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12.8 Equity method
Publication date: 30 Jun 2023
us IFRS & US GAAP guide
Differences exist between US GAAP and IFRS Accounting Standards in the accounting for equity method investments.
12.8.1 Equity method—significant influence
Under US GAAP and IFRS Accounting Standards, an investor should generally apply the equity method of accounting when the investor does not control the investee but has the ability to exercise significant influence. However, there is specific guidance under US GAAP related to limited partnerships and LLCs that does not exist under IFRS Accounting Standards. In addition, the equity method under US GAAP only applies to investments in common stock or in-substance common stock. IFRS Accounting Standards does not have this limitation.
US GAAP |
IFRS Accounting Standards |
Significant influence is presumed to exist for investments of 20% or more in common stock or in-substance common stock of a corporation. However, an ownership interest greater than 3-5% in limited partnerships (in accordance with ASC 323-30-S99-1), unincorporated joint ventures, and limited liability companies (LLCs) is presumed to provide an investor with significant influence. |
Significant influence is presumed to exist for investments of 20% or more of the voting rights of another entity. There is no specific guidance on assessing significant influence in limited partnerships, LLCs, or similar entities. |
12.8.2 Equity method—potential voting rights
The consideration of potential voting rights might lead to differences in concluding whether an investor has significant influence.
US GAAP |
IFRS Accounting Standards |
Potential voting rights are generally not considered in the assessment of whether an investor has significant influence. |
Potential voting rights that are currently exercisable or currently convertible are considered in determining whether the investor exerts significant influence over the investee. Potential voting rights are generally not, however, considered in the measurement of the equity earnings recorded by the investor. |
12.8.3 Equity method—investments other than common equity
US GAAP is more restrictive than IFRS Accounting Standards regarding the types of investments that are subject to the scope of the equity method guidance (i.e., under US GAAP, the guidance only applies if there is at least some amount of investment in common stock or in-substance common stock).
US GAAP |
IFRS Accounting Standards |
The equity method is used to account for investments in common stock or other eligible investments by recognizing the investor’s share of the economic resources underlying those investments. Investments within the scope of the equity method include investments in common stock and/or in-substance common stock (i.e., an investor may hold stock or other instruments that have risk and reward characteristics that are substantially similar to common stock, such as an LP interest), although all types of investments in the investee would be included when considering whether the investor has the ability to exert significant influence over the investee. Additionally, once subject to the equity method, losses can continue to be recognized against the basis of these other securities. If an investor does not hold any investments in common stock or in-substance common stock of an investee, it would be precluded from applying the equity method.
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Significant influence is presumed to exist for investments of 20% or more of the voting rights of another entity. There is no specific guidance on whether the equity method is applied to instruments that have risk and reward characteristics that are substantially similar to common stock. |
12.8.4 Equity method—reporting periods
In the event the investor and investee do not have uniform reporting periods, the treatment of significant transactions in any gap period varies under the two frameworks, with a potential for earlier recognition under IFRS Accounting Standards.
US GAAP |
IFRS Accounting Standards |
The financial statements of the investor and equity method investee should have the same reporting period. However, when this is impracticable, the investee’s accounts may be reported as of a different date, provided the difference between the reporting dates is no more than three months.
The effects of intervening events that would materially affect the investor’s financial statements are recognized through disclosure or adjustment based on the investor’s policy (see EM 4.4).
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The financial statements of the investor and the equity method investee should have the same reporting period. However, when this is impracticable, the investee’s accounts may be reported as of a different date, provided the difference between the reporting dates is no more than three months.
Adjustments are made to the financial statements for significant transactions that occur in the gap period.
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12.8.5 Equity method—exemptions and FVO election
The exemptions from applying the equity method differ between IFRS Accounting Standards and US GAAP. Exemptions from applying the equity method of accounting are available to a broader group of entities under US GAAP. Additionally, more entities may elect the fair value option (FVO) for equity method investments under US GAAP.
US GAAP |
IFRS Accounting Standards |
The equity method of accounting does not apply to certain investments as detailed in ASC 323, including the following:
Equity method investments are considered financial assets and therefore are eligible for the fair value option (see EM 1.4.5). If this option is elected, an entity measures its investment in associates or joint ventures at fair value through profit or loss, regardless of whether it is a venture capital or similar organization.
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An entity does not need to apply the equity method to its investment in an associate or a joint venture if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in IFRS 10.4(a) or if all the following conditions apply (IAS 28.17):
An entity can only elect fair value through profit or loss accounting for equity method investments held by venture capital organizations, mutual funds, unit trusts, and similar entities, including investment-linked insurance funds. If an associate or joint venture is an investment entity, the equity method of accounting is applied by either (1) recording the results of the investment entity that are at fair value or (2) undoing the fair value measurements of the investment entity. In other instances, an entity must apply the equity method to its investments in associates and joint ventures unless it is exempt from preparing consolidated financial statements.
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12.8.6 Equity method—classification as held for sale
Application of the equity method of accounting may cease before significant influence is lost under IFRS Accounting Standards but not under US GAAP if an equity method investment meets the held for sale criteria.
