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A reporting entity will initially measure and recognize its equity method investment using a cost accumulation model, following the asset acquisition guidance in ASC 805‑50‑30. The investment should be presented on the investor’s balance sheet as a single amount, as described in FSP 10.3.
The investor’s cost of the investment will generally differ from the investor’s proportionate share of the net assets of the investee. More specifically, the investor’s initial carrying amount will reflect its cost to acquire the investment, while the investee continues to carry the underlying assets and liabilities based on its historical application of GAAP. Therefore, to properly account for its investment, an investor will need to determine and track the difference between its own carrying amount in the underlying assets and liabilities, and those of the investee, commonly referred to as basis differences.
An investor’s previously held ownership percentage in an investee may change. Alternatively, an investor may be required to apply the equity method to a previously owned investment even when its percentage ownership interest does not change, such as when it gains significant influence. See EM 5 for a discussion of how to apply the equity method when an investor had a prior interest in the investee.
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