The Financial Accounting Standards Board (FASB) recently has issued a new Accounting Standards Update (ASU) 2016-7, Simplifying the Transition to the Equity Method of Accounting, which affects accounting for investments. Under the new guidance, an investor must implement the equity method of accounting on the date that the change in ownership or degree of influence occurs with no retroactive adjustments necessary. If an entity has an available-for-sale security that becomes qualified for the equity method of accounting, then the unrealized gain or loss position must be recognized in current year earnings.
FASB issued this update as part of an ongoing effort, known as the Simplification Initiative, to simplify generally accepted accounting principles (GAAP). The update also brings GAAP more closely into alignment with guidance in International Financial Reporting Standards.
Stakeholders, including financial statement preparers and auditors, had communicated to the FASB that the current requirements related to retroactively applying the equity method of accounting to an investment are burdensome with no clear benefit to users of the financial statements. Under current GAAP, when an investment qualifies for the equity method of accounting (which occurs when an investor holds more than 20% of the ownership in a company or is able to exert significant influence over the company’s management or operations), the investing entity is required to retroactively adjust its investment balance, results of operations, and retained earnings to reflect what its financial position would have been in prior periods if the investment was accounted for under the equity method.
The effective date of the new guidance is for fiscal years beginning after December 15, 2016, for all entities. As the amendments are not costly to implement, the effective data is the same for both public and non-public business entities. Early adoption is permitted.
If you have questions about this new ASU, or would like to request a speaker on this topic for your organization or event, contact one of our executives listed below, (800) 270-9629.