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An investor holding an investment that is accounted for in accordance with ASC 321 will be required to apply equity method accounting to that investment if it gains significant influence (see EM 2). In addition to obtaining significant influence through its own actions (e.g., purchasing additional common stock), an investor may also gain significant influence as a result of investee transactions, as further explained in EM 5.2.3.
An entity that is required to adopt the equity method of accounting should do so prospectively from the date significant influence is obtained. Under ASC 323-10-35-33, an investor should add the cost of acquiring the additional interest in the investee (if any) to the carrying amount of its previously held interest.

ASC 323-10-35-33

Paragraph 323-10-15-12 explains that an investment in common stock of an investee that was previously accounted for on other than the equity method may become qualified for use of the equity method by an increase in the level of ownership described in paragraph 323-10-15-3 (that is, acquisition of additional voting stock by the investor, acquisition or retirement of voting stock by the investee, or other transactions). If an investment qualifies for use of the equity method (that is, falls within the scope of this Subtopic), the investor shall add the cost of acquiring the additional interest in the investee (if any) to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The current basis of the investor’s previously held interest in the investee shall be remeasured in accordance with paragraph 321-10-35-1 or 321-10-35-2, as applicable, immediately before adopting the equity method of accounting. For purposes of applying paragraph 321-10-35-2 to the investor’s previously held interest, if the investor identifies observable price changes in orderly transactions for an identical or a similar investment of the same issuer that results in it applying Topic 323, the entity shall remeasure its previously held interest at fair value immediately before applying Topic 323.

An investor may have accounted for its previously held interest at fair value as further explained in LI 2.3. In such cases, the investor should remeasure its investment at fair value through earnings prior to adding the cost of the additional investment (if any) and accounting for the investment as an equity method investment.
Alternatively, an investor may have accounted for its previously-held interest using the measurement alternative described in ASC 321-10-35-2 (see LI 2.3.3 for an explanation of the measurement alternative). In such cases, prior to transitioning to equity method accounting, an entity should consider whether an orderly transaction exists that would necessitate a remeasurement of its existing ASC 321 investment. Shares purchased by an investor that cause it to account for its investment using the equity method represent an observable transaction if they were identical or similar to the existing investment that was accounted for using the measurement alternative and the shares were purchased in an orderly transaction. See LI 2.3.2.2 for a discussion of whether instruments should be deemed similar and what constitutes an orderly transaction. Only after considering whether remeasurement is warranted should the entity add the cost of the additional investment (if any) and account for the investment as an equity method investment.
ASU 2020-01 clarifies that a forward or option to purchase shares that will be accounted for as an equity method investment should be accounted for under ASC 321. A forward or an option with no intrinsic value at acquisition should be measured at fair value at exercise or settlement even if the measurement alternative is elected based on the guidance in ASC 815-10-35-6. While the scope of ASC 815-10-15-141 and ASC 815-10-15-141A does not include options with intrinsic value at acquisition, we generally believe the guidance should also be applied to options with intrinsic value. See LI 2.3.2.3 for a discussion of options or forwards accounted for under ASC 321.
ASC 323 does not provide specific guidance on how basis differences should be determined and allocated to the equity method investment when the investor had a previous interest that was accounted for in accordance with ASC 321. There are several reasonable and acceptable methods to determine and allocate any basis differences. For example, assume an investor that holds a 15% interest in the investee acquires an additional 10% interest resulting in the investor having significant influence over the investee. The investor may treat the total carrying value of its 25% investment in the investee as the cost of acquiring its 25% equity method investment and determine and allocate basis differences accordingly. Notwithstanding, when the fair value of the acquired assets is greater than the cost basis of the investment, a bargain purchase should not be recognized. See EM 3.3.7 for a discussion of how to treat situations that would result in a bargain purchase gain. See EM 4.3.1 for information on the subsequent accounting of basis differences.
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