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The financial statements of an investee may not be available for the investor to apply the equity method as of the current reporting date. For example, the investor and investee may both have a reporting period ending on March 31, but the investor might not receive the investee’s financial statements for several months. The investor can make an accounting policy election to record its share of the earnings or losses of the investee using a lag period of one to three months. The lag should be applied consistently from period to period.
The decision to record an investee’s results on a lag can be made on an investment-by-investment basis. Therefore, each investment should be assessed separately to determine if a lag in investee reporting is necessary.
While ASC 323 does not specify a limit on the extent of the lag period, the provisions relating to consolidation of subsidiaries with different fiscal year ends than its parent entities offer a reasonable guideline (i.e., three months).

ASC 810-10-45-12

It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.

When results of the investee are reported on a lag, the investee results should be for the same length of time as what is included in the investor’s financial statements. For example, for an investor’s annual financial statements, the investee’s results for 12 months should be included, although the results are for a different 12 months than those of the investor’s standalone results. Including the investee’s results for a period greater or less than 12 months in the investor’s annual financial statements is generally not appropriate. A time lag in reporting should be consistent from period to period. See EM 4.4.1 for information regarding the investor’s accounting for a new investment that is reported on a lag.
The investor should consider the effect of any known events occurring during the lag period that materially affect the financial position or results of operations of the investee if those events are also material to the financial position or results of operations of the investor.
An investor may elect to either (1) disclose or (2) disclose and record adjustments for material events occurring during the intervening period. This policy should be applied on a consistent basis from one period to the next. Often reporting entities choose disclosure only for material intervening events as it may be challenging to determine a threshold for when to adjust for intervening events. The investor would also need to track adjustments to ensure it does not record its share of intervening events in subsequent periods.

4.4.1 Initial lag period

An investor may elect to include the investee’s results on a lag for an investment in an investee for which it will apply the equity method for the first time. The investor would include its share of the investee earnings from the date of acquisition through the end of the date selected for lag reporting in the investor’s first reporting period. Example EM 4-5 illustrates an investor’s accounting for the acquisition of an equity method investment that is reported with a lag period.
EXAMPLE EM 4-5
Acquisition of equity method investment reported with a lag
Investor, a public company with a calendar year end, acquires an equity method investment in Investee on December 1, 20X1, which will be accounted for on a two-month lag.
How should Investor record its share of Investee’s earnings for 20X1 and 20X2?
Analysis
In its annual 20X1 financial statements, Investor would record the acquisition of its interest in Investee at cost. However, Investor would not record any share of Investee earnings despite having owned the investment for the month of December.
In its first quarter 20X2 financial statements, Investor would include its share of Investee earnings for December 20X1 and January 20X2. Investor’s share of Investee earnings for the year ended 20X2 would include 11 months (December 1, 20X1 to October 31, 20X2).

4.4.2 Sale of interest when reporting on a lag

When an investor disposes of all or a portion of its investment in an investee that it reported on a lag, it should generally reflect its share of the investee earnings in net income only up to the end of the date selected for lag reporting. An investor would usually record its gain or loss on sale of the investment when it is sold, and would not record the disposal on a lag.
Example EM 4-6 illustrates the sale of an interest in an investee after the lag period.
EXAMPLE EM 4-6
Sale of interest in an investee after the lag period
Investor, a public company with a calendar year end, has an equity method investment in Investee, which it accounts for on a three-month lag. Investor sells its equity investment in Investee on July 1, 20X2.
How should Investor record its share of Investee’s earnings through the date of sale?
Analysis
In its first and second quarter 20X2 financial statements, Investor would record its share of Investee’s earnings for the three months ended December 31, 20X1 and March 31, 20X2, respectively. In the third quarter, Investor would record its share of Investee’s earnings for the three-months ended June 30, 20X2. Investor would also recognize the gain or loss in earnings on the sale of Investee in its third quarter 20X2 financial statements.

