This free, guided checker walks your finance team through the key decision points for ASC 323 Equity Method of Accounting. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Consolidation analysis precedes the equity method assessment. First determine whether the investee is a variable interest entity and whether the investor is its primary beneficiary; only if not does the voting interest model apply. Note that substantive participating rights held by other shareholders can preclude control even when the investor owns more than 50 percent of the voting shares.
Consolidation is required under ASC 810; the equity method in ASC 323 does not apply to a controlling financial interest.
Official guidance: FASB Accounting Standards Codification
The equity method applies only to common stock and in-substance common stock. Test in-substance common stock by comparing the instrument's subordination, its participation in the risks and rewards of ownership, and any obligation to transfer value against the investee's actual common stock (ASC 323-10-15-13), and reconsider the determination whenever the instrument's terms or the investee's capital structure change.
Instruments other than common stock or in-substance common stock are outside the scope of the equity method (ASC 323-10-15-13) and are measured under other applicable guidance.
Official guidance: FASB Accounting Standards Codification
Compute the percentage from outstanding voting shares, including shares held through subsidiaries; potential voting rights from options, warrants, and convertible securities are generally excluded until exercised or converted. The 20 percent threshold is a presumption, not a bright line - the surrounding facts and circumstances can rebut it in either direction, and the assessment requires an evaluation of all facts and circumstances (ASC 323-10-15-9).
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Official guidance: FASB Accounting Standards Codification
Limited partnership and similar interests use a much lower threshold than the 20 percent presumption for corporate stock. Under the SEC staff position in ASC 323-30-S99-1, the equity method is applied unless the interest is so minor that the limited partner has virtually no influence over partnership operating and financial policies, which practice generally interprets as 3 to 5 percent or less. An LLC that maintains a specific ownership account for each member is evaluated in the same manner as a limited partnership.
An interest so minor that the investor has virtually no influence is not accounted for under the equity method (ASC 323-30-S99-1); measure the interest under other applicable guidance.
Official guidance: FASB Accounting Standards Codification
The 20 percent presumption is overcome only by predominant evidence, which is a deliberately high bar. Evaluate the indicators in ASC 323-10-15-10 - investee opposition, standstill agreements, concentrated majority ownership, inability to obtain needed financial information, and failed attempts at board representation - individually and in the aggregate. No single indicator is necessarily conclusive, and the conclusion must be reassessed as facts change.
The presumption of significant influence is overcome by predominant evidence to the contrary (ASC 323-10-15-10); the equity method does not apply.
Official guidance: FASB Accounting Standards Codification
Below 20 percent the burden reverses: the investor must affirmatively demonstrate significant influence through indicators such as board representation, participation in policy-making processes, material intra-entity transactions, interchange of managerial personnel, or technological dependency (ASC 323-10-15-6). The size of the holding relative to the dispersion of other shareholdings also informs the assessment, and the conclusion should be revisited whenever governance arrangements change.
Without the ability to exercise significant influence, the equity method does not apply (ASC 323-10-15-8); measure the equity security under ASC 321.
Official guidance: FASB Accounting Standards Codification
Under ASC 323-10-35-19, an investor ordinarily discontinues applying the equity method when the investment, together with net advances, is reduced to zero. Before suspending loss recognition, apply the share of losses to the investor's other investments in the investee - such as loans, advances, and preferred stock - in reverse order of seniority based on their adjusted basis (ASC 323-10-35). Maintain a continuity schedule of every layer of the net investment.
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Official guidance: FASB Accounting Standards Codification
Commitments can be explicit, such as guarantees and funding agreements, or implicit, such as a consistent history of funding the investee or representations made to its lenders. If losses are recognized beyond a zero investment balance, the credit is presented as a liability, and the amounts must be tracked so that when the investee later reports net income the equity method resumes only after the investor's share of that income equals the losses not recognized during the suspension (ASC 323-10-35-20).
Continue recognizing the share of losses beyond the carrying amount because of the guarantee or commitment (ASC 323-10-35-19), presenting the excess as a liability. Suspend the equity method at a zero carrying amount and recognize no additional losses (ASC 323-10-35-19 through 35-22), tracking unrecognized losses in a memorandum account.
Official guidance: FASB Accounting Standards Codification
ASC 323-10-35-32 notes that a current fair value below the carrying amount may indicate a loss in value, though it is not conclusive by itself. Other indicators include the investee's recurring operating losses, an apparent inability to recover the carrying amount, substantial doubt about the investee's ability to continue as a going concern, and adverse industry or regulatory developments (ASC 323-10-35-31). Evaluate indicators every reporting period, not only at year end.
No impairment indicator is present; continue applying the equity method and recognizing the share of investee earnings under ASC 323-10-35-4.
Official guidance: FASB Accounting Standards Codification
A decline is not other than temporary merely because it exists, but the burden of demonstrating recoverability grows with the severity and duration of the decline. Document the specific positive and negative evidence weighed and how it was balanced. The investment is evaluated as a single unit of account: the investor does not separately test the investee's underlying assets, and equity method goodwill is not tested separately under ASC 350-20, although the investor recognizes its share of impairment charges the investee records (ASC 323-10-35-32A).
Recognize an impairment loss in earnings to write the investment down to fair value (ASC 323-10-35-31 through 35-32A). The decline is judged temporary; continue the equity method and document the positive evidence supporting recovery (ASC 323-10-35-32).
Official guidance: FASB Accounting Standards Codification
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