SEC Amends Financial Disclosure Rules Regarding Acquired and Disposed Businesses
On May 20, 2020, the Securities and Exchange Commission (SEC) adopted comprehensive Amendments to its financial disclosure rules regarding acquired and disposed businesses. The amended rules, set forth in a 267-page release, are the result of an extensive review of such requirements, and are intended to facilitate more timely access to capital and reduce complexity and compliance costs.
Importantly, the amended rules reduce the maximum number of years of historical financial statements required for significant business acquisitions from three years to two years. The SEC has also revised the tests used to measure the "significance" of acquired and disposed businesses. The level of "significance" determines whether financial statements are required for an acquired business and, if so, the number of years required. The modifications are aimed at better linking the significance of an acquired business to the registrant's financial position and results of operations, thereby reducing circumstances in which registrants are required to provide financial statements for a business that are not meaningful to investors.
The SEC has also amended the requirements related to pro forma financial information for acquired and disposed businesses to improve their content and relevance to investors by, among other things, permitting registrants to present reasonably estimable synergies and dis-synergies related to acquisitions.
The new rules have been a long time in the making, stemming from the mandate to the SEC under the 2012 JOBS Act to review disclosure requirements, and the Staff's resulting ongoing Disclosure Effectiveness Initiative. Although the SEC has, with increasing frequency over the last several years, granted exemptive relief from the requirements to provide audited financial statements for acquired businesses, the modernization of these rules will further reduce the time and expense of accessing the capital markets for many companies.
|A one-page reference guide to the financial statement requirements for acquired businesses is set forth here as an appendix.|
The new rules become effective January 1, 2021, but earlier compliance is permitted provided all amendments are applied (see the caption "Transition" at the end of this Advisory).
Under Regulation S-X Rule 3-05, a registrant that acquires a business (other than a real estate operation) is generally required to file separate audited annual and unaudited interim pre-acquisition financial statements of the business if it is "significant" to the registrant (Rule 3-05 Financial Statements).1 Significance is determined using the sliding scale "significant subsidiary" definition in Regulation S-X Rule 1-02(w), with higher levels of significance increasing the number of years of audited historical financial statements required to be filed. Rule 1-02(w) provides three tests intended to measure the significance of an acquired business relative to a registrant's financial position and results of operations. These tests are generally referred to as the Investment Test, the Asset Test and the Income Test.
If historical financial statements for an acquired business are required to be filed, a registrant must also file unaudited pro forma financial information giving effect to the acquisition as prescribed by Regulation S-X Article 11. Registrants generally must file the required historical and pro forma financial statements on Form 8-K within 75 days after consummation of an acquisition but may be required to do so sooner in connection with filing a registration statement or proxy statement.2
Summary of the Amendments
The new rules include the following key changes:
- update the significance tests in Rule 1-02(w) pertaining to acquisitions and dispositions to make them more reflective of economic significance by considering market capitalization in the "Investment Test" and adding a revenue component to the "Income Test";
- require the financial statements of the acquired business to cover only up to the two most recent completed fiscal years, rather than three fiscal years;
- add "Management's Adjustments" as a new category of permitted pro forma adjustments to allow presentation of synergies and dis-synergies;
- expand the use of pro forma financial information in measuring significance in initial public offerings;
- conform the significance threshold and tests for a disposed business to those used for an acquired business by increasing the threshold to 20% from 10%;
- permit disclosure of abbreviated financial statements for certain acquisitions of a component of an entity without requiring the registrant to seek relief from the Staff;
- ·no longer require separate acquired business financial statements once a business has been included in the registrant's post-acquisition audited annual financial statements for nine months, if the acquired entity is significant at the 20-40% level, and for a complete fiscal year, if the acquired entity is significant at a greater than 40% level; and
- modify the significance test for individually insignificant acquisitions that in aggregate exceed 50% significance to include in such aggregate calculation completed or probable significant acquisitions for which financial statements are not yet required to be filed, and, in registration statements and proxy statements, require pro forma financial statements giving effect to all such businesses in all material respects but require audited financials only for any such business whose individual significance exceeds 20%.
