Equity Method Investments (Portfolio 5130)

Bloomberg BNA Accounting Policy and Practice Portfolio 5130, Equity Method Investments, explains and analyzes the rules and best practices for accounting for investments using the equity method. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.


Bloomberg BNA Accounting Policy and Practice Portfolio 5130, Equity Method Investments, explains and analyzes the rules and best practices for accounting for investments using the equity method. The Portfolio includes extensive discussion and examples of the application of the guidance in FASB Accounting Standards Codification (ASC) 323, Investments – Equity Method and Joint Ventures.

The Portfolio covers accounting for investments in non-consolidated corporations, as well as investments in non-corporate, non-controlled entities, including real estate ventures. The Portfolio discusses how to determine whether the equity method applies to a particular investment in a particular form of entity, including a detailed analysis of how to determine whether “significant influence” exists and how to analyze equity instruments to determine whether they qualify as in-substance common stock. Also included is a detailed explanation of how to apply the equity method to a particular investment as well as a detailed explanation of the disclosure and presentation requirements (including sample disclosures and SEC Comment Letters). The Portfolio includes analysis of the international accounting standards applicable to accounting for equity investments and analyzes the differences between the international accounting standards and U.S. GAAP. In addition to its discussion of the equity method, the Portfolio also includes a general overview of the cost method of accounting for investments.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5130, Starczewski, Equity Method Investments (Accounting Policy and Practice Series).


Lisa Marie Starczewski, Esq.

Lisa Marie Starczewski, Shareholder, Buchanan Ingersoll & Rooney; J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski currently practices tax law with Buchanan Ingersoll & Rooney. Her practice focuses on corporate & partnership tax planning, leasing and installment sales. She previously practiced law in the tax departments of Morgan, Lewis & Bockius, and Schnader, Harrison, Segal & Lewis. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and taught in the LL.M. program at Villanova University School of Law. She has authored several Bloomberg BNA Tax Management Portfolios in the U.S. Income Series, including 714 T.M., Partnerships—Allocation of Liabilities; Basis Rules565 T.M., Installment Sales550 T.M., At-Risk Rules621 T.M., IRS National Office Procedures – Rulings, Closing Agreements587 T.M., Noncorporate Alternative Minimum Tax752 T.M., Corporate Alternative Minimum Tax; and 523 T.M., Deductibility of Legal and Other Professional Fees. She has also authored Portfolios in the Accounting Series, including 5130, Equity Method Investments5100, Revenue Recognition: Fundamental Principles5101,Revenue Recognition: Product Sales and Services5114, Accounting for Leases: Fundamental Principles5117, Leases: Lessee Perspective5118, Leases: Lessee Perspective—Selected Topics; and 5120, Leases: Lessor Perspective—Economics. Ms. Starczewski is also the author and co-author of numerous Bloomberg BNA Tax Practice Series chapters. She is a frequent speaker at tax and accounting conferences. She has received the Tax Management Distinguished Author Award and is co-chair on the following Bloomberg BNA Tax Advisory Boards: Compensation Planning, Corporate, International, Transfer Pricing, Real Estate, and U.S. Income.

