Heads Up — FASB issues proposed ASU to amend equity method accounting

On June 5, 2015, the FASB issued a proposed ASU on equity method accounting as part of its simplification initiative (i.e., the Board’s effort to reduce the cost and complexity of current U.S. GAAP while maintaining or enhancing the usefulness of the related financial statement information). The proposal would amend the accounting for equity method investments, eliminating the requirements for an investor to (1) account for basis differences related to its equity method investees and (2) retroactively account for an investment that becomes newly qualified for use of the equity method because of an increased ownership interest as if the equity method had been applied during all previous periods in which the investment was held.

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Elimination of Basis Differences

Under current U.S. GAAP, a reporting entity is required to analyze the differences between the purchase price of its equity method investee and its share of the underlying net assets of the investee (in a manner similar to the approach required when an investee is consolidated). This basis difference is attributed to the investee’s identifiable assets and liabilities whose fair values differ from their book values as of the acquisition date. Any excess cost that is not allocated to the identifiable net assets is considered equity method goodwill. The investor is also required to identify the deferred tax consequences of the equity method basis differences.

Subsequently, the investor must adjust its share of the earnings or losses of the equity method investee to account for the basis differences. For example, the investor would adjust its share of the investee’s earnings for additional amortization related to basis differences on identifiable intangible assets. However, the portion of the basis difference that is considered goodwill would not be amortized unless the entity is a private company that has elected the accounting alternative in ASC 350-203 to amortize goodwill.

The proposed ASU would eliminate the requirement to separately account for the basis difference of equity method investments. Rather, the entire basis difference would be considered part of the investment basis. The FASB believes that this amendment would reduce complexity because the investor would not be required to determine the acquisition-date fair value of the investee’s identifiable assets and liabilities assumed. In addition, no amount of the excess of the cost of the equity method investment over the investor’s share of the underlying net assets of the investee would be considered equity method goodwill. Therefore, private companies that have elected to amortize goodwill would no longer amortize the portion of the investment that was previously considered equity method goodwill.

Although the proposed ASU would eliminate the requirement to separately account for the basis differences, it would not affect the requirement to eliminate intra-entity transactions between the investor and investee until the profits and losses are realized.

Volume 22, Issue 20 | June 16, 2015

Increase in Level of Ownership or Degree of Influence

Under current U.S. GAAP (ASC 323-10-35-33), if an investor increases its investment in an investee (or otherwise gains significant influence over the investee), the “investment, results of operations (current and prior periods presented), and retained earnings of the investor shall be adjusted retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods in which the investment was held.” The proposed ASU would eliminate this requirement. Rather, the cost of acquiring the additional interest in the investee would be added to the carrying value of the investor’s previously held interest (which may be at cost or fair value for marketable securities), and the equity method of accounting would be applied subsequently from the date on which the investor obtains the ability to exercise significant influence over the investee.


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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.

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