A Roadmap to Accounting for Equity Method Investments and ...

A Roadmap to Accounting for Equity Method Investments and Joint Ventures

2019

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Other Publications in Deloitte's Roadmap Series

Business Combinations Business Combinations -- SEC Reporting Considerations Carve-Out Transactions Consolidation -- Identifying a Controlling Financial Interest Contracts on an Entity's Own Equity Convertible Debt Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investees -- SEC Reporting Considerations Foreign Currency Transactions and Translations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows

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Acknowledgments

This Roadmap reflects the thoughts and contributions of the consolidation team in Deloitte's National Office as well as the input from the many auditors and advisers in the Deloitte network who, over the past several years, have helped develop the comprehensive views and interpretations in this publication. Rob Moynihan, John Wilde, and Andy Winters led the overall preparation of the 2019 update to this Roadmap, under the guidance of Brandon Coleman. They wish to extend their deepest appreciation to Elena Cilenti, Michael Scheper, and Bailey Walsh for their hard work in updating this publication. Special thanks also go to Teri Asarito, Lynne Campbell, Amy Davidson, Geri Driscoll, David Frangione, Peter McLaughlin, Jeanine Pagliaro, and Yvonne Rudek for their editorial and desktop publishing contributions to this update.

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Contents

Prefacexi

Contactsxii

Chapter 1 -- Overview1

Chapter 2 -- Scope and Scope Exceptions5

2.1Overview

5

2.2Investments in Partnerships, Unincorporated Joint Ventures, and LLCs

6

2.2.1Limited Liability Companies

6

2.2.1.1LLC That Does Maintain Specific Ownership Accounts

7

2.2.1.2LLC That Does Not Maintain Specific Ownership Accounts

8

2.2.2Limited Partnership Interests in Partnerships and Similar Entities

8

2.2.3General Partnership Interests in Partnerships

8

2.2.4Corporate Joint Ventures

9

2.3Scope Exceptions

9

2.3.1Investments Accounted for in Accordance With ASC 815-10

9

2.3.2Investments in Common Stock Held by a Nonbusiness Entity

10

2.3.2.1Investments Held by Real Estate Investment Trusts

10

2.3.3Investments in Common Stock Within the Scope of ASC 810

10

2.3.4Investments Held by Investment Companies Within the Scope of ASC 946

11

2.3.4.1Investor Is an Investment Company

11

2.3.4.2Investor Is Not an Investment Company

11

2.3.5Investments in Certain Securitization Entities

11

2.4Applicability of Equity Method to Other Investments

12

2.4.1Investments Held by Not-for-Profit Entities

12

2.4.2Equity Method Investments Eligible for Fair Value Option

12

2.4.2.1Availability of the Fair Value Option for Financial Instruments With a Substantive Future

Services Component

13

2.4.2.2Change From the Equity Method to Other Method of Accounting

15

2.4.3Qualified Affordable Housing Project Investments

16

2.4.3.1Before the Adoption of ASU 2014-01

16

2.4.3.2After the Adoption of ASU 2014-01

17

2.4.4Proportionate Consolidation Method

17

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Deloitte | A Roadmap to Accounting for Equity Method Investments and Joint Ventures (2019)

2.5Investments in In-Substance Common Stock

18

2.5.1Characteristics of In-Substance Common Stock

18

2.5.1.1Subordination

20

2.5.1.2Risks and Rewards of Ownership

21

2.5.1.3Obligation to Transfer Value

24

2.5.2Initial Determination and Reconsideration Events

25

Chapter 3 -- Applying the Equity Method of Accounting

27

3.1Overview

27

3.2General Presumption

27

3.2.1Corporations

30

3.2.2Limited Liability Companies

30

3.2.3Partnerships and Unincorporated Joint Ventures

30

3.2.4General Partnership Interest in Partnerships

31

3.2.5Corporate Joint Ventures

31

3.2.6Potential Voting Rights

31

3.2.7Direct and Indirect Interest in an Investee

32

3.2.7.1Earnings or Losses of an Investee's Subsidiary

34

3.3Other Indicators of Significant Influence

34

3.3.1Conditions Indicating Lack of Significant Influence

37

3.4Considerations Related to Certain Investments

