Interaction between Codification topics clarified

FASB issues ASU on accounting for equity securities, certain contracts on equity securities, equity method investments

In this New Developments Summary, we explore new guidance from the FASB intended to clarify accounting for equity securities, equity method investments and certain contracts on equity securities.

Under ASC 321, Investments – Equity Securities, certain equity securities without a readily determinable fair value are eligible for a measurement alternative whereby the securities are carried at cost, less impairment, and marked to fair value upon observable price changes in identical or similar investment from the same issuer. The FASB’s ASU 2020-01 clarifies how the guidance for equity method accounting in ASC 323 and non-derivative forward contracts and purchase options in ASC 815 interacts with the measurement alternative in ASC 321.

The new ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under ASC 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in ASC 321 immediately before applying or upon discontinuing the equity method.

The new guidance is effective in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 for public business entities and in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 for all other entities. Early adoption is permitted, including adoption in an interim period, for public business entities in periods for which the financial statements have not yet been issued and for all other entities in periods for which the financial statements have not yet been made available for issuance.

Download our review of this FASB guidance here.