The Investment Test, Asset Test and Income Test in Rule 1-02(w) determine whether a subsidiary is deemed significant for the purposes of certain Regulation S-X and Regulation S-K requirements, as well as certain Securities Act and Exchange Act rules and forms.3 The current tests are as follows:
- The Investment Test compares the registrant's investments in and advances to the tested subsidiary to the total assets of the registrant. In the context of an acquisition, the test compares the purchase price for the acquired business under GAAP to the total assets of the registrant.
- The Asset Test compares the total assets of the tested subsidiary to the total assets of the registrant.
- The Income Test compares the registrant's equity in the income from continuing operations of tested subsidiary before income taxes, exclusive of amounts attributable to any noncontrolling interests, to the same measure for the registrant.
The following is a description of the amendments to these tests.
Investment Test Amended to Provide for Comparison to Registrant's Aggregate Worldwide Market Value of Common Equity
The new rules revise the Investment Test, with respect to acquisitions and dispositions, to compare the registrant's investments in and advances to the tested subsidiary to the aggregate worldwide market value of the registrant's voting and non-voting common equity. Market value will be based on the average for the last five trading days of the registrant's most recently completed month ending prior to the earlier of the registrant's announcement date or agreement date of the acquisition or disposition.
The existing test has been retained for acquisitions and dispositions where the registrant does not have an aggregate worldwide market value.4 For example, the existing test would be used in connection with a company's initial public offering. The SEC explicitly declined some commentators' suggestion that estimated market value be used in favor of keeping an objective test.
The new rules are intended to provide for a better measure of the relative fair value of the assets of the registrant compared to those of the acquired or disposed business. In an acquisition or disposition, the registrant's "investments in" the tested subsidiary are generally the consideration transferred or received (i.e., the purchase or sales price). The new test addresses the potential mismatch caused by comparing the fair value of a target's assets, as measured by purchase or sales price, with the book value of the registrant's assets.
For acquisitions and dispositions, the registrant's "investments in" the tested subsidiary will generally be the consideration transferred, including the fair value of any contingent consideration (e.g., earnouts) if required to be recognized at fair value by the registrant at the acquisition date under US GAAP or International Financial Reporting Standards (IFRS), as applicable. If such recognition is not required, "investments in" the tested subsidiary will include all contingent consideration, except contingent consideration for which the likelihood of payment is remote.5
Additionally, for combinations between entities or businesses under common control, the Investment Test has been revised to provide that an acquisition is significant if either of two alternative tests is met based on: (i) net book value of the tested subsidiary as compared to the registrant's consolidated total assets and (ii) the number of common shares exchanged or to be exchanged by the registrant as compared to the total common shares outstanding for the registrant at the date the combination is initiated.
Asset Test Amended to Provide for Intercompany Eliminations
The new rules leave the Asset Test substantially "as is" but provide that, for acquisitions, intercompany transactions with the acquired business must be eliminated in computing the registrant's and its subsidiaries' consolidated total assets.
Income Test Amended to Provide for Additional Test Based Upon Revenue
The new rules add a revenue test aimed at reducing anomalous results caused by the impact on a registrant's net income from continuing operations of infrequent gains or losses, such as impairments or litigation expenses. Under the amended rules, the tested subsidiary must meet both a new revenue component and the net income component. The SEC has retained the net income component because the revenue test alone does not capture the significance of a tested business to the registrant's bottom line (e.g., in the case of a business with high revenue but low margins). For purposes of the application of Rule 3-05, registrants may use the lower of the revenue component and the net income component to determine the number of periods for which financial statements are required.
The new revenue component compares a registrant's consolidated total revenues from continuing operations (after intercompany eliminations) to the consolidated total revenues of the registrant for the most recently completed fiscal year. The revenue component will not apply if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years.6
The net income component remains largely unchanged and is based upon a comparison of the tested subsidiary's net income (loss) from continuing operations before taxes to the same measure for the registrant.7
Maximum of Two Years of Audited Financial Statements for Significant Acquisitions
The amendments revise Rule 3-05 to require only up to two years of Rule 3-05 Financial Statements, as compared to the maximum three years required under the current rules. The rules are a recognition, consistent with the JOBS Act, that the third year of financial statements is generally less indicative of current operations, and a requirement for its inclusion can often add significant expense, particularly when a change in auditor has occurred. Under the new rules, Rule 3-05 Financial Statements are required for the most recent fiscal year if any of the Rule 3-05 significance tests exceeds 20%, but none exceeds 40%; a second year is required if any test exceeds 40%. The requirement for a third year of financial statements when a significance test exceeds 50% has been eliminated.
