FASB Proposes Changes to Equity Method Accounting

FASB Proposes Changes to Equity Method Accounting Under ASC 323

On October 28, 2026, the Financial Accounting Standards Board issued a proposed Accounting Standards Update that could change which investments qualify for equity method accounting and clarify how investors recognize earnings under complex contractual arrangements.

The proposed amendments would apply across different legal structures, including corporations, partnerships, LLCs, and joint ventures.

Three key areas of the proposal

• A single significant influence model Current GAAP generally applies different criteria to corporate and partnership investments. The proposal would establish significant influence as the common threshold for applying the equity method, regardless of the investee's legal structure.

• Revised significant influence indicators The proposal would eliminate the presumption that ownership below 20% indicates an absence of significant influence. The existing presumption for ownership of 20% or more would remain rebuttable, requiring consideration of all relevant facts and circumstances. It would also recognize equivalent governing bodies and specify that noncontrolling general partners and equivalent managing members have significant influence.

• Complex earnings allocations Existing guidance under ASC 970-323 addressing contractual allocation arrangements would be incorporated into the broader ASC 323 framework. New examples illustrate possible approaches to allocating earnings when contractual distribution waterfalls differ from ownership percentages, without prescribing a single method.

Why does this matter for CFOs and controllers?

Consider a business holding a passive 10% interest in a limited partnership or an LLC that maintains separate member capital accounts.

Under existing GAAP, a more than minor ownership interest in these entities may require the equity method even when the investor lacks significant influence over financial and operating policies.

Under the proposed framework, that investment could instead fall under ASC 321 if significant influence is absent and no other accounting guidance takes precedence.

The financial reporting consequences extend beyond classification.

Under ASC 323, investors generally recognize their share of an investee's earnings or losses and adjust the investment's carrying amount accordingly.

Under ASC 321, equity securities are generally measured at fair value, with changes recognized in earnings. Eligible investments without readily determinable fair values may qualify for the measurement alternative, which generally uses cost adjusted for impairment and observable price changes.

The proposed ASU also establishes different transition approaches depending on the subsequent measurement method.

Complex ownership arrangements present a separate accounting consideration.

Investments involving preferred returns, disproportionate distributions, or contractual profit sharing waterfalls require analysis of the investors' substantive economic rights. Simply applying an ownership percentage to reported net income may not appropriately reflect the allocation of earnings.

The practical takeaway

Accounting teams should inventory partnership and joint venture investments, review governance and distribution agreements, and document significant influence assessments. Identifying potentially affected investments now can help assess future measurement and transition requirements.

Status

Proposed ASU, not final GAAP. The FASB has not established an effective date. Comments are due January 11, 2027.

Source

Financial Accounting Standards Board, Investments, Equity Method and Joint Ventures (Topic 323): Equity Method of Accounting, Targeted Improvements, proposed October 28, 2026.

Disclaimer: This brief is provided by #GomezCPA for general informational and educational purposes only. It is not intended and should not be construed as tax, accounting, legal, investment, or financial advice.

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