FAR, Financial Accounting and Reporting
Sources for Investments: Equity Method and Joint Ventures
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Investments: Equity Method and Joint Ventures. The topic rests on ASC 323.
About this topic
When one company buys enough stock in another to influence it but not enough to control it, neither fair value accounting nor consolidation fits.
Fair value would ignore that the investor has a real seat at the table. Consolidation would overstate what the investor commands, because the investor does not direct the investee's assets.
Key points
- The equity method applies when the investor has significant influence, presumed at 20-50% ownership.
- The investor records its share of the investee's income and adjusts the carrying amount; dividends reduce it.
- A basis difference between cost and underlying equity is amortized like the asset it relates to.
- Below 20%, the presumption can be overcome if specific indicators of influence are present.
What the lessons cover
- When the equity method applies: significant influence (ASC 323-10-15-8)
- Initial recognition at cost and the basis difference (ASC 323-10-30-2)
- Running-balance mechanics, and changes in the level of influence (ASC 323-10-35-4)
- A multi-year rollforward, start to finish
- Losses limited to the investment plus net advances (ASC 323-10-35-19 through 35-20)
- Other-than-temporary impairment (ASC 323-10-35-32)
- Intra-entity profit elimination (ASC 323-10-55-27)
Authoritative references
- ASC 323-10-15-3, the definition of significant influence short of control.
- ASC 323-10-15-6 and 15-10, the indicators that confirm influence, such as board representation and policy-making participation, and the indicators that it is absent.
- ASC 323-10-15-8, when the equity method applies.
- ASC 323-10-25-2 and 30-2, recognition of the investment as an asset at cost, and the basis difference between cost and the share of underlying equity.
- ASC 323-10-35-4, the running-balance mechanics and changes in the level of influence.
- ASC 323-10-35-13, accounting for the basis difference as if the investee were a consolidated subsidiary.
- ASC 323-10-35-19 through 35-22, losses limited to the investment plus net advances, the liability where the investor is committed to provide financial support, and the resumption of income only after suspended losses are absorbed.
- ASC 323-10-35-23 through 35-26, extension of the loss floor to loans and preferred stock, in reverse order of seniority, illustrated at ASC 323-10-55-30.
- ASC 323-10-35-32, the impairment test applied to the whole investment, goodwill included.
- ASC 323-10-35-33, moving into the equity method: the cost of the additional interest is added to the current basis, with the previously held interest remeasured under ASC 321 immediately before.
- ASC 323-10-35-36, 35-37 and 35-39, moving out of the method, and the offset of accumulated other comprehensive income against the carrying value that comes first.
- ASC 323-10-45-1, presentation of the investee's results on a single line on the income statement and the investment on a single line on the balance sheet.
- ASC 323-10-55-27, the elimination of intra-entity profit.
Related requirements outside the Topic:
- Equity securities at fair value, and the measurement alternative, ASC 321-10-30-1, 321-10-35-1 and 321-10-35-2.
- Limited partnership interests, ASC 323-30-S99-1.
- The fair value option, ASC 825-10.
- Goodwill impairment, ASC 350-20.
How PocketCPA uses these sources
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