DealLawyers.com Blog

Equity method investments are pretty common and have a lot going for them from a financial reporting perspective for the entity making the investment. That’s why last week’s announcement by FASB that its issuing a proposed ASU that would tweak the criteria for applying the equity method is kind of a big deal. Here’s an excerpt from the announcement:

During the FASB’s 2025 agenda consultation and other outreach, stakeholders identified challenges related to the equity method of accounting guidance. Those challenges include (1) the different criteria for applying the equity method to investments in corporations (and similar entities) and investments in partnerships (and similar entities), (2) the lack of authoritative guidance on allocating earnings in complex allocation structures for investments in non-real-estate entities, and (3) the cost and complexity of applying the equity method.

To address that feedback and help reduce overall cost and complexity, the proposed ASU would:

– Require a single threshold (significant influence) for applying the equity method, 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

– Clarify how the equity method is applied by investors that have equity method investments with complex allocation structures.

Check out Meredith’s blog on TheCorporateCounsel.net from earlier this week for more details on the proposal. Comments on FASB’s exposure draft of the ASU are due by January 11, 2027.

– John Jenkins