Equity Method of Accounting for Investments in Foreign Entities
Author: Justin McNabb
Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters, addresses accounting for foreign currency transactions and translation of foreign currency financial statements. This guidance is associated with the consolidation of a majority-owned investee with a different functional currency than the reporting entity. However, it’s important to remember Topic 830 guidance also applies to investments accounted for under the equity method of accounting.
ASC Topic 830-10-15-3, Transactions, indicates Topic 830’s guidance applies to all foreign currency transactions in a reporting entity’s financial statements and foreign currency statements incorporated in an entity’s financial statements by consolidation, combination or the equity method. In addition, pursuant to ASC 830-10-15-5, Financial Statements of an Equity Method Investee, foreign currency financial statements of a foreign investee accounted for by the equity method should be translated to the reporting currency in the same manner as the financial statements of a consolidated foreign investee.
A sometimes overlooked aspect of accounting for a foreign investee using the equity method is recording other comprehensive income (OCI) related to translation adjustments. When applying the equity method to a foreign entity, the reporting entity should:
- Record in income its share of the foreign entity’s translated net income
- Record in OCI its share of the translation adjustments arising in the translation of the foreign investee’s financial statements from its functional currency to the reporting entity’s currency
By recording both adjustments, the asset balance in the investment in the foreign investee will be properly recorded as of the period-end.
Contact your BKD advisor for more information.