The FASB recently issued a proposed ASU, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The proposed ASU is intended to clarify the accounting for equity securities in instances where there are observable transactions that may require the application or discontinuation of the equity method of accounting. In addition, the scope of Topic 815 would be clarified.
Topic 321 addresses how to account for equity securities that do not result in the consolidation of an investee and are not accounted for under the equity method of accounting. As amended by ASU 2016-01, Topic 321 allows an entity to elect to measure investments without a readily determinable fair value at cost minus any impairment. However, if the entity can subsequently identify price changes in orderly transactions for identical or a similar investment, it is to measure the equity security at fair value as of the date that the observable transaction occurred.
Topic 323 provides guidance on the equity method of accounting, which applies when an investor has the ability to exercise significant influence over the investee but does not meet the criteria to consolidate. The proposed ASU would clarify that upon the discontinuance of the equity method, an investor would revalue the retained equity securities in accordance with Topic 321. Additionally, it specifies that the investment transaction that caused the loss of influence would itself be considered when revaluing investments according to the measurement alternative described by Topic 321.
Topic 815 addresses the accounting for certain forward contracts or purchase options related to debt and equity securities. Under current guidance, one of the criteria to apply Topic 815 states that “the contract is entered into to purchase securities that will be accounted for under either Topic 320 or Topic 321”. It was previously unclear how Topic 815 applied in the event that a purchase option, if exercised, would cause the entity to have significant influence over the investee (thus requiring the application of Topic 323 for the equity method of accounting). The proposed ASU clarifies that for purposes of applying Topic 815, an entity would not consider whether the settlement of a forward contract or exercise of a purchase option would result in application of the equity method of accounting.
The effective date and the ability to early adopt the amendments have not yet been determined.
The full text of the Exposure Draft is available here.
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