A new proposed Accounting Standards Update from the Financial Accounting Standards Board would make targeted improvements to the accounting for equity method investments.
During the standard-setting board’s 2025 agenda consultation and other outreach, stakeholders identified challenges related to the equity method of accounting guidance. Those challenges include:
- The different criteria for applying the equity method to investments in corporations (and similar entities) and investments in partnerships (and similar entities);
- The lack of authoritative guidance on allocating earnings in complex allocation structures for investments in non-real estate entities; and
- The cost and complexity of applying the equity method.
To address that feedback and help reduce overall cost and complexity, the proposed ASU, which was issued on Oct. 28, would:
- Issue A: Scope of Topic 323. Require a single threshold (significant influence) for applying the equity method of accounting, regardless of the legal form of the entity, and make certain changes to the indicators of significant influence in Subtopic 323-10, Investments—Equity Method and Joint Ventures—Overall.
- Issue B: Complex allocation structures. Clarify how the equity method is applied by investors that have equity method investments with complex allocation structures.
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The amendments in the proposed ASU would affect all entities with investments that are currently accounted for under the equity method and investments that must be evaluated to determine whether the equity method of accounting applies, the FASB says.
The proposed amendments also would address entities that have the following:
- Investments in unincorporated legal entities in the construction industry or an extractive industry accounted for by proportionately consolidating the assets, liabilities, revenues, and expenses of the investee (referred to as “proportionate consolidation”);
- Investments accounted for under the proportional amortization method in Subtopic 740-323, Income Taxes—Investments—Equity Method and Joint Ventures;
- Noncontrolling interests in a subsidiary with a complex allocation structure; and
- Investments in the real estate industry that are evaluated for consolidation.
Stakeholders are encouraged to review and provide comments on the proposed ASU by Jan. 11, 2027.
Photo credit: Financial Accounting Standards Board
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