The document discusses ASU 2016-07, which simplifies the transition to the equity method of accounting for investments by eliminating the requirement for retroactive application. It details the process for adjustments when an investor gains significant influence over an investee and the treatment of basis differences. The changes are effective for fiscal years beginning after December 15, 2016, although earlier adoption is permitted.

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in current practice. ASU 2016-07 addresses the issue
by allowing the investor to add the cost of acquiring the
additional interest in the investment on the basis of its
previously held interest and then adopting the equity
method of accounting as of the date the investment
became eligible for the method.
Should the original equity investment be classified
as available-for-sale, the investor recognizes the
unrealized holding gain or loss in the investor’s
accumulated other comprehensive income on the
date that the investment became eligible for the equity
method.
Changes from the Proposed Standard
Not included in the final accounting standard is
guidance regarding the basis difference, which the
FASB marked for change in the same proposed ASU
that it suggested eliminating the retroactive equity
method of accounting.
In U.S. GAAP, when an investment becomes eligible
for equity accounting, the investor must allocate the
difference between the cost of the equity method
investment and the book value of the ownership
interest in the equity of the equity method investee
based on the fair value of the investee’s assets and
liabilities using the guidance related to business
combinations. The investor’s proportionate share of
the difference between the fair value of the investee’s
assets and liabilities and the assets and liabilities’
book value is tracked and accounted for in all future
periods.
Investors will no longer be required to retroactively
apply the equity method of accounting when their
existing unconsolidated equity investment first
qualifies for its use. The new guidance comes in
Financial Accounting Standards Board (FASB)’s
Accounting Standards Update (ASU) 2016-07,
Investments- Equity Method and Joint Ventures (Topic
323), Simplifying the Transition to the Equity Method
of Accounting.
An entity may increase its investment in equity
securities of an entity or another change may occur that
causes it to obtain significant influence over another
entity that triggers an existing equity investment to
qualify for the use of equity method in accounting. U.S.
Generally Accepted Accounting Principles (GAAP)
asks that when the investor transitions to the equity
method because it gains significant influence over
an investee, the investor must adjust the investment,
results of the operations and retained earnings as if
the equity method had been used since the investor’s
original investment. The retroactive application of the
equity method was often costly and difficult to apply.
The Simplification Initiative earmarked equity method
accounting transitions for change, citing the complexity
March 2016
Guidance Streamlines Equity Method Accounting

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
The June 2015 proposed ASU suggested that
allocating and tracking of the basis difference be
eliminated from U.S. GAAP. After hearing feedback,
the FASB separated the two proposals and asked
its staff to conduct more research to identify ways to
simplify the equity method of accounting.
Effective Date
All entity types will be able to eliminate their equity
method of accounting retroactive application
requirement for fiscal years beginning after December
15, 2016. Earlier adoption is also permitted.
When adopting, the amendment is to be applied on
a prospective basis from the date the investment
became eligible for the equity method of accounting.
For More Information
If you have any specific comments, questions or
concerns about the changes to the equity method
of accounting, please contact Mark Winiarski of the
MHM Professional Standards Group. Mark can be
reached at mwiniarski@cbiz.com or 816.945.5614.