In addition, the new rules amend the requirement for interim financial statements. In circumstances where only one year of Rule 3-05 Financial Statements is required, the amendments clarify that financial statements will be required for the "most recent" interim period, rather than "any" interim period (eliminating the need to provide a comparative interim period when only one year of audited Rule 3-05 Financial Statements is required).8
The amendments raise the significance threshold for the disposition of a business from 10% to 20% and conform, to the extent applicable, the tests used to determine significance of a disposed business to those used to determine significance of an acquired business.
Form 8-K and Article 8 have been amended to require smaller reporting companies to provide pro forma financial information for dispositions of a significant business in Form 8-K and in certain registration statements and proxy statements when the disposition occurs during or after the most recently completed fiscal year. These changes also apply to dispositions of real estate operations as defined in Rule 3-14(a)(2).
Amendments Relating to Rule 3-05 Financial Statements Included in Registration Statements and Proxy Statements
Disclosure Requirements for Individually Insignificant Acquisitions
Rule 3-05 currently contains an additional requirement applicable to registration statements and proxy statements in cases where the aggregate significance of individually insignificant businesses acquired since the date of the most recent audited balance sheet filed for the registrant exceeds 50%. Under the current rules, registrants are required to provide Rule 3-05 Financial Statements for a mathematical majority of such businesses and pro forma financial information giving effect to the businesses for which financial statements are provided. The current rule has created uncertainty for registrants as to whether financial statements of an individually insignificant business may later be needed and therefore added complexity to negotiations with sellers.
The new rules expand the types of acquisitions included for purposes of determining whether the 50% significance threshold has been exceeded. In addition to individually insignificant consummated acquisitions (i.e., below 20% significance), registrants will also be required to include in such calculation significant probable or completed acquisitions for which financial statements will be required but that are not yet required to be filed.9 These would include: (i) any probable acquisition if the significance does not exceed 50%; and (ii) any consummated acquisition if the significance exceeds 20%, but does not exceed 50%, for which financial statements are not yet required due to the 75-day grace period provided in Form 8-K. Under the amended rules, registrants will be required to provide pre-acquisition historical financial statements only for businesses whose individual significance exceeds 20%.
In addition, registrants will be required to file pro forma financial statements depicting the aggregate effects of all such probable or completed acquisitions in all material respects.
Omission of Rule 3-05 Financial Statements for Businesses That Have Been Included in the Registrant's Financial Statements
The current rules permit Rule 3-05 Financial Statements to be omitted from a registration statement or proxy statement once the operating results of the acquired business have been reflected in the registrant's audited financial statements for a complete fiscal year, unless the financial statements of the acquired business have not been previously filed or the acquired business is of "major" significance to the registrant (i.e., over 70% significance). The amendments eliminate these exceptions and shorten the period for which pre-acquisition financial statements must be included from one year to nine months for businesses that exceed 20% but do not exceed 40% significance.
Use of Pro Forma Financial Information to Measure Significance
A registrant is generally permitted to use pro forma, rather than historical, financial information to test significance of a subsequently acquired business if the registrant made a significant acquisition after the latest fiscal year-end and filed its Rule 3-05 Financial Statements and pro forma financial information on Form 8-K. However, this Form 8-K filing requirement has the practical effect of precluding the use of pro forma financial information to test significance for Rule 3-05 disclosure requirements in the case of initial registration statements.
The amendments will permit registrants, in initial registration statements, to measure significance using filed pro forma financial information that only depicts significant acquired or disposed businesses consummated after the latest fiscal year-end for which financial statements are required to be filed, subject to specified conditions. The pro forma financial information used to measure significance may only give effect to Transaction Accounting Adjustments and not Autonomous Entity Adjustments or Management's Adjustments (defined below) or other transactions (e.g., use of proceeds from an offering). Once a registrant uses pro forma financial information to measure significance, it must continue to use pro forma financial information to measure significance until the next annual report on Form 10-K or Form 20-F.
