The following is the text of SAB Topic 6.K.2, Parent Company Financial Information.
- a. Computation of restricted net assets of subsidiaries.
- Facts: The revised rules for parent company disclosures adopted in ASR 302 require, in certain circumstances, (1) footnote disclosure in the consolidated financial statements about the nature and amount of significant restrictions on the ability of subsidiaries to transfer funds to the parent through intercompany loans, advances or cash dividends [Rule 4-08(e)(3)], and (2) the presentation of condensed parent company financial information and other data in a schedule (Rule 12-04). To determine which disclosures, if any, are required, a registrant must compute its proportionate share of the net assets of its consolidated and unconsolidated subsidiary companies as of the end of the most recent fiscal year which are restricted as to transfer to the parent company because the consent of a third party (a lender, regulatory agency, foreign government, etc.) is required. If the registrant's proportionate share of the restricted net assets of consolidated subsidiaries exceeds 25% of the registrant's consolidated net assets, both the footnote and schedule information are required. If the amount of such restrictions is less than 25%, but the sum of these restrictions plus the amount of the registrant's proportionate share of restricted net assets of unconsolidated subsidiaries plus the registrant's equity in the undistributed earnings of 50% or less owned persons (investees) accounted for by the equity method exceed 25% of consolidated net assets, the footnote disclosure is required.
- Question 1: How are restricted net assets of subsidiaries computed?
- Interpretative Response: The calculation of restricted net assets requires an evaluation of each subsidiary to identify any circumstances where third parties may limit the subsidiary's ability to loan, advance or dividend funds to the parent. This evaluation normally comprises a review of loan agreements, statutory and regulatory requirements, etc., to determine the dollar amount of each subsidiary's restrictions. The related amount of the subsidiary's net assets designated as restricted, however, should not exceed the amount of the subsidiary's net assets included in consolidated net assets, since parent company disclosures are triggered when a significant amount of consolidated net assets are restricted. The amount of each subsidiary's net assets included in consolidated net assets is determined by allocating (pushing down) to each subsidiary any related consolidation adjustments such as intercompany balances, intercompany profits, and differences between fair value and historical cost arising from a business combination accounted for as a purchase. This amount is referred to as the subsidiary's adjusted net assets. If the subsidiary's adjusted net assets are less than the amount of its restrictions because the push down of consolidating adjustments reduced its net assets, the subsidiary's adjusted net assets is the amount of the subsidiary's restricted net assets used in the tests.
- Registrants with numerous subsidiaries and investees may wish to develop approaches to facilitate the determination of its parent company disclosure requirements. For example, if the parent company's adjusted net assets (excluding any interest in its subsidiaries) exceed 75% of consolidated net assets, or if the total of all of the registrant's consolidated and unconsolidated subsidiaries' restrictions and its equity in investees' earnings is less than 25% of consolidated net assets, then the allocation of consolidating adjustments to the subsidiaries to determine the amount of their adjusted net assets would not be necessary since no parent company disclosures would be required.
- Question 2: If a registrant makes a decision that it will permanently reinvest the undistributed earnings of a subsidiary, and thus does not provide for income taxes thereon because it meets the criteria set forth in FASB ASC Subtopic Check output number.740-30, Income Taxes—Other Considerations or Special Areas, is there considered to be a restriction for purposes of the test?
- Interpretive Response: No. The rules require that only third party restrictions be considered. Restrictions on subsidiary net assets imposed by management are not included.
- b. Application of tests for parent company disclosures.
- Facts: The balance sheet of the registrant's 100%-owned subsidiary at the most recent fiscal year-end is summarized as follows:
![](\"/asc-img/GUID-2C87008F-615B-4F33-B350-9D7B71425B30-low.gif\")
Current assets $120 Current liabilities $30 Noncurrent assets 45 Long-term debt 60 90 Common stock 25 Retained earnings 50 75 $165 $165- Net assets of the subsidiary are $75. Assume there are no consolidating adjustments to be allocated to the subsidiary. Restrictive covenants of the subsidiary's debt agreements provide that:
- Net assets, excluding intercompany loans, cannot be less than $35.
- 60% of accumulated earnings must be maintained.
