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5.6 Other investee transactions
Publication date: 30 Jun 2023
us Equity method of accounting guide
An equity method investor may need to reflect the impact of investee transactions in the carrying amount of its investment. Treasury transactions are addressed in EM 5.2.3. Other transactions include:
5.6.1 Investee spinoff and split-offs
A pro rata distribution of shares by an investee to shareholders (e.g., in a spinoff or other form of reorganization or liquidation) should be accounted for as a deemed distribution to shareholders at the carrying amount of the investment. That is, an investor who receives the distribution would allocate its previous investment between the spinnor and the shares received in the spinoff.
A non-pro rata disposition of shares by an investee (e.g., a split-off) may give rise to a gain or loss to an investor that is a net seller. That gain or loss would be equal to the difference between the fair value of the investment received at the date of exchange and the investor’s carrying amount of the proportionate share in the investee that was sold, including, if applicable, a proportionate share of any unamortized basis differences.
5.6.2 Common control transactions of the investee
An investee may receive assets from its parent or from a sister entity with which it shares a common parent in return for issuing additional shares. Since the transfer to the investee is considered a common control transfer, the investee would record the receipt of the assets at the parent’s carrying basis. A question then arises as to how a third-party investor in the investee should account for the dilution effect of this transaction. This issue could also arise when an investee transfers assets to its parent or sister entity in return for investee shares.
For example, assume Investor has a 40% equity method investment in Investee. The remaining 60% interest in Investee is held by ParentCo, which consolidates Investee. ParentCo contributes additional assets to Investee in return for additional shares. The contribution by ParentCo dilutes Investor’s interest in Investee. In this case, Investee would account for the contribution received from ParentCo as a common control transaction. However, Investor would determine its dilution gain or loss using the fair value of the assets contributed and the additional interest issued to ParentCo. Investor would track any basis differences using its memo accounts.
5.6.3 Investee transactions with noncontrolling interest holders
An investee may have a wholly-owned subsidiary and decide to sell a noncontrolling interest in the subsidiary to third parties. Similarly, an investee may have a partially-owned subsidiary and decide to sell an additional noncontrolling interest in the subsidiary to third parties, or acquire some or all of the existing noncontrolling interest from the noncontrolling interest holders. From the investee’s perspective, these transactions are considered equity transactions and are accounted for in accordance with ASC 810, as the investee continues to have a controlling financial interest in the subsidiaries. The accounting standards do not provide guidance on how the equity method investor should account for these transactions.
If the investee sells a noncontrolling interest in its subsidiary, we believe the equity method investor may account for the transaction using one of the following methods.
- Account for the transaction as if it had sold a portion of its investment, similar to a dilution gain or loss, and record the gain or loss in its income statement. This method follows the guidance in ASC 323-10-40-1 on how an equity method investor records a dilution gain or loss for its equity method investment when the investee issues additional shares to another party. Under this method, the equity method investor has sold a portion of its investment in the investee even though its ownership percentage has not changed. This method is similar to the indirect sale approach when an investee sells shares to other investors and the equity method investor has a decrease in its ownership percentage in the investee. See EM 5.4.2.
- Account for the transaction as an equity transaction and record its portion of the investee’s equity transaction directly to its additional paid in capital. This method follows the guidance in ASC 323-10-35-15 on how an equity method investor should record its portion of an investee’s equity transaction in a similar manner.
If the investee acquires a noncontrolling interest in its subsidiary, we believe the equity method investor may account for the transaction using one of the following methods.
- Account for the transaction as if the equity method investor had acquired an additional interest in the investee similar to a step acquisition. This method follows the guidance in ASC 323-10-35-33 on how an equity method investor records a step acquisition for its equity method investment. Under this method, the equity method investor has effectively acquired an additional interest in the investee even though its ownership percentage has not changed. This method is similar to the step acquisition approach when an investee acquires shares from the other investors (treasury stock transaction) and the equity method investor has an increase in its ownership percentage in the investee. See EM 5.3.2. This method will likely result in the equity method investor having to account for new or additional basis differences in its memo accounts.
- Account for the transaction as an equity transaction and record its portion of the investee’s equity transaction directly to its additional paid in capital. This method follows the guidance in ASC 323-10-35-15 on how an equity method investor should record its portion of an investee’s equity transaction in a similar manner.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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