An investor may receive cash distributions in excess of the carrying amount of its investment. We believe that an investor should account for cash distributions received in excess of its investment in an investee as a gain when (a) the distributions are not refundable by agreement or by law and (b) the investor is not liable for investee obligations and is not committed or expected to provide financial support. Otherwise, the investor should account for the excess distribution as a liability. Whether an investor has a non-legal commitment to provide financial support to an investee depends on the facts and circumstances surrounding an investor's relationship with the investee and other investors. The considerations in assessing whether a non-legal obligation exists are similar to those set forth in EM 4.5.
If a general partner has an equity method investment in a limited partnership and receives cash distributions in excess of its investment balance, the excess distributions are recorded as a reduction of its partnership interest, even if it results in a negative net investment (liability). This treatment, consistent with ASC 970-323, is due to the general partner's ongoing obligation to support the partnership. Alternatively, for a limited partner investor, gain recognition may be appropriate if it does not have an obligation (by agreement or law) or intent to fund future cash flow requirements of the partnership.
If an investor records an excess distribution from an equity method investee as income, the investor should generally not record its share of any subsequent investee income until it equals the gain recorded. This approach is similar to the method applied for the recovery of unrecorded excess losses by the investor in ASC 323-10-35-22. If an investor records an excess distribution from an equity method investee as a liability (negative investment), the investor should record its portion of any subsequent investee income as equity method income.
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