Pro Forma Financial Information (Article 11)
In addition to the amendments to Rule 3-05, the SEC has adopted amendments that significantly impact the presentation of pro forma financial information for acquired businesses provided in Article 11 of Regulation S-X. The SEC's revisions are aimed at improving the content and relevance to investors of pro forma financial information.
Article 11 currently limits pro form adjustments to those that are directly attributable to the transaction and factually supportable. In addition, pro forma adjustments in income statements are limited to those that will have a continuing impact on the registrant, with the aim of distinguishing between one-time impacts and the on-going impact of a transaction on registrant's result of operations.
The amendments to Article 11 replace the existing pro forma adjustment criteria with the following three categories of adjustments, each of which must be presented separately: (i) Transaction Accounting Adjustments, (ii) Autonomous Entity Adjustments, and (iii) Management's Adjustments. Transaction Accounting Adjustments and Autonomous Entity Adjustments are required, while Management's Adjustments are optional. All required adjustments must be presented on the face of the pro forma financial information, whether deemed recurring or nonrecurring. Registrants will be required to disclose in the explanatory notes whether revenue, expenses, gains or losses and related tax effects will not recur in income beyond 12 months from the transaction.
Historical and pro forma per share data must be presented on the face of the pro forma income statement, and may give effect to Transaction Accounting Adjustments and the Autonomous Entity Adjustments only.
The following is a description of each of the three categories of pro forma adjustments:
Transaction Accounting Adjustments. Transaction Accounting Adjustments reflect only the application of required accounting to the acquisition, disposition, or other transaction linking the effects of the acquired business to the registrant's audited historical financial statements. If the initial accounting is incomplete, a prominent statement to this effect must be included, as well as additional disclosure regarding the related uncertainties.
Autonomous Entity Adjustments. Autonomous Entity Adjustments are adjustments necessary to reflect the operations and financial position of the registrant as an autonomous entity when the registrant was previously part of another entity.
Management's Adjustments. Management's Adjustments include the synergies and dis-synergies of the acquisitions and dispositions for which pro forma financial information is being given, and may be presented if, in management's opinion, such adjustments would enhance an understanding of the pro forma effects of the transaction and the following conditions are met:
- there is a reasonable basis for each such adjustment;
- adjustments are limited to the effect of such synergies and dis-synergies on the historical financial statements that form the basis for the pro forma income statement as if the synergies and dis-synergies existed as of the beginning of the fiscal year presented;
- if an adjustment reduces expenses, the reduction may not exceed the amount of the related expense historically incurred during the pro forma period presented;
- information reflects all Management's Adjustments that are, in the opinion of management, necessary to a fair statement of the pro forma financial information presented and a statement to that effect is disclosed; and
- if synergies are presented, any related dis-synergies must also be presented.
The new rules also contain presentation requirements, including a requirement that Management's Adjustments be presented in the explanatory notes in the form of reconciliations of pro forma net income from continuing operations attributable to the controlling interest and the related pro forma earnings per share data to such amounts after giving effect to Management's Adjustments. The explanatory notes must also disclose the basis for and material limitations of each Management's Adjustment, including any material assumptions or uncertainties of such adjustment, an explanation of the method of the calculation of the adjustment, if material, and the estimated time frame for achieving the synergies and dis-synergies of such adjustment.
Management's Adjustments included or incorporated by reference into a registration statement, proxy statement, offering statement or Form 8-K should be as of the most recent practicable date prior to the effective date, mail date, qualified date, or filing date as applicable, which may require that they be updated if previously provided in a Form 8-K that is appropriately incorporated by reference.
Forward-looking information will be covered by applicable safe harbors.
Amendments Applicable to Specific Issuers and Industries
Smaller Reporting Companies and Issuers Relying on Regulation A
The amendments to S-X Rule 8-05 require that the preparation, presentation, and disclosure of pro forma financial information by smaller reporting companies and issuers relying on Regulation A substantially comply with Article 11. In limited circumstances, smaller reporting companies and issuers relying on Regulation A will now have to provide pro forma financial information for two years when the transaction for which pro forma effect is being given is required by GAAP to be retrospectively reflected in the historical financial statements (e.g., a combination of entities under common control or discontinued operation).
