosures of the recently acquired issuer or guarantor subsidiaries.

2.3.6 Ongoing Reporting Obligation

To remain eligible to omit the financial statements of any subsidiary issuers or guarantors, or both, a registrant must continue to provide the alternative disclosures for as long as the subsidiary issuers or guarantors have a reporting obligation with respect to the guarantee or guaranteed security. A registrant may cease providing the alternative disclosures if such subsidiary issuers or guarantors no longer have a reporting obligation or the obligation has been suspended. For example, Rule 12h-3 of the Exchange Act allows for the automatic suspension of a company’s reporting obligation if, as of the beginning of the fiscal year, the securities are “held of record by . . . [f]ewer than 300 persons, or in the case of a bank; a savings and loan holding company; . . . or a bank holding company . . . 1,200 persons.”

2.4 Application to Various Types of Issuers

Rules 3-10 and 13-01 apply to several categories of issuers, including FPIs, SRCs, and issuers offering securities under Regulation A. In certain circumstances, Rules 3-10 and 13-01 also apply to the financial information of third parties provided by issuers of asset-backed securities. The sections below discuss specific considerations.

2.4.1 Foreign Private Issuers

FPIs may provide financial statements in accordance with U.S. GAAP, IFRS Standards, or home country GAAP reconciled to U.S. GAAP. The alternative financial disclosures required by Rule 13-01 may be provided on the same basis as the registrant’s financial statements and for the same periods presented by the registrant. If such information is disclosed on the basis of home country GAAP, there is no explicit requirement for the FPI to reconcile to U.S. GAAP, as is required for the registrant’s consolidated financial statements. However, FPIs that apply home country GAAP should consider Rule 13-01(a)(6) and (7), which require the registrant to disclose additional financial information “if the information would be material for investors to evaluate the sufficiency of the guarantee” and would provide “[s]ufficient information so as to make the financial and non-financial information presented not misleading.” As a result, registrants that apply home country GAAP may conclude that reconciliation of the alternative financial disclosures to U.S. GAAP is appropriate, although it is not explicitly required. In addition, FPIs are not required to issue quarterly reports, and thus they are only required to provide interim alternative financial disclosures in registration statements for guaranteed securities.

2.4.2 Smaller Reporting Companies

Rule 13-01 requires SRCs to provide the same information as other registrants. One of the primary disclosure accommodations available to SRCs is the ability to provide two years, rather than three, of annual financial statements. However, because Rule 13-01 only requires reporting of the most recent annual and interim periods, this accommodation for SRCs does not affect the disclosures required for

2.4.3 Regulation A

Although Regulation A of the Securities Act exempts offerings under a certain threshold from registration, the SEC issued clarifying instructions to Form 1-A that specify that Rules 3-10 and 13-01 apply to Regulation A issuers.

2.4.4 Asset-Backed Issuers

Asset-backed securities are generally fixed-income securities for which the payments primarily depend on cash flows generated by specific underlying assets. Issuers of asset-backed securities are required to disclose financial information about significant obligors or guarantors of such assets. If the obligor or guarantor is an Exchange Act reporting company and provides the information required by Rule 13-01, this requirement may be satisfied.

Chapter 3 — Affiliates Whose Securities

Collateralize Securities Registered or

Being Registered

3.1 Overview

In certain offerings under the Securities Act, the securities of an issuer may be collateralized (“collateralized securities”) with the securities of one or more of its affiliates. Generally, an issuer collateralizes its securities with those of its consolidated subsidiaries; however, in some circumstances an issuer may collateralize securities with those of an unconsolidated affiliate as well.

Collateral is typically defined as a borrower’s pledge of an asset as security to protect a lender’s

interests. Sometimes, the entity registering the securities (i.e., the “issuer” or the “registrant”) pledges the capital stock of one or more of its affiliates as collateral to security holders in the event of a default. If the issuer were to default, the debt security holder could enforce the collateral provisions and become a holder of the equity securities of the affiliate(s) whose securities were pledged as collateral. By obtaining the affiliate’s capital stock as collateral in the event of the issuer’s default, the investor in a registrant’s collateralized securities becomes an investor in the capital stock of the registrant’s affiliate.

Consequently, while investors in collateralized securities may rely on an issuer’s financial statements as their primary source of information when making investment decisions, they may also find it useful to consider supplemental details about the affiliates of the issuer whose securities are pledged.

Accordingly, Regulation S-X, Rule 13-02, requires registrants to provide certain alternative financial and nonfinancial disclosures about (1) any affiliates whose securities have been pledged as collateral and (2) the collateral arrangement, if material.

Note that if an entity pledges an asset of an affiliate other than the affiliate’s capital stock (e.g., the affiliate’s property, plant, or equipment) to collateralize registered debt issuances, such a pledge would not trigger the reporting requirements discussed in this chapter.

