Search within this section
Select a section below and enter your search term, or to search all click Equity method of accounting
Favorited Content
Excerpt from ASC 970-323-35-17
Such agreements may also provide for changes in the allocations at specified times or on the occurrence of specified events. Accounting by the investors for their equity in the venture’s earnings under such agreements requires careful consideration of substance over form and consideration of underlying values as discussed in paragraph 970-323-35-10. To determine the investor’s share of venture net income or loss, such agreements or arrangements shall be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Specified profit and loss allocation ratios shall not be used to determine an investor’s equity in venture earnings if the allocation of cash distributions and liquidating distributions are determined on some other basis.
Excerpt from ASC 323-10-55-49
Common stock |
$— |
Preferred stock |
$100 |
Loan |
$100 |
20X1 |
($160) |
20X2 |
($200) |
20X3 |
$500 |
1/1/X1 |
12/31/X1 |
12/31/X2 |
12/31/X3 |
|
Assets |
$ 367 |
$ 207 |
$ 7 |
$ 507 |
Loan |
167 |
167 |
167 |
167 |
Preferred stock |
200 |
200 |
200 |
200 |
Common stock |
300 |
300 |
300 |
300 |
Accumulated deficit |
(300) |
(460) |
(660) |
(160) |
$ 367 |
$ 207 |
$ 7 |
$ 507 |
Under this approach, Investor A would recognize equity method losses based on the change in the investor’s claim on the investee’s book value.
With respect to 20X1, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X1, it would have $207 available to distribute. Investor A would receive $120 (Investor A’s 60% share of a priority claim from the loan [$100] and a priority distribution of its preferred stock investment of $20 [which is 50% of the $40 remaining to distribute after the creditors are paid]). Investor A’s claim on Investee’s book value at January 1, 20X1, was $200 (60% × $167 = $100 and 50% × $200 = $100). Therefore, during 20X1, Investor A’s claim on Investee’s book value decreased by $80 and that is the amount Investor A would recognize in 20X1 as its share of Investee’s losses. Investor A would record the following journal entry.
Equity method loss |
$80 |
|||
Preferred stock investment |
$80 |
With respect to 20X2, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X2, it would have $7 available to distribute. Investor A would receive $4 (Investor A’s 60% share of a priority claim from the loan). Investor A’s claim on Investee’s book value at December 31, 20X1, was $120 (see the preceding paragraph). Therefore, during 20X2, Investor A’s claim on Investee’s book value decreased by $116 and that is the amount Investor A would recognize in 20X2 as its share of Investee’s losses. Investor A would record the following journal entry.
Equity method loss |
$116 |
|||
Preferred stock investment |
$20 |
|||
Loan |
$96 |
With respect to 20X3, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X3, it would have $507 available to distribute. Investor A would receive $256 (Investor A’s 60% share of a priority claim from the loan [$100], Investor A’s 50% share of a priority distribution from its preferred stock investment [$100], and 40% of the remaining cash available to distribute [$140 × 40% = $56]). Investor A’s claim on Investee’s book value at December 31, 20X2, was $4 (see above). Therefore, during 20X3, Investor A’s claim on Investee’s book value increased by $252 and that is the amount Investor A would recognize in 20X3 as its share of Investee’s earnings. Investor A would record the following journal entry.
Loan |
$96 |
||||
Preferred stock |
100 |
||||
Investment in investee |
56 |
||||
Equity method income |
$252 |
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.
Select a section below and enter your search term, or to search all click Equity method of accounting