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New FASB Standard Simplifies Equity Method Accounting

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Mar 21st 2016
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The Financial Accounting Standards Board (FASB) determined that it is not cost beneficial and is potentially misleading for investors to retroactively apply the equity method of accounting to periods before an investment qualifies for use of the equity method.

Accounting Standards Update (ASU) No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting, was issued on March 15 as part of FASB’s simplification initiative to reduce the cost and complexity of financial reporting while improving or maintaining the usefulness of information reported to investors.

The FASB heard concerns that the requirement to retroactively adopt the equity method was costly and time-consuming when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. It was also noted that the requirement does not provide a clear benefit to financial statement users.

The amendments in the ASU “eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retrospectively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held,” the FASB said.

The new standard requires that:

  • The equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.
  • An entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016.

The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

No additional disclosures are required at transition, according to the FASB.

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