Single threshold for applying the equity method
Under current GAAP, the threshold for applying the equity method depends on the investee’s legal form. Investments in corporations and limited liability companies that do not maintain specific ownership accounts are accounted for under the equity method when the investor has significant influence, which is presumed at 20% or more of the voting stock. In contrast, investments in partnerships, unincorporated joint ventures and limited liability companies that maintain specific ownership accounts are accounted for under the equity method when the investment is more than minor – commonly viewed in practice as more than 3% to 5%.
Under the proposed ASU, significant influence would be the threshold for applying the equity method regardless of the investee’s legal form.
The existing presumption that an investor holding 20% or more of an investee has significant influence would be retained and would apply to all investments. The proposal would also amend the significant influence guidance in ASC 323-10 by:
- removing the presumption that an investor holding less than 20% of an investee does not have significant influence, so those investors would instead evaluate significant influence based on facts and circumstances;
- expanding the board of directors indicator to include functionally equivalent governing bodies; and
- specifying that a noncontrolling general partner or functional equivalent (such as a managing member in a limited liability company) has significant influence and therefore applies the equity method.
As a result, investments in partnerships that do not give the investor significant influence would no longer be accounted for under the equity method.
Investments that are currently eligible for proportionate consolidation (in the construction and extractive industries) or the proportional amortization method would remain eligible for those methods.