In Example EM 4-6, the investor sold its investment in the investee at the commencement of a lag period (i.e., July 1, 20X2). In this instance, the investor did not have to address how to record the investee’s earnings from the end of the previous quarter’s lag period (i.e., June 30, 20X2) through the date of the sale. However, in most cases, an investor does not sell its investment at the commencement of the lag period. An investor should consider how to record its share of the investee’s earnings through the sale date in order to not record earnings for a period greater than the investor’s reporting period. Example EM 4-7 illustrates an acceptable view as to how the investor would record the sale of an interest in an investee during the lag period.
EXAMPLE EM 4-7
Sale of interest in an investee during a lag period
Investor, a public company with a calendar year end, has an equity method investment in Investee, which it accounts for on a three-month lag. Investor sells its equity investment in Investee on September 30, 20X2.
How should Investor record its share of Investee’s earnings through the date of sale?
Analysis
In the absence of a sale, Investor would record its share of Investee’s earnings for the three months ended June 30, 20X2 in the third quarter ended September 30, 20X2 because of the lag in recording its share of Investee’s earnings. However, recording a gain determined using Investor’s June 30, 20X2 investment balance would effectively result in also recording Investee earnings for the three-months ended September 30, 20X2 (i.e., the sales proceeds, based on the September 30, 20X2 fair values, would have considered Investee’s earnings for the three-months ended September 30, 20X2). Recording earnings for the three-months ended June 30, 20X2 under Investor’s lag reporting as well as effectively recording Investee earnings for the three-months ended September 30, 20X2 through the gain on sale would inappropriately result in a total of six months of Investee earnings recognized in Investor’s third quarter financial statements.
In order to only record three-months of earnings in the third quarter, Investor could analogize to the accounting for the elimination of a lag period when the earliest period presented would be adjusted. For example, in this case, Investor would record Investee’s earnings for the three-months ended June 30, 20X2 as an adjustment to beginning retained earnings. See EM 4.4.3 for further information on the accounting for changes to a lag in investee reporting.

4.4.3 Change to lag in investee reporting

The change or elimination of a lag between investor and investee reporting periods is considered a change in accounting principle. The investor is required to demonstrate preferability before making the change. In addition, public companies are required to obtain a preferability letter from the investor’s independent auditor when the change is material. See FSP 30.4 for a discussion of changes in accounting principles.

ASC 810-10-45-13

A parent or an investor should report a change to (or the elimination of) a previously existing difference between the parent’s reporting period and the reporting period of a consolidated entity or between the reporting period of an investor and the reporting period of an equity method investee in the parent’s or investor’s consolidated financial statements as a change in accounting principle in accordance with the provisions of Topic 250. While that Topic generally requires voluntary changes in accounting principles to be reported retrospectively, retrospective application is not required if it is impracticable to apply the effects of the change pursuant to paragraphs 250-10-45-9 through 45-10. The change or elimination of a lag period represents a change in accounting principle as defined in Topic 250. The scope of this paragraph applies to all entities that change (or eliminate) a previously existing difference between the reporting periods of a parent and a consolidated entity or an investor and an equity method investee. That change may include a change in or the elimination of the previously existing difference (lag period) due to the parent’s or investor’s ability to obtain financial results from a reporting period that is more consistent with, or the same as, that of the parent or investor. This paragraph does not apply in situations in which a parent entity or an investor changes its fiscal year-end.

Generally, retrospective application is required under ASC 250 unless impracticable to apply the effects of the change. Therefore, for the elimination of a lag period, an investor should adjust its financial statements for all periods presented as if the reporting lag never existed. For example, assume Investor, a calendar year end public company, eliminated the existing three-month reporting lag in the fourth quarter 20X1. Investor would adjust its 20X1 financial statements to reflect its share of investee’s earnings for the twelve months ended December 31, 20X1. Investor would reverse its share of Investee’s earnings for the three months ended December 31, 20X0, which, absent the elimination of the lag, would have been recognized in its 20X1 financial statements. Such amounts would be recorded as a direct adjustment to the current period opening retained earnings balance as if recognized in the prior period.
In practice, it is difficult to justify the preferability of a change that creates (or lengthens) a lag period. The inability to obtain timely information when historically able to do so is unusual, and is generally not on its own a sufficient reason for introducing a lag in reporting. Further, the inability to obtain timely financial information may indicate that the investor does not have the ability to exert significant influence over an investee and the applicability of the equity method of accounting should be reevaluated (see EM 2 for a further discussion).

4.4.4 Availability of public information

If an investee is a public entity, certain laws may preclude an investor from disclosing information about a public investee that is not already publicly available. This can occur when the investee’s financial statements are not due to be filed until after the investor’s financial statements. As a result, the investor may elect to report its investment in the investee on a lag, provided such lag does not exceed three months.
Similarly, even when an investor elects the fair value option for an investment in a public company that would otherwise qualify for the equity method, it may be difficult to provide the required equity method disclosures for that investee. Even though fair value is determined at the end of the current reporting period, it may be appropriate to provide the disclosures based on the most recent publicly available financial statements, as long as the lag does not exceed three months.
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