TheCorporateCounsel.net

Last week, FASB announced the issuance of a proposed Accounting Standards Update (ASU) to make some tweaks to the accounting for equity method investments. This PwC viewpoint explains the proposed changes as follows:

A single significant influence threshold: Under existing guidance, the assessment can differ for investments in corporations compared with partnerships and similar entities [. . .]  The proposal would eliminate those differing scope thresholds and use “significant influence” as the single principle for determining whether an investment is subject to the equity method. As a result, some investments in partnerships and similar entities that are currently accounted for under the equity method may no longer qualify for the equity method if the investor does not have significant influence. The FASB also proposed several targeted changes to the significant influence guidance in ASC 323 to:

– Remove the presumption that an investor does not have significant influence when it owns less than 20% of an investee’s voting stock

– Expand the existing board representation indicator to include representation on a functionally equivalent governing body

– Specify that a noncontrolling general partner or its functional equivalent (such as a managing member in a limited liability company) has significant influence

An investor would continue to presume significant influence when the 20% ownership threshold is met; however, an ownership interest below 20% would no longer create a presumption that significant influence does not exist. Rather, the other relevant factors in the existing guidance would need to be considered.

Complex allocation structures: The proposal also aims to clarify how an equity method investor determines its share of an investee’s earnings when the investee has a complex allocation structure, which is often done using an approach referred to as “hypothetical liquidation at book value.” The proposed ASU would move guidance on this topic in ASC 970-323, Real Estate—General—Investments—Equity Method and Joint Ventures, which is not specific to the real estate industry or to a particular transaction into ASC 323 so it is more easily accessible for financial statement preparers.

Other proposed amendments: The proposal would also make consequential amendments to ASC 810, Consolidation, related to (1) allocating income to noncontrolling interests that involve complex allocation structures and (2) the application of proportionate consolidation in certain industries.

Comments are due January 11, 2027. The proposed ASU is available at  www.fasb.org with instructions on how to submit comments.

– Meredith Ervine