NAREIT Alert (March 22, 2016)

March 22, 2016

FASB Simplifies Transition to the Equity Method of Accounting

On March 15, the Financial Accounting Standards Board (FASB or Board) issued an Accounting Standards Update on Simplifying the Transition to the Equity Method of Accounting (the ASU). Consistent with NAREIT’s recommendation in its comment letter, the Board reaffirmed a previous decision to eliminate the retrospective application of the equity method of accounting for all previous periods presented when the investor obtains significant influence over the investee (e.g., increases its percentage ownership) and thus is required to begin reporting under the equity method of accounting. This change in U.S. GAAP will simplify the accounting when transitioning to the equity method. Additionally, the ASU provides specific guidance for available-for-sale equity securities that become eligible for the equity method of accounting. When this occurs, the guidance requires that any unrealized holding gains or losses in accumulated other comprehensive income be recognized in net income at the date the investment qualifies for the equity method.

Transition and Effective Date

The ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The FASB will permit early adoption of the ASU. No additional disclosures are required at transition.

Contact

For more information, contact George Yungmann, Senior Vice President Financial Standards at gyungmann@nareit.com, or Christopher Drula, Vice President Financial Standards at cdrula@nareit.com.