3.2 Alternative Disclosure Requirements

3.2.1 Alternative Nonfinancial Disclosures

Alternative nonfinancial disclosures can help investors understand the nature of the securities of affiliates that have been pledged as collateral by the issuer and the underlying collateralization arrangements. Rule 13-02 requires registrants to provide, to the extent material, certain alternative nonfinancial disclosures, such as:

(1) A description of the securities pledged as collateral and the affiliates whose securities are pledged as collateral;

(2) A description of the terms and conditions of the collateral arrangement, including the events or circumstances that would require delivery of the collateral;

(3) A description of the trading market for the affiliate’s security pledged as collateral or a statement that there is no market.

In addition, some individual affiliates may have unique fact patterns regarding the pledge of their securities, collateralization arrangements, or both that would warrant specific disclosure. Beyond the requirements outlined above, registrants are required to disclose specific facts and circumstances related to individual affiliates or collateral arrangements if such information would be material to investors and would help them understand and evaluate the pledges of the affiliates’ securities and the underlying collateral arrangements. Registrants must also provide additional information to the extent necessary to ensure that the disclosures provided are not misleading.

For example, a registrant that pledges its equity interest in an affiliate that is not wholly owned would be required to include additional disclosures about its ownership interest in the affiliate, including relevant information about the amount of interest not held by the registrant. In addition, a registrant that pledges its equity interest in an unconsolidated affiliate that is accounted for by using the equity method may also be required to file the separate financial statements of the equity method investee if such statements are material to the pledge because equity method investees are not consolidated in an issuer’s financial statements.

Further, Regulation S-K, Item 601(b)(22), requires a registrant to include in its disclosure Exhibit 22, which lists “each of its affiliates whose securities are pledged as collateral for securities registered or being registered, and also [identifies] the securities pledged as collateral.”

3.2.2 Alternative Financial Disclosures

3.2.2.1 Level of Detail

For each affiliate whose securities are pledged as collateral, Rule 13-02(a)(4) requires the registrant to disclose, to the extent material, the summarized financial information specified in Regulation S-X, Rule 1-02(bb)(1), which includes select balance sheet and income statement line items, and provide an accompanying note that briefly describes the basis of presentation (see Section 3.2.2.2). The summarized financial information must include, at a minimum, the following:

•

Current and noncurrent assets.

•

Current and noncurrent liabilities.

•

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.

In addition to the financial information prescribed by Rule 1-02(bb)(1), registrants should separately present additional line items when such financial information would be material to investors. For example, if a material goodwill impairment charge is incurred for an affiliate whose stock is pledged as collateral, separate disclosure of this item may be meaningful to an investor.

Further, the rule requires registrants to present separate line items for “[a]n affiliate’s amounts due from, amounts due to, and transactions with” (1) the registrant and any consolidated subsidiaries that are not included in the summarized financial information and (2) related parties (e.g., transactions between affiliates and unconsolidated equity method investments or entities with common ownership or management). Supplemental cash flow information is not required to be disclosed.

3.2.2.2 Basis of Presentation

The alternative financial disclosures of each consolidated affiliate whose securities are pledged may be presented on a combined basis provided that “[i]ntercompany balances and transactions between affiliates whose summarized financial information is presented on a combined basis [are] eliminated.” However, the registrant does not need to provide separate columns for each issuer and affiliate whose securities are pledged or to show the associated eliminations; only the combined amounts must be disclosed. The alternative financial disclosures of each affiliate whose securities are pledged as collateral should reflect the financial information of its subsidiaries on a consolidated basis, even if the capital stock of the affiliate’s subsidiaries is not pledged as collateral.

When an alternative nonfinancial disclosure (as described in Section 3.2.1) applies to one or more, but not all, affiliates whose securities are pledged as collateral, the registrant is required to present separate alternative financial disclosures regarding the affiliate(s) to which the unique alternative nonfinancial disclosure applies. For example, if there is a trading market for one affiliate’s pledged securities, the summarized financial information for that affiliate should be presented separately from the combined information for the affiliates for which there is no trading market. If the alternative financial disclosures for those affiliates to which the separate narrative information applies can be easily explained and understood, it may be acceptable for the registrant to provide narrative disclosure in lieu of the separate summarized financial information. However, such situations are expected to be limited.

3.2.2.3 Omission of Alternative Financial Disclosures

The rule permits registrants to omit the alternative financial disclosures in either of the following scenarios:

•

The amounts to be presented for “the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements.”1 _{For example, this could be the case when an issuer}

(1) pledges stock of all of its subsidiaries or (2) pledges the stock of a majority of its subsidiaries and the subsidiaries whose stock is not pledged is immaterial.