Excerpts from ASC 323 The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles (GAAP) in the economic resources underlying the investments. On June 5, 2015, the Board issued proposed Accounting Standards Update, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of Accounting, for public comment. As a general rule of thumb, an investment of 20% - 50% of the voting stock gives the investor “significant influence.” But what are other indicators of significant influence? This excess represents goodwill, which is often referred to as “equity method goodwill.” However, consistent with the acquisition method in ASC 805, an investor should not automatically allocate the excess entirely to goodwill but must first attribute the excess to fair value adjustments of the identified assets and liabilities. ASC 323 comprises three Subtopics, below is an overview of each Subtopic. ... equity method due to an increase in the level of ownership interest. If a company does not account for its basis differences, it could result in the misstatement of its equity method earnings. You must log in{"id":"id-f127f7ac-8085-4243-99f7-6d750c0a7090","action":"login-q3j74v"} to view this content and have a subscription package that includes this content. As a result, Company A determines its actual equity investment earnings for each year as follows. This presentation is commonly referred to as “one-line consolidation.” This means an investor must determine the acquisition date fair value of the identified assets and liabilities, which might include identifying intangible assets not already recorded on the investee’s balance sheet. To calculate its share of those earnings, Company A will first apply its ownership interest to the full year net income/loss and determine its initial proportionate share of earnings to be $25,000 income ($100,000 x 25%) for the first year and a $12,500 loss ($50,000x 25%) for the second year. Generally, an investor is considered to have significant influence over the investee and should apply the equity method of accounting when it holds an ownership interest between 20% to 50%. As such, the cumulative balance of its equity method investment in Investee Z as of the sale date would have been $1,012,500 and Company A would have incorrectly recognized a loss on the sale of $12,500 as shown below. Codification Topic 323-30 Investments - Equity Method Partnerships, Joint Ventures, Limited Liability Entities Equity method for partnerships and joint ventures AICPA Accounting Interpretations (AIN) APB 18" The Equity Method of Accounting for Investments in Common Stock: Accounting Interpretations of APB Opinion No. During the first and second years of Company A’s ownership, Investee Z has net income of $100,000 and a net loss of $50,000, respectively. These differences are referred to as basis differences and must be accounted for by the investor as if the investee were a consolidated subsidiary even though its equity method investment is presented as a single line item on the balance sheet. Your email address will not be published. Welcome to the Deloitte Accounting Research Tool (DART)! Boundless: Being Aware of off-Balance-Sheet-Financing ; Bryant University: Enron and Arthur Andersen -- The Case of the … Investments in equity securities that have (A) (A) readily determinable fair value. display: none !important; However, Company A will maintain a separate subledger for its investment in Investee Z in order to track these basis differences and the impact on equity earnings in future periods. If basis differences are not correctly factored into equity method accounting, an investor risks misstating its earnings and balance sheet. Investments in equity securities that have (A) ... --> Apply asc topic 323-10: Investments - Equity Method and Joint Ventures--> APB 18 4. Investments - Equity Method and Joint Ventures. At the acquisition date, the book value of Investee Z’s net assets is $3,000,000 and Company A’s proportionate share of those net assets is $750,000, resulting in a $250,000 difference when compared to the purchase price (or cost basis). Joint Ventures and Accounting for Equity-Based Payments to Non-Employees Amendments to Sections 323-10-S99 and 505-50-S99 This Accounting Standards Update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. ASC 323-10 provides guidance on the application of the equity method of accounting to investments within the Subtopic’s scope. Investments in Equity of Other Entities. Equity method for partnerships and joint ventures. How do basis differences impact equity method accounting? Copyright © 2020 Deloitte Development LLC. ASC 323 specifies that an investor should initially measure its equity method investment at cost in accordance with the guidelines in ASC 805 Business Combinations (“ASC 805”). Equity Method, ASC 323. accta December 15, 2015 November 30, 2018 U.S. GAAP by Topic. This October 2020 edition incorporates updated guidance on: Carried interest and equity method investments ... ASC 323 Investments -- Equity Method ; Resources. The investor applies the equity method in the usual way, but complications arise when the investee is loss-making. Let’s review the equity method of accounting under ASC 323 before we take a closer look at the changes. All companies with equity method investments; Relevant dates.  −  three However, US GAAP does not set bright lines for determining when an investor has significant influence and in reality making this conclusion requires careful analysis and judgment. As this example illustrates, not properly tracking and accounting for equity method investments, including identifying and adjusting for basis differences, can directly impact a company’s financial results. 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