The FASB has issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
to clarify the application of the measurement alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment plus or minus any observable price changes amended in ASU 2016-01. ASU 2020-01 is applicable for all entities who elect to apply this measurement alternative or enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting.
The main provisions of the ASU are as follows:
- For transactions such as a change in ownership percentage that could require the application or discontinuation of the equity method of accounting, entities should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.
- The amendments clarify that for purposes of applying ASC 815-10-15-141(a) to forward contracts an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.
These amendments will be effective for public business entities for fiscal years beginning after December 15, 2020 and for all other entities for fiscal years beginning after December 15, 2021. Early adoption is permitted and the amendments in this update should be applied prospectively.
The full text of ASU 2020-01 is available here.
Readers should not act upon information presented without individual professional consultation.