The Financial Accounting Standards Board has issued an accounting standards update making it easier for companies to transition to the equity method of accounting.
Stakeholders told FASB that the requirement to retroactively adopt the equity method of accounting is 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. They said the requirement does not provide a clear benefit to users of financial statements.
As part of FASB’s simplification initiative, the amendments in the update eliminate the requirement to retroactively adopt the equity method of accounting. They get rid of 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 retroactively on a step-by-step basis as if the equity method had been in effect during all the previous periods when the investment has been held.
The amendments require 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.
Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment will be required. The amendments require 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 on the date when 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. FASB said the changes 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 by FASB, and no additional disclosures are required for the transition.
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