Description
Proposal to Simplify
Equity Method Accounting
As part of its ongoing simplification initiative, the Financial Accounting Standards Board (FASB) has proposed
eliminating the requirement that an equity method investor identify, allocate and disclose basis differences. An
entity would recognize its equity method investments at cost, eliminating the need to determine the fair value of
an investee’s assets and liabilities to account for basis differences. FASB also proposed eliminating the
requirement for an entity to retroactively adjust its financial statements when it increases its ownership to a level
that initially qualifies for the equity method.
The proposed elimination of accounting for basis differences of equity method investments would be applied on a
modified prospective basis. An investor would apply the proposal to all equity method investments existing on or
after the effective date and would stop amortizing all remaining basis differences.
In the year of adoption, an investor would disclose prior periods’ amortization of basis differences. The proposed amendments to eliminate retroactive application of the equity method would be applied prospectively to ownership-level increases occurring after the proposed amendments become effective, from the date the investment qualifies for the equity method. The effective date, as well as whether early adoption would be permitted for elimination of accounting for the basis differences, will be determined after the board considers stakeholder feedback on the amendments in this proposed update. Comments are due by August 4, 2015. Eliminating Basis Difference Accounting FASB’s proposal to eliminate the concept of basis differences in equity method accounting (the difference between the cost of an investment and the amount of underlying equity in net assets of an investee) provides both acquisition-year relief and subsequent year simplifications. Under current guidance, basis difference is accounted for as if the investee were a consolidated subsidiary.
The proposal would simplify equity method accounting because the investor entity would no longer need to obtain or estimate the fair value of an investee’s identifiable assets and liabilities to allocate the basis difference in accordance with Topic 805, Business Combinations. Allocation of basis differences is often a costly and arduous exercise, especially when the investor entity has little, if any, access to the information needed. Under existing guidance, the basis difference related to depreciable or amortizable assets or liabilities is amortized or accreted in subsequent periods in connection with recognition of the investor’s share of the investee’s net income or loss. Since cost-to-book value basis differences would disappear, a reporting entity no longer would track basis differences to adjust equity method earnings for their amortization or accretion—amounts often recorded in off-balance sheet “memo accounts.” Due to elimination of basis differences, equity method investments (presented as a single line item) and investor equity method earnings may be larger under the proposal. The proposed update also would eliminate the requirement for an investor to disclose any difference between the amount at which an investment is carried and the amount of underlying equity in net assets, along with the . Proposal to Simplify Equity Method Accounting accounting treatment of the difference, e.g., amortization of identifiable intangible assets. Change to Equity Method & Retroactive Adjustment Under current requirements, when an entity initially accounts for an investment under a method other than the equity method, e.g., the cost method, and the investment later qualifies for use of the equity method, the investor is required to retroactively adopt the equity method of accounting. Retrospective application is required in all prior periods in which it held the unconsolidated investment if it subsequently obtains significant influence due to an increase in the level of ownership interest. The investment, results of operations and retained earnings of the investor must be adjusted retroactively as if the equity method had been in effect during all previous periods in which the investment was held. Under current guidance, this requires the investor entity to retrospectively perform a fair value allocation as of the original date of investment purchase. Under the proposed guidance, on the date the investment qualifies for the equity method, the carrying value of the existing investment would be added to the cost of the additional investment to determine the initial cost basis of the equity method investment.
The investor then would apply the equity method on a prospective basis. For more information on how this proposed change could affect your organization, contact your BKD advisor. Contributor Connie Spinelli Director 303.861.4545 cspinelli@bkd.com 2 .
In the year of adoption, an investor would disclose prior periods’ amortization of basis differences. The proposed amendments to eliminate retroactive application of the equity method would be applied prospectively to ownership-level increases occurring after the proposed amendments become effective, from the date the investment qualifies for the equity method. The effective date, as well as whether early adoption would be permitted for elimination of accounting for the basis differences, will be determined after the board considers stakeholder feedback on the amendments in this proposed update. Comments are due by August 4, 2015. Eliminating Basis Difference Accounting FASB’s proposal to eliminate the concept of basis differences in equity method accounting (the difference between the cost of an investment and the amount of underlying equity in net assets of an investee) provides both acquisition-year relief and subsequent year simplifications. Under current guidance, basis difference is accounted for as if the investee were a consolidated subsidiary.
The proposal would simplify equity method accounting because the investor entity would no longer need to obtain or estimate the fair value of an investee’s identifiable assets and liabilities to allocate the basis difference in accordance with Topic 805, Business Combinations. Allocation of basis differences is often a costly and arduous exercise, especially when the investor entity has little, if any, access to the information needed. Under existing guidance, the basis difference related to depreciable or amortizable assets or liabilities is amortized or accreted in subsequent periods in connection with recognition of the investor’s share of the investee’s net income or loss. Since cost-to-book value basis differences would disappear, a reporting entity no longer would track basis differences to adjust equity method earnings for their amortization or accretion—amounts often recorded in off-balance sheet “memo accounts.” Due to elimination of basis differences, equity method investments (presented as a single line item) and investor equity method earnings may be larger under the proposal. The proposed update also would eliminate the requirement for an investor to disclose any difference between the amount at which an investment is carried and the amount of underlying equity in net assets, along with the . Proposal to Simplify Equity Method Accounting accounting treatment of the difference, e.g., amortization of identifiable intangible assets. Change to Equity Method & Retroactive Adjustment Under current requirements, when an entity initially accounts for an investment under a method other than the equity method, e.g., the cost method, and the investment later qualifies for use of the equity method, the investor is required to retroactively adopt the equity method of accounting. Retrospective application is required in all prior periods in which it held the unconsolidated investment if it subsequently obtains significant influence due to an increase in the level of ownership interest. The investment, results of operations and retained earnings of the investor must be adjusted retroactively as if the equity method had been in effect during all previous periods in which the investment was held. Under current guidance, this requires the investor entity to retrospectively perform a fair value allocation as of the original date of investment purchase. Under the proposed guidance, on the date the investment qualifies for the equity method, the carrying value of the existing investment would be added to the cost of the additional investment to determine the initial cost basis of the equity method investment.
The investor then would apply the equity method on a prospective basis. For more information on how this proposed change could affect your organization, contact your BKD advisor. Contributor Connie Spinelli Director 303.861.4545 cspinelli@bkd.com 2 .
