EITF 08-6 – Equity Method Accounting Considerations
EITF 08-6 was ratified by the FASB Board in November 2008 and is effective for fiscal years beginning on or after December 15, 2008. It is to be applied on a prospective basis and early adoption is not permitted.
This EITF was issued to clarify the interaction between FAS 141(R) and FAS 160 and equity method accounting. Equity method accounting is discussed in FAS 141 (before revision) and ARB 51.
An equity method investment should be initially recorded at cost in accordance with paragraphs D3-D7 of FAS 141(R). Contingent consideration should only be included in the initial measurement if it is required by specific authoritative literature (I would assume ARB 51 or Opinion 18).
A liability should be recorded if the agreement involves a contingent consideration arrangement in which the fair value of the investor’s share of the investee’s net assets exceeds the investor’s initial cost. (When you exclude the contingent consideration, it looks like you paid less than the fair value of your share of the net assets)
The liability would be an amount equal to the lesser of the maximum amount of contingent consideration not otherwise recognized and the excess of the investor’s share of the investee’s net assets over the initial cost measurement.
When the contingency is resolved, the fair value of the consideration to be issued is compared to the liability previously recorded and any difference increases or decreases the cost of the initial investment.
Indefinite-Live Intangible Asset
An equity method investment must be reduced if there is an other-than-temporary impairment in accordance with Opinion 18. However, the investee’s underlying indefinite-lived intangible assets should not be tested for impairment separately from the rest of the investment.
Change in Level of Ownership or Degree of Influence
If the investee issues shares, then the investor would account for the issuance as if it had sold a proportionate share of its investment. Any gain or less would be recognized in earnings, subject to certain exceptions.
Gain recognition would not be appropriate:
1. in situations where future capital transactions are contemplated that would raise concerns about the likelihood of the gain being realized.
2. in situations in which the investee is a newly formed, non-operating entity, an R&D entity, a start-up or development entity, an entity whose ability to continue its existence is in question, or an entity in another similar circumstances.
In those situations, the gain or loss would be accounted for as an equity transaction in consolidation and subsequent reversal of this amount is prohibited.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.