FASB simplifies transition to equity method of accounting

FASB’s efforts to simplify accounting continued Tuesday, when the board issued a standard eliminating the requirement to retroactively adopt the equity method of accounting when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence.

Through its simplification initiative, FASB is identifying areas of GAAP where complexity can be reduced without sacrificing the usefulness of information provided in financial statements.

Accounting Standards Update No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting, addresses a concern about accounting requirements that are perceived to involve costly and time-consuming work without clear benefits to financial statement users.

Under the new standard, when an investment qualifies for the use of the equity method because of an increase in the level of ownership interest or degree of influence:

• The requirement to adjust the investment, results of earnings, and retained earnings retroactively has been eliminated.
• The equity method investor is required to 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 is required to 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 will take effect for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016. The amendments are required to 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.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.