Dive Brief:
- The Financial Accounting Standards Board on Wednesday issued a proposed standards update that would affect how companies account for investments in partnerships and joint ventures. It asked for public comment on the change by Jan. 11.
- The drafted changes to the topic formally titled Investments—Equity Method and Joint Ventures (Topic 323) would require report preparers to use a single threshold for determining whether to use the equity method of accounting rather than allowing that determination to stem from the size of the investment in the company, according to the 84-page draft proposal.
- “Stakeholders indicated that entities that invest in partnerships often have significant influence at ownership levels below 20 percent,” the draft states. “The board decided to remove the presumption that an entity does not have significant influence when it holds less than 20% of an investee.”
Dive Insight:
Like a number of recent proposed changes, the FASB said its latest proposed update is “targeted,” or narrow, and came in response to requests for change made by users of the standards that underpin Generally Accepted Accounting Principles in the U.S.
Jack Castonguay, an associate professor of accounting at Hofstra University and a technical content producer at LumiQ, sees the change as a simplification and reorganization of existing standards that will mostly apply to real estate and construction companies.
“The biggest provision is it moves the investments that are currently subject to the ‘more-than-minor’ threshold to the more commonly applied significant influence threshold that we see followed for investments in corporations,” he said.
“In doing so it also eliminates the presumption that just because an entity doesn't own 20% or more of another entity, it lacks significant influence,” he said.
Daniel Tinkelman, an accounting professor at Brooklyn College, warned that the new standards could be gamed by report preparers because determining whether an investor has “significant influence” as compared to a 20% investment is more subjective.
“If the issue of significant influence is ambiguous, there may be some gaming of the system,” Tinkelman said in an email. “It would seem to put the FASB more along the road of using judgmental tests rather than bright line numerical tests.”
