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 prospectively applied 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.