EITF reaches final consensus on accounting for certain equity method investments

KPMG reports that the EITF discussed accounting for certain equity method investments and licensing contract modifications. It reached a final consensus on the accounting for certain equity method investments which is subject to ratification by the FASB.

Applicability

Final consensus: Clarification of interactions between ASC 321, ASC 323 and ASC 815  

• All companies that invest in equity securities without readily determinable fair values that are accounted for under the ASC 321 measurement alternative
• All companies that hold certain non-derivative forward contracts and purchased options to acquire equity securities without readily determinable fair values

Contract modifications of licenses of intellectual property

• All companies that modify licenses of intellectual property

Key impacts

The EITF final consensus clarifies the interactions between ASC 321, ASC 323 and ASC 815: 

• A company should consider observable transactions that require it to either apply or discontinue the equity method of accounting for purposes of the measurement alternative under ASC 321 – immediately before applying, or upon discontinuing, the equity method of accounting under ASC 323.
• When accounting for forward contracts and purchased call options to acquire equity securities, a company should not consider the following: whether upon the settlement of the forward contract or exercise of the call option the equity security would – individually or with existing investments – be accounted for under the equity method in ASC 323. 

The EITF discussed accounting for contract modifications of licenses of intellectual property. No decisions were made and the EITF asked the FASB staff to perform additional outreach about potential accounting alternatives to address the diversity in practice.

Report contents

• Applicability
• Clarifying the interactions between ASC 321, ASC 323 and ASC 815
• Contract modifications of intellectual property licenses

Related content

• KPMG’s Defining Issues: FASB clarifies accounting for certain equity method investments
  
• KPMG Handbook: Equity method of accounting 
• KPMG Handbook: Revenue for software and SaaS