Try as it might, the Financial Accounting Standards Board simply cannot come up with a way to simplify the equity method of accounting.
FASB published a proposal in June 2015 and asked for public comment on two ideas to simplify equity accounting. One idea was to eliminate the current requirement under equity method accounting to account for the basis difference in a given investment as if the investment were a consolidated subsidiary. Second, the board proposed eliminating the requirement to retroactively adopt the equity method of accounting if an investment qualifies for use of the method because of an increase in ownership or influence.
In a summary of the feedback, the board says it received more than 40 comment letters, nearly half from preparers. Most feedback expressed support for dropping the retroactive adoption requirement, but responses to the questions around basis difference were all over the map. And those who opposed the idea raised a variety of different concerns, FASB found.
FASB staff members offered a variety of ideas for how FASB could proceed with a final change to accounting standards, but board members had little appetite for moving forward. FASB member Larry Smith said he read up on the decisions that led to the current accounting requirements more than four decades ago. The board writing accounting rules then wrestled with many of the same issues that make it difficult to envision a simpler way to apply the accounting today, he said. “They came up with the equity method, and it was a reasonable way of doing it,” he said.
A few board members supported the idea of simply requiring fair value for investments accounted for under the equity method, but acknowledged that wouldn’t exactly make the accounting simpler compared to current requirements. “I think fair value is the best answer and I could support that today,” said FASB member Hal Schroeder. If that’s not an option, he said, he would opt to simply drop the project and leave current accounting as it is.
FASB agreed to drop the project, which means current guidance will continue. Under existing rules, an entity determines the acquisition date fair value of the identifiable assets and liabilities just as they would for a business combination. The entity’s proportionate share of the difference between fair value of those assets and liabilities and their book value would be accounted for as net income in following periods.