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Proposal to be issued to clarify technical rule related to common stock investments

Companies will get a 30-day period to comment on a narrow Financial Accounting Standards Board (FASB) proposal that aims to remove confusion related to common stock transactions that cause an investor to obtain or lose significant influence in a company.

The FASB on June 26, 2019, voted to issue a proposal that tackles the subsequent accounting for an investment that results in an investor either applying or discontinuing the equity method of accounting.

The topic deals with the interaction of Topic 323, Investments-Equity Method and Joint Ventures, with Topic 321, Investments-Equity Securities, when a measurement alternative under subtopic 321-10-35-2 has been elected.

The board unanimously agreed—without redeliberations—to propose the Emerging Issues Task Force’s (EITF) June 13 consensus that “an entity should consider observable transactions that require the investor to either apply or discontinue the equity method of accounting for the purposes of the applying the measurement alternative under Topic 321, immediately before applying or upon discontinuing the equity method under Topic 323.”

The proposal would require relevant equity securities to be measured at fair value when there is an observable transaction that results in an investor applying or discontinuing the equity method, according to a FASB handout.

The clarification would provide investors with better information in financial reports by taking the most recent transaction into account.

The FASB also unanimously affirmed the EITF’s decision that forward contracts and purchased options on equity securities (except those deemed to be in-substance common stock or accounted for as derivatives) are within the scope of Topic 321.

If finalized, the proposal would be applied prospectively, the FASB said. Companies would disclose, in the period of adoption, the nature of and reasons for the change in accounting principle. They would also disclose the transition method and describe the financial statement line items affected by the change.

On an issue that the EITF was unable to reach a consensus on related to how a company would recognize its losses when an investor has other equity investments in it, the FASB agreed with its task force that staff accountants should do more research on the matter to determine whether it is pervasive.

FASB Vice Chairman James Kroeker said if staff research revealed that the board should add a project to its agenda on the topic, the matter should be addressed more broadly. “Why are we allocating equity method losses beyond the actual investment?” Kroeker said.

“We have accounting guidance that deals with valuations for each of those other classes of securities,” he said, “so I think the application of that is a recording of losses beyond the impairment of the individual security so if it were a project I wouldn’t do it narrowly.”

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