Table of Contents

Detailed Analysis
I. Introduction & Scope of Portfolio
A. Types of Entities – Definition and Characteristics
1. Subsidiary
2. Joint Venture
3. Real Estate Venture
4. Real Estate Investment Trust
5. Investment Company
B. Determining Whether to Consolidate an Investment
1. Consolidation Rules – Prior to Amendment by ASU 2015-02
a. Entities Excepted From Application of ASC 810
b. VIE Consolidation Model
c. Voting Interest Entity Consolidation Model
2. Consolidation Rules – ASU 2015-02
a. Entities Excepted From Application of ASC 810
b. VIE Consolidation Model
c. Voting Interest Model
C. Applicable Methods of Accounting for Non-Consolidated Investments
1. Equity Method – Brief Overview
2. Fair Value Method (Current U.S. GAAP)
3. Fair Value Method (Post Effective Date of ASU 2016-01)—Equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this ASU
4. Cost Method—Superseded by ASU 2016-01
D. Scope of Portfolio
II. Determining Whether the Equity Method Applies to An Investment
A. Scope of ASC 323
1. Instruments
2. Entities
3. Application of the Equity Method by Investment Companies
4. Application of the Equity Method by an Investor in a Qualified Affordable Housing Project
5. Decision Flowchart
B. Investments in Non-Consolidated Corporations
1. Significant Influence
a. Presumption of Significant Influence—20 Percent Voting Interest
b. Evidence to Rebut Presumption
2. Corporate Joint Ventures
3. Special Rule Applicable to Real Estate Investment Trusts
4. Common Stock and In-Substance Common Stock
a. How to Determine Whether a Particular Investment Is In-Substance Common Stock
b. When to Determine Whether a Particular Investment Is In-Substance Common Stock
C. Investments in Non-Consolidated General Partnerships
D. Investments in Non-Consolidated Limited Partnerships
E. Investments in Non-Consolidated LLCs
1. LLCS That Do Not Maintain Specific Ownership Accounts
2. LLCs That Maintain Specific Ownership Accounts
F. Investments in Trusts or Other Entities That Maintain Specific Ownership Accounts
G. Investments in Unincorporated Joint Ventures
III. Applying the Equity Method
A. Recognition and Initial Measurement
1. General Rules
2. Acquisition of an Equity Method Investment in a Business Combination
3. Nonmonetary Exchanges
a. Contribution of an Assets or a Group of Assets That Is Qualified as a Business or Nonprofit Activity
b. Exchange of a Controlled Asset or Group of Assets That Is Not a Business for an Equity Method Investment
c. Exchange of One Equity Method Investment for Another
4. Increase in Ownership/Influence That Leads to Application of Equity Method
5. Decrease in Ownership/Influence That Leads to Application of Equity Method
6. Contingent Consideration
7. Basis Differences
a. Equity Method Goodwill
b. Deferred Taxes on Basis Differences
c. Accumulated Other Comprehensive Income
8. Bargain Purchase of an Equity Method Investment
9. Stock-Based Compensation Granted to Investee's Employees
B. Subsequent Measurement and Presentation
1. General Rules
2. Effect of Basis Differences on Calculation of Earnings or Losses
3. No Conformity Requirement
4. Elimination of Intra-Entity Profits and Losses
5. Investee Capital Transactions
6. Other Comprehensive Income
7. Contingent Consideration
8. Dividend Distributions
9. Interest on Loans to Investee
10. Reciprocal Interests
11. Equity Method Losses
a. General Rule – Suspension of Losses
b. Additional Investment After Suspension of Loss Recognition
c. Investor Has Other Investments
12. Decreases in Value of Equity Method Investment – Other-Than-Temporary Impairment
13. Changes in an Investor's Level of Ownership or Degree of Influence
a. Decreases in Ownership/Influence
b. Increases in Ownership/Influence
14. Special Rules Applicable to Real Estate Corporate Joint Ventures
15. Special Rule Applicable to Not-for-Profit Entities
C. Dispositions
1. Accounting for Disposal of Equity Method Investment
2. Discontinued Operations
D. Disclosure Requirements
1. Codification – ASC 323
2. Codification – ASC 810
a. Disclosure Requirements – Primary Beneficiaries and Other Holders of Variable Interest in VIEs
b. Disclosure Requirements – Non-Primary Beneficiary Holder of a Significant Variable Interest
c. Scope-Related Disclosures
3. Codification – ASC 205
a. Disclosure Requirements Applicable to All Discontinued Operations
b. Disclosure Requirements Applicable If Discontinued Operation Includes an Equity Method Investment
IV. Special Rules Applicable to Interests in Real Estate Ventures
A. General Rules
B. Initial Measurement
C. Subsequent Measurement
1. Investor Accounting for Losses and Declines in Value of Investment
2. Allocation Ratios
D. Derecognition
V. Accounting for “Other” Investments – The Cost Method – ASC 325 (Superseded by ASU 2016-01)
A. In General
B. Recognition and Initial Measurement Rules
C. Subsequent Measurement
D. Accounting for a Cost Method Investment in Affordable Housing Projects With Allocated Tax Credits
E. Disclosures
VI. SEC Disclosure and Presentation Requirements
A. In General
B. Financial Information Required of Equity Method Investees Currently Owned
1. Annual Reporting Periods
a. Separate Audited Financial Statements of Equity Method Investees
b. Summarized Financial Statements of Equity Method Investees
c. Other Disclosure
2. Interim Reporting Periods
3. A Company Following the Fair Value Option Method for Its Equity Method Investments
4. Required MD&A Disclosures
C. Financial Information for Probable Equity Method Investees Not Currently Owned
VII. International Standards
A. Background
B. Accounting for Investments in Joint Arrangements
1. Accounting for Investments in Joint Arrangements
2. Determining Whether a Joint Arrangement Exists
3. Categorizing a Joint Arrangement as Either a Joint Operation or a Joint Venture
4. Accounting for an Investment in a Joint Operation
5. Accounting for an Investment in a Joint Venture
C. Accounting for Investments in “Associates”
D. Application of the Equity Method
1. Scope Exceptions to Equity Method
2. Application of the Equity Method – In General
3. Upstream and Downstream Transactions
4. Financial Statements and Accounting Policies
5. Impairment Losses
6. Discontinuing Use of Equity Method Due to Change in Nature of Investment
E. Disclosure
1. IFRS 12 – In General
2. Disclosure Requirements—Investments in All Joint Arrangements and Associates
3. Disclosure Requirements—Investments in Joint Arrangements and Associates That Are Individually Material
4. Investments in Joint Ventures and Associates That Are Not Individually Material
5. Aggregation

Working Papers

Worksheet 1 Chart to Aid in Analysis of Factors Relevant to In-Substance Common Stock
Worksheet 2 Sample Disclosure (Equity Method Investment) – Twenty-First Century Fox, Inc.
Worksheet 3 Sample Disclosure – Walgreens Boots Alliance, Inc.
Worksheet 4 Sample Disclosure – 1-800-FLOWERS.COM, Inc.
Worksheet 5 Sample Disclosure (Equity Method Investment – Summarized Financial Information) – Constellation Brands, Inc.
Worksheet 6 Sample Disclosure – PriceSmart, Inc.
Worksheet 7 Sample Disclosure – ABAXIS, INC.
Worksheet 8 Private Company Accounting Alternative
Worksheet 9 IFRS and US GAAP Comparison—IAS 28 vs ASC 323