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2.4 Accounting for changes in equity interests
Publication date: 31 May 2022
us Loans & investments guide
An increase or decrease in the level of ownership of an investee’s equity interests may cause a reporting entity to change its method of accounting for securities to or from the guidance in ASC 321.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies that observable transactions that result in a company applying or discontinuing the equity method of accounting for an investment should be considered for the purposes of applying the measurement alternative. This guidance became effective for calendar year public business entities on January 1, 2021. See LI 13 for additional information on the effective date and transition requirements for ASU 2020-01. See PwC’s Equity method investments and joint ventures guide for additional information on the application of ASU 2020-01.
2.4.1 Increase in ownership in an equity interest
An increase in the level of ownership of an equity interest previously accounted for under ASC 321 may require the investor to adopt the equity method of accounting or consolidate the investee. See PwC’s Equity method investments and joint ventures guide for information on applying the equity method and PwC’s Consolidation guide for information on consolidating an investee. See FSP 10.4.3 for information on the presentation of an investment that qualifies for the equity method of accounting. In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies that observable transactions that result in a company applying or discontinuing the equity method of accounting for an investment should be considered for the purposes of applying the measurement alternative. This guidance became effective for calendar year public business entities on January 1, 2021. See LI 13 for additional information on the effective date and transition requirements for ASU 2020-01. See PwC’s Equity method investments and joint ventures guide for additional information on the application of ASU 2020-01.
2.4.2 Decrease in the level of ownership of an investee
A decrease in the level of ownership of an equity interest may require a reporting entity to deconsolidate an investee or to cease applying the equity method of accounting. The retained equity interests that are not accounted for as consolidated subsidiaries or equity method investees should apply the guidance in ASC 321. See EM 5.4.3 for information on accounting for equity interests that cease to qualify for the equity method of accounting when a reporting entity loses control of a subsidiary.
If the retained equity interests have a readily determinable fair value, they should be carried at fair value with changes in value recorded in net income. Any adjustment to the equity interest’s initial carrying amount upon the application of ASC 321 (i.e., to adjust the investment’s carrying amount to fair value) should be recognized in net income. If the retained equity interest does not have a readily determinable fair value, it may be eligible for the measurement alternative discussed in LI 2.3.2. In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies that observable transactions that result in a company applying or discontinuing the equity method of accounting for an investment should be considered for the purposes of applying the measurement alternative. This guidance became effective for calendar year public business entities on January 1, 2021. See LI 13 for additional information on the effective date and transition requirements for ASU 2020-01. See PwC’s Equity method investments and joint ventures guide for additional information on the application of ASU 2020-01.
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