- Question 1: What is the amount of the subsidiary's restricted net assets?
- Interpretive Response:
![](\"/asc-img/GUID-80A5CE4D-6458-4BE7-BA1E-877F4CDD51F2-low.gif\")
Restriction\tComputed Restrictions \"Net assets: currently $75, cannot be less than $35; therefore \"\t$35 Dividends: 60% of accumulated earnings ($50) cannot be paid out; therefore $30- Restricted net assets for purposes of the test are $35. The maximum amount that can be loaned or advanced to the parent without violating the net asset covenant is $40 ($75 - 35). Alternatively, the subsidiary could pay a dividend of up to $20 ($50 - 30) without violating the dividend covenant, and loan or advance up to $20, without violating the net asset provision.
- Facts: The registrant has one 100%-owned subsidiary. The balance sheet of the subsidiary at the latest fiscal year-end is summarized as follows:
![](\"/asc-img/GUID-1822D533-DDEE-4081-A793-7EDA3E4A8D65-low.gif\")
Current assets $75 Current liabilities $23 Noncurrent assets 90 Long-term debt 57 Redeemable preferred stock 10 Common stock 30 Retained earnings 45 75 $165 $165- Assume that the registrant's consolidated net assets are $130 and there are no consolidating adjustments to be allocated to the subsidiary. The subsidiary's net assets are $75. The subsidiary's noncurrent assets are comprised of $40 in operating plant and equipment used in the subsidiary's business and a $50 investment in a 30% investee. The subsidiary's equity in this investee's undistributed earnings is $18. Restrictive covenants of the subsidiary's debt agreements are as follows:
- 1. Net assets, excluding intercompany balances, cannot be less than $20.
- 2. 80% of accumulated earnings must be reinvested in the subsidiary.
- 3. Current ratio of 2:1 must be maintained.
- Question 2: Are parent company footnote or schedule disclosures required?
- Interpretive Response: Only the parent company footnote disclosures are required. The subsidiary's restricted net assets are computed as follows:
![](\"/asc-img/GUID-413FAB50-6AB6-44EC-AC71-58773179865F-low.gif\")
Restriction\tComputed Restriction \"Net assets: currently $75, cannot be less than $20; therefore \"\t$20 Dividends: 80% of accumulated earnings ($45) cannot be paid; therefore $36 Current ratio: must be at least 2:1 ($46 current assets must be maintained since current liabilities are $23 at fiscal year-end); therefore $46- Restricted net assets for purposes of the test are $20. The amount computed from the dividend restriction ($36) and the current ratio requirement ($46) are not used because net assets may be transferred by the subsidiary up to the limitation imposed by the requirement to maintain net assets of at least $20, without violating the other restrictions. For example, a transfer to the parent of up to $55 of net assets could be accomplished by a combination of dividends of current assets of $9 ($45-36), and loans or advances of current assets of up to $20 and noncurrent assets of up to $26.
- Parent company footnote disclosures are required in this example since the restricted net assets of the subsidiary and the registrant's equity in the earnings of its 100%-owned subsidiary's investee exceed 25% of consolidated net assets [($20 + 18)/$130 = 29%]. The parent company schedule information is not required since the restricted net assets of the subsidiary are only 15% of consolidated net assets ($20/$130 = 15%).
- Although the subsidiary's noncurrent assets are not in a form which is readily transferable to the parent company, the illiquid nature of the assets is not relevant for purposes of the parent company tests. The objective of the tests is to require parent company disclosures when the parent company does not have control of its subsidiaries' funds because it does not have unrestricted access to their net assets. The tests trigger parent company disclosures only when there are significant third party restrictions on transfers by subsidiaries of net assets and the subsidiaries' net assets comprise a significant portion of consolidated net assets. Practical limitations, other than third party restrictions on transferability at the measurement date (most recent fiscal year-end), such as subsidiary illiquidity, are not considered in computing restricted net assets. However, the potential effect of any limitations other than those imposed by third parties should be considered for inclusion in Management's Discussion and Analysis of liquidity.