The amendments revise Rule 3-05(c) to permit foreign private issuers that prepare their financial statements using IFRS to reconcile Rule 3-05 Financial Statements of foreign businesses prepared using home country GAAP to IFRS rather than US GAAP, generally following the form and content requirements in Item 17(c) of Form 20-F. Additionally, Rule 3-05 Financial Statements may be prepared in accordance with IFRS without reconciliation to US GAAP if the acquired business would qualify as a foreign private issuer if it were a registrant. Where the registrant presents its financial statements in US GAAP, the pro forma financial information reflecting the acquisition will continue to be required to be presented in US GAAP.
Real Estate Operations Acquired or to be Acquired (Rule 3-14)
The amendments align Rule 3-14 with Rule 3-05 where no unique industry considerations exist. Specifically, the amendments:
- conform the significance threshold for individual acquisitions to the 20% threshold and the significance threshold for the aggregate impact of acquisitions to the 50% threshold;
- eliminate the requirement to provide three years of financial statements for acquisitions from related parties;
- permit the filing of financial statements covering a period of nine to 12 months to satisfy the requirement for filing financial statements for a period of one year for an acquired or to be acquired real estate operation;
- provide for the same period for the filing of financial statements under Rule 3-14 in registration statements and proxy statements;
- clarify that "to be acquired" real estate operations must be evaluated under the rule only if they are probable of acquisition;
- permit pro forma amounts to be used for significance testing in certain circumstances consistent with the application in Rule 3-05; and
- specify that financial statements are required for the most recent year-to-date interim period prior to the acquisition.
The amendments revise Form 8-K to clarify that Item 2.01 requires the disclosure of the acquisition or disposition of assets that constitute a significant real estate operation.
The amendments specify that significance under Rule 3-14 should be based on the Investment Test in Rule 1-02(w) (i.e., comparison with the registrant's aggregate world-wide market value, if available, and otherwise, based on total assets). For acquired businesses, if significance is based on total assets, "investments in" should include any debt secured by the real properties (e.g., mortgages) assumed by the registrant.10 In contrast, for dispositions of real estate operations, the significance determination is not limited to only the Investment Test and the modification relating to debt secured by real properties does not apply.
The amendments also provide guidance on significance tests in connection with blind pool real estate offerings.
The amendments add a new definition of "significant subsidiary" in Rule 1-02(w) that is specific to investment companies and which would include an Investment Test and an Income Test but not an Asset Test. The Investment Test for investment companies compares the registrant's investment in the acquired entity to the registrant's total investments, rather than to total assets.
The Asset Test has been eliminated as a measure of significance for investment companies because it would not add material information to investors beyond that provided by the Investment Test.
As amended, the Income Test for investment companies will include, in the numerator, the following amounts for the tested subsidiary: (i) investment income, such as dividends, interest, and other income; (ii) the net realized gains and losses on investments; and (iii) the net change in unrealized gains and losses. The foregoing amount will be compared to the registrant's change in net assets from operations.
A tested subsidiary will be deemed significant under the Income Test for investment companies if the test yields a condition of greater than either: (i) 80% by itself, or (ii) 10% and the Investment Test for investment companies yields a result of greater than 5%.11
The amendments also add new S-X Rule 6-11, which specifically covers financial reporting in the event of a fund acquisition. With respect to fund acquisitions, for purposes of Rule 6-11, the Income Test will compare the absolute value of the change in net assets resulting from operations of the tested subsidiary with that of the investment company registrant. For pro forma financial statements, investment companies will be required to comply with new Rule 6-11(d) instead of Article 11, which will require supplemental financial information about the newly combined entity.
Financial Statements for Net Assets that Constitute a Business
Where registrants acquire a component of an entity that is a business, allocating the selling entity's corporate overhead, interest, and income tax expenses necessary to provide Rule 3-05 Financial Statements may be impracticable. In such cases, the SEC staff has used its delegated authority under Regulation S-X Rule 3-13 to permit registrants to provide audited abbreviated financial statements in the form of statements of assets acquired and liabilities assumed and statements of revenues and expenses.
