The Move to the Equity Accounting Method Streamlined by FASB

Friday, March 25, 2016 Print Email

An accounting standards update has been issued by the Financial Accounting Standards Board thus easing corporations to transit to the equity accounting method. FASB was told by stakeholders that the need to adopt retroactively the equity accounting method is not only expensive but time consuming whenever an investment qualifies for usage in the equity method of accounting due to increased ownership levels or the level of influence. They stated that the need does not offer an implicit advantage to the financial statements users.

Being part of the simplification initiative of FASB, the update’s amendments eliminate the need to adopt retroactively the equity accounting method. Usually, this requirement is discarded whenever that investment qualifies use of the equity method of accounting due to increased ownership levels and degree influence. The investment must be adjusted by the investor, operation results and also the retained earnings retroactively through a step by step basis as though the equity accounting method was in effect in all prior periods when the investments were held.

These amendments require that the investor of the equity accounting method adds the acquisition costs of adding interest in the investee to the present basis of the previously held investor interest and adopt the equity accounting method by the date of investment becoming qualified for the equity accounting method.

As such, upon qualifying for the equity accounting method, there is no retroactive adjustment of the investment that will be needed. These amendments require that an organization has an available for sale equity security which qualifies for the equity method of accounting that is recognized through earnings the unrealized loss or gains in all cumulative comprehensive income by the date when the investment is qualified for use in the equity accounting method.

These amendments are effective for every entity’s fiscal year and interim periods within the fiscal years starting after 15th December 2016. According to FASB, these changes should prospectively be applied up to their effective date in order to raise the ownership interest level or degree of influence that causes the adoption of the equity accounting method. FASB allows earlier application and no more additional disclosures are needed for this transition.


Source: ReadyRatios

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