On March 15, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-07. ASU 2016-07 amends the requirements in Topic 323, Investments – Equity Method and Joint Venture for accounting for an investment that becomes qualified for the equity method of accounting. It goes into effect for periods beginning after December 15, 2016.
Currently, when an investment becomes qualified for equity method accounting, it is applied retroactively with an adjustment to the investment, to the earnings of the current period and all prior periods presented, and to retained earnings. The investor will recalculate these amounts as if the equity method had been applied on the basis of the previous percentage owned.
This pronouncement requires that the cost of acquiring an additional interest in the entity, if any, that resulted in the investment qualifying for the equity method be added to the carrying value of the investment. The equity method will then be applied from that point forward without any retroactive application or adjustment.
Why is the FASB issuing this Accounting Standards Update?
The Board is issuing this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.
Stakeholders told the Board that the requirement to retroactively adopt the equity method of accounting is costly and time consuming when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. Stakeholders noted that this requirement does not provide a clear benefit to users of financial statements.
The amendments in this Update eliminate the requirement to retroactively adopt the equity method of accounting.
When is Statement ASU 2016-03 eligible to be tested on the CPA Exam?
ASU 2016-03 is eligible for testing on the CPA Exam in the Q1 2017 testing window. Be sure to check back often to receive the most up-to-date information on CPA Exam changes.