(a) General. For purposes of this subpart, the total equity controlled
by a first company in a second company that is organized as a stock
corporation and prepares financial statements pursuant to U.S. generally
accepted accounting principles will be calculated as described in
paragraph (b) of this section. With respect to a second company that
is not organized as a stock corporation or that does not prepare financial
statements pursuant to U.S. generally accepted accounting principles,
the first company’s total equity in the second company will
be calculated so as to be reasonably consistent with the methodology
described in paragraph (b) of this section, while taking into account
the legal form of the second company and the accounting system used
by the second company to prepare financial statements.
(b) Calculation of total equity.
(1) Total equity. The first company’s total equity in the
second company, expressed as a percentage, is equal to:
(i) The
sum of Investor Common Equity and, for each class of preferred stock
issued by the second company, Investor Preferred Equity, divided by
(ii) Issuer Shareholders’
Equity.
(2) Investor Common Equity equals the greater of:
(i) Zero,
and
(ii) The quotient
of the number of shares of common stock of the second company that
are controlled by the first company divided by the total number of
shares of common stock of the second company that are issued and outstanding,
multiplied by the amount of shareholders’ equity of the second
company not allocated to preferred stock under U.S. generally accepted
accounting principles.
1(3) Investor Preferred Equity equals,
for each class of preferred stock issued by the second company, the
greater of:
(i) Zero, and
(ii) The quotient of the number of shares
of the class of preferred stock of the second company that are controlled
by the first company divided by the total number of shares of the
class of preferred stock that are issued and outstanding, multiplied
by the amount of shareholders’ equity of the second company
allocated to the class of preferred stock under U.S. generally accepted
accounting principles.
2(c) Consideration of debt
instruments and other interests in total equity.
(1) For purposes of the total equity calculation
in paragraph (b) of this section, a debt instrument or other interest
issued by the second company that is controlled by the first company
may be treated as an equity instrument if that debt instrument or
other interest is functionally equivalent to equity.
(2) For purposes of paragraph (b)(1) of
this section, the principal amount of all debt instruments and the
market value of all other interests that are functionally equivalent
to equity that are controlled by the first company are added to the
sum under paragraph (b)(1)(i) of this section, and the principal amount
of all debt instruments and the market value of all other interests
that are functionally equivalent to equity that are outstanding are
added to Issuer Shareholders’ Equity.
(3) For purposes of paragraph (c)(1) of
this section, a debt instrument issued by the second company may be
considered functionally equivalent to equity if it has equity-like
characteristics, such as:
(i) Extremely long-dated maturity;
(ii) Subordination
to other debt instruments issued by the second company;
(ii) Qualification as regulatory
capital under any regulatory capital rules applicable to the second
company;
(iii) Qualification
as equity under applicable tax law;
(iv) Qualification as equity under U.S. generally
accepted accounting principles or other applicable accounting standards;
(v) Inadequacy of the
equity capital underlying the debt at the time of the issuance of
the debt; or
(vi)
Issuance not on market terms.
(4) For purposes of paragraph (c)(1) of
this section, an interest that is not a debt instrument issued by
the second company may be considered functionally equivalent to equity
if it has equity-like characteristics, such as entitling its owner
to a share of the profits of the second company.
(d) Exclusion of certain equity
instruments from total equity.
(1) For purposes of the total equity calculation
in paragraph (b) of this section, an equity instrument issued by the
second company that is controlled by the first company may be treated
as not an equity instrument if the equity instrument is functionally
equivalent to debt.
(2) For purposes of paragraph (d)(1) of this section, an equity instrument
issued by the second company may be considered functionally equivalent
to debt if it has debt-like characteristics, such as protections generally
provided to creditors, a limited term, a fixed rate of return or a
variable rate of return linked to a reference interest rate, classification
as debt for tax purposes, or classification as debt for accounting
purposes.
(e) Frequency of total equity calculation. The total equity of a
first company in a second company is calculated each time the first
company acquires control over equity instruments of the second company,
including any debt instruments or other interests that are functionally
equivalent to equity in accordance with paragraph (c) of this section.
