Defining Issues | January 2020

FASB clarifies accounting for certain equity method investments

The FASB has issued ASU 2020-01, which clarifies the interactions between ASC 321, ASC 323 and ASC 815. The new guidance addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments.

Applicability

ASU 2020-01

  • 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

Relevant dates

Effective date Public entities All other entities

Annual and Interim periods – Fiscal years beginning after                                                                                      

Dec. 15, 2020

Dec. 15, 2021

Early adoption permitted

Yes. If this occurs during an interim period, any adjustments are reflected as of the beginning of the interim period of adoption.

 

Key impacts

  • If a company is applying the measurement alternative for an equity investment under ASC 321 and must transition to the equity method because of an observable transaction, it will remeasure its investment immediately before transition.
  • Similarly, if a company is applying the equity method and must transition to ASC 321 because of an observable transaction, it will remeasure its investment immediately after transition. 
  • If a company holds certain non-derivative forward contracts or purchased call options to acquire equity securities, such instruments generally will be measured using the fair value principles of ASC 321 before settlement or exercise. The entity will not consider how it will account for the resulting investments on eventual settlement or exercise. 

 

 

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