FASB continued its efforts to simplify financial reporting by issuing separate proposals designed to simplify the equity method of accounting and improve employee share-based payment accounting.
Two exposure drafts have been issued to help eliminate accounting that is costly and complex without providing value to financial statement users.
The exposure draft Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of Accounting, issued Friday, would eliminate the requirement for an equity-method investor to account for the basis difference.
The basis difference is the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee. Existing equity-method guidance requires an entity to determine the acquisition date fair value of the identifiable assets and liabilities assumed, using the same manner that would be used for a business combination.
The entity’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of the recorded assets and liabilities generally is required to be accounted for in net income in subsequent periods.
The proposed amendments would eliminate the requirement to separately account for the basis difference of equity-method investments. Instead, an entity would recognize its equity-method investment at its cost and would no longer determine the acquisition-date fair value of the investee’s identifiable assets and liabilities assumed.
In addition, the proposal would eliminate the requirement that when an investment qualifies for the use of the equity method as the result of an increase in the level of ownership interest, 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 previous periods in which the investment was held.
The proposal would no longer require an equity-method investor to retroactively perform a fair value allocation of the basis difference as of the original purchase date of the investment and adjust prior earnings for equity-method earnings.
An effective date will be determined after FASB considers stakeholder feedback.
Comments are due Aug. 4 at FASB’s website.
The other exposure draft, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, issued Monday, is intended to simplify several aspects of accounting for share-based payment transactions. These include:
- Income tax consequences.
- Classification of awards as either equity or liabilities.
- Classification on the statement of cash flows.
Some of the areas for proposed simplification apply only to nonpublic entities.
Comments are due Aug. 14 at FASB’s website.
—Ken Tysiac ( firstname.lastname@example.org ) is a JofA editorial director.