Under new Rule 3-05(e), a registrant will no longer be required to seek relief to present audited abbreviated financial statements of an acquired or to be acquired business if certain conditions are met. The conditions set forth in the new rules are generally consistent with those previously used by the Staff and include the following: (i) the total assets and total revenues (both after intercompany eliminations) of such business constitute 20% or less of such corresponding amounts of the seller and its subsidiaries consolidated as of and for the most recently completed fiscal year; (ii) the acquired business was not a separate entity, subsidiary, operating segment (as defined in US GAAP or IFRS, as applicable), or division during the periods for which the acquired business financial statements would be required; (iii) separate financial statements for the business have not previously been prepared; and (iv) the seller has not maintained the distinct and separate accounts necessary to present financial statements that include the omitted expenses and it is impracticable to prepare such financial statements.
If the foregoing conditions are satisfied, the audited abbreviated financial statements must also conform to specified presentation conditions and include additional disclosures, including a discussion of the type of omitted expenses and the reason(s) why they are excluded from the financial statements.
In situations where an acquired business exceeds the 20% threshold but the registrant nonetheless confronts unique challenges in making the relevant allocations, the registrant could continue to seek relief under S-X Rule 3-13.
Registrants will not be required to apply the amendments until the beginning of their fiscal year beginning after December 31, 2020 (Mandatory Compliance Date). Acquisitions and dispositions that are probable or consummated after the Mandatory Compliance Date must be evaluated for significance using the amendments. Registrants filing initial registration statements are not required to apply the amendments until an initial registration statement is first filed on or after the Mandatory Compliance Date. For initial registration statements first filed on or after the Mandatory Compliance Date, all probable or consummated acquisitions and dispositions, including those consummated prior to the Mandatory Compliance Date, must be evaluated for significance using the amendments. Voluntary early compliance is permitted, provided the amendments are applied in their entirety.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Rule 3-05 Financial Statements are required in a registration statement if the acquisition was or will be significant at a greater than 50% level and closed at any point before the offering closed or is probable.
In addition to Rules 3-05 and 3-14, the definition of "significant subsidiary" is used in bank and bank holding company disclosure requirements, in the determination of when a business combination or disposition will be considered significant, in S-K Items 101 and 103 (used in Form 10-K), in Forms 20-F, S-4, F-4, 8-K, 1-U, and Form 10-Q, and in Schedule 14A. In addition to Rule 1-02(w), the term "significant subsidiary" is also defined in Securities Act Rule 405, Exchange Act Rule 12b-2, and Investment Company Act Rule 8b-2 (IC Rule 8b-2). The amendments conform these provisions to the new definition in Rule 1-02(w), which includes a new definition tailored to investment companies. Note, however, that the new Investment Test based upon worldwide market value is limited to acquisitions and dispositions.
The calculation of investments excludes the registrant’s proportionate interest in the carrying value of any assets transferred by the registrant to the acquired subsidiary that will remain with the combined entity after the acquisition.
If the revenue component does not apply and the absolute value of the registrant’s consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributed to the controlling interests for the most recent fiscal year is at least 10% lower than the average of the absolute value of such amounts for each of its last five fiscal years, the Income Test should be computed using such average.
The income component has been clarified by inserting references to the absolute value of equity in the tested subsidiary's consolidated income or loss from continuing operations to mitigate the potential for misinterpretation that may result from inclusion of a negative amount in the computation. Absolute values will also be used to calculate average net income.
Regardless of the number of years presented, if trends depicted in Rule 3-05 Financial Statements are not indicative or are otherwise incomplete, S-X Rule 4-01(a) requires provision of "such further material information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading."
Registrants will be required to include both Rule 3-05 businesses and Rule 3-14 real estate operations when determining the aggregate impact of the Investment Test for individually insignificant acquisitions. The amendments limit this modification to the Investment Test because the Asset Test and Income Test do not apply to Rule 3-14 real estate operations.
The use of the Asset or Income Tests generally is not practical for a real estate operation because the historical amounts of assets and income of the acquired or to be acquired real estate operation are not available. Furthermore, because Rule 3-14 only requires abbreviated income statements to be filed, additional financial statements would have to be prepared solely for purposes of significance testing if the Asset and Income Tests applied to acquisitions of real estate operations.
If the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated is at least 10% lower than the average of the absolute value of such amounts for each of its last five fiscal years, then the registrant may compute both conditions of the Income Test using the average of the absolute value of such amounts for the registrant and its subsidiaries consolidated for each of its last five fiscal years.