US GAAP |
IFRS Accounting Standards |
Under US GAAP, if an equity method investment is classified as held for sale, an investor applies equity method accounting until significant influence is lost. That is, in accordance with ASC 360-10-15-5(d), equity method investments are not within the scope of the held-for-sale guidance in ASC 360. |
If an equity method investment meets the held for sale criteria in accordance with IFRS 5, an investor records the investment at the lower of its (1) fair value less costs to sell or (2) carrying amount as of the date the investment is classified as held for sale. |
An equity method investment can be classified as held for sale in accordance with ASC 205-20-45-1E only if it meets the definition of a discontinued operation. |
Equity method investments are included in the scope of IFRS 5, which includes criteria for held for sale classification and discontinued operations. Under IFRS 5, it is possible for an equity method investment to be classified as held for sale even if the discontinued operations criteria are not met. |
12.8.7 Equity method—acquisition date excess of investor’s share
IFRS Accounting Standards requires day one gain recognition of an investor’s share of the fair value of an associates’ net identifiable assets and liabilities over the cost of its investment (whereas US GAAP would not).
US GAAP |
IFRS Accounting Standards |
Any acquisition date excess of the investor’s share of the net fair value of the associate’s identifiable assets and liabilities over the cost of the investment is included in the basis differences and is amortized—if appropriate—over the underlying asset’s useful life. If amortization is not appropriate, the difference is included in the gain/loss upon ultimate disposition of the investment. |
Any acquisition date excess of the investor’s share of net fair value of the associates’ identifiable assets and liabilities over the cost of the investment is recognized as income in the period in which the investment is acquired. |
12.8.8 Equity method—conforming accounting policies
A greater degree of accounting policy conformity is required for equity method investments under IFRS Accounting Standards.
US GAAP |
IFRS Accounting Standards |
The equity investee’s accounting policies do not have to conform to the investor’s accounting policies if the investee follows an acceptable alternative US GAAP treatment. Further, if an investee uses industry-specific accounting principles when preparing its own financial statements, the investor is required to retain the industry-specific accounting principles in its application of the equity method (ASC 323-10-25-7). |
An investor’s financial statements are prepared using uniform accounting policies for similar transactions and events. This also applies to equity method investees. |
12.8.9 Equity method—impairment
Differences exist in the impairment models for equity method investments under US GAAP and IFRS Accounting Standards, including the fact that impairments potentially may be reversed under IFRS Accounting Standards.
US GAAP |
IFRS Accounting Standards |
An investor should determine whether a loss in the fair value of an investment below its carrying value is a temporary decline. If it is other than temporary, the investor calculates an impairment as the excess of the investment’s carrying amount over the fair value.
Reversals of impairments on equity method investments are prohibited.
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An investor should assess whether objective indicators of impairment exist based on the “loss event” criteria in IAS 28. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is considered objective evidence of impairment. If there are objective indicators that the investment may be impaired, the investment is tested for impairment in accordance with IAS 36.
Impairments of equity method investments can be reversed in accordance with IAS 36.
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12.8.10 Equity method—losses in excess of an investor’s interest
Equity method losses in excess of an investor’s interest may be recognized earlier under US GAAP.
US GAAP |
IFRS Accounting Standards |
Even without a legal or constructive obligation to fund losses, a loss in excess of the investment amount (i.e., a negative or liability investment balance) should be recognized when the imminent return to profitable operations by an investee appears to be assured.
US GAAP does not contain detailed guidance on how to record profits or losses under the equity method when an investor also has other investments in the investee that are not subject to the equity method of accounting.
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Unless an entity has incurred a legal or constructive obligation, losses in excess of the investment are not recognized (IAS 28.39). The concept of an imminent return to profitable operations does not exist under IFRS Accounting Standards.
IFRS Accounting Standards contain detailed guidance on how to record profits or losses under the equity method when an investor also has other investments in the investee that are not subject to the equity method of accounting (e.g., debt or preferred shares) (IAS 28.38). Therefore, differences could arise.
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12.8.11 Equity method—loss of significant influence/joint control
When an investor discontinues applying the equity method due to the loss of significant influence, the retained interest is generally accounted for by the investor at fair value. Under US GAAP, the investment is subsequently measured at fair value unless the measurement alternative practical expedient is elected. No such measurement alternative exists under IFRS Accounting Standards.
US GAAP |
IFRS Accounting Standards |
If an investment no longer qualifies for equity method accounting (for example, due to a decrease in the level of ownership), the investment’s initial basis is the previous carrying amount of the investment.
Under ASC 321, an initial gain or loss is generally recorded to recognize the investment at fair value and the investment is subsequently measured at fair value with gains or losses recorded to earnings. If the investment does not have a readily determinable fair value, a practical expedient can be elected to measure it at cost minus impairment, adjusted for changes for observable transactions (measurement alternative). Under this expedient, if the investor identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer that results in it discontinuing the equity method, the entity remeasures its retained investment at fair value immediately after discontinuing the equity method.
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If an entity loses significant influence or joint control over an equity method investment and the retained interest is a financial asset, the entity should measure the retained interest at fair value. The resulting gain or loss is recognized in the income statement. There is no measurement alternative for such an investment under IFRS Accounting Standards (see SD 7.7).
In contrast, if an investment in an associate becomes an investment in a joint venture, or vice versa, such that the equity method of accounting continues to apply, no gain or loss is recognized in the income statement.
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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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