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Proposal Aims to Simplify Two Issues in Equity Method Accounting

The FASB released a proposal to simplify two narrow areas in the equity method of accounting.The proposal eliminates the basis difference related to equity investments and gets rid of a requirement to retroactively use the equity method if an investment qualifies for it because of an increase in the level of ownership.

The FASB on June 5, 2015, released Proposed Accounting Standards Update (ASU) No. 2015-280,Investments — Equity Method and Joint Ventures (Topic 323), a narrow proposal that aims to simplify two issues in the equity method of accounting.

Comments are due by August 4.

The proposal eliminates the requirement for an equity method investor to account for the basis difference — the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee.It also scraps the requirement to retroactively use the equity method of accounting for prior periods if an investment qualifies for the equity method as the result of an increase in the level of ownership.

The proposal is meant to simplify how companies account for stakes they hold in other companies.

Under the guidance in Topic 323,Investments, Equity Method and Joint Ventures, formerly Accounting Principles Board (APB) Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock, a business determines the fair value of the assets and liabilities acquired in the same manner as a business combination.The business’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets generally must be accounted for in net income.

Accountants told the FASB that accounting for the basis difference of equity method investments adds cost and complexity to financial statement reporting without improving information offered to investors.

“Stakeholders noted that determining the acquisition date fair value of an investee’s identifiable assets and liabilities assumed can be costly and, in some cases, an entity may not have access or may have limited access to the information necessary to perform the investment,” the proposal reads.

Instead of accounting for the basis difference of an equity method investment, a business would recognize its equity method investment at its cost.It would no longer determine the acquisition date fair value of the assets and liabilities assumed.

In addition, the proposal would eliminate the requirement that when an investment qualifies for the use of the equity method because of an increase in the level of ownership, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in use in previous periods.

An equity method investor also would no longer have to perform a fair value allocation of the basis difference as of the original purchase date and adjust prior earnings.

“Stakeholders have told the board that the requirement to retroactively adopt the equity method of accounting is costly and time consuming.The board also learned from stakeholders that this requirement does not provide a clear benefit to financial statement users,” the proposal reads.

The proposal is part of the FASB’s so-called Simplification Initiative, a larger project in which the accounting board is addressing complex areas in its standards and simplifying them.

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