![](\"/asc-img/GUID-FFCCC9F7-C134-4E7F-ADEA-9CD31D1206CD-low.gif\")
Net assets Subsidiary A $ (500) Subsidiary B \"$2,000 \" Consolidated \"$3,700 \"- Subsidiaries A and B are 100% owned by the registrant. Assume there are no consolidating adjustments to be allocated to the subsidiaries. Subsidiary A has restrictions amounting to $200. Subsidiary B's restrictions are $1,000.
- Question 3: What parent company disclosures are required for the registrant?
- Interpretive Response: Since subsidiary A has an excess of liabilities over assets, it has no restricted net assets for purposes of the test. However, both parent company footnote and schedule disclosures are required, since the restricted net assets of subsidiary B exceed 25% of consolidated net assets ($1,000/3,700 = 27%).
![](\"/asc-img/GUID-11221191-2744-40E1-A5FD-7549DEE35AF9-low.gif\")
\tNet assets Subsidiary A $ 850 Subsidiary B $ 300 Consolidated $ 3700- The registrant owns 80% of subsidiary A. Subsidiary A owns 100% of subsidiary B. Assume there are no consolidating adjustments to be allocated to the subsidiaries. A may not pay any dividends or make any affiliate loans or advances. B has no restrictions. A's net assets of $850 do not include its investment in B.
- Question 4: Are parent company footnote or schedule disclosures required for this registrant?
- Interpretive Response: No. All of the registrant's share of subsidiary A's net assets ($680) are restricted. Although B may pay dividends and loan or advance funds to A, the parent's access to B's funds through A is restricted. However, since there are no limitations on B's ability to loan or advance funds to the parent, none of the parent's share of B's net assets are restricted. Since A's restricted net assets are less than 25% of consolidated net assets ($680/3700 = 18%), no parent company disclosures are required.
- Facts: The consolidating balance sheet of the registrant at the latest fiscal year-end is summarized as follows:
![](\"/asc-img/GUID-A66FB021-AC87-4856-80F3-A53CBAA80446-low.gif\")
\tRegistrant\tSubsidiary\tConsolidating Adjustments\tConsolidated Current assets $800 $700 $0 \" $1,500 \" 30% investment in affiliate 175 0\t0 175 Investment in subsidiary 350 0 (350)\t0 Other noncurrent assets $625 $300 (100) $825 \" $1,950 \"\t\" $1,000 \" $(450)\t\" $2,500 \" Current liabilities 600 400 $0 \" 1,000 \" Concurrent liabilities 375 150 0 525 Redeemable preferred stock 275 0\t0 275 Common stock 110 1 (1) 110 Paid-in capital 290 49 (49) 290 \"Retained earnings \" 300 400 (400) 300 700 450 (450) 700 \" $1,950 \"\t\" $1,000 \" $(450)\t\" $2,500 \"- The acquisition of the 100%-owned subsidiary was consummated on the last day of the most recent fiscal year. Immediately preceding the acquisition, the registrant had net assets of $700, which included its equity in the undistributed earnings of its 30% investee of $75. Immediately after acquiring the subsidiary's net assets, which had an historical cost of $450 and a fair value of $350, the registrant's net assets were still $700 since debt and preferred stock totaling $350 were issued in the purchase. The subsidiary has debt covenants which permit dividends, loans or advances, to the extent, if any, that net assets exceed an amount which is determined by the sum of $100 plus 75% of the subsidiary's accumulated earnings.
- Question 5: What is the amount of the subsidiary's restricted net assets? Are parent company footnote or schedule disclosures required?
- Interpretive Response: Restricted net assets for purposes of the test are $350, and both the parent company footnote and schedule disclosures are required.
- The amount of the subsidiary's restrictions at year-end is $400 [$100 + (75% x $400)]. The subsidiary's adjusted net assets after the push down of the consolidation entry to the subsidiary to record the noncurrent assets acquired at their fair value is $350 ($450 - $100). Since the subsidiary's adjusted net assets ($350) are less than the amount of its restrictions ($400), restricted net assets are $350. The computed percentages applicable to each of the disclosure tests is in excess of 25%. Therefore, both parent company footnote and schedule information are required. The percentage applicable to the footnote disclosure test is 61% [($75 + 350)/$700]. The computed percentage for the schedule disclosure is 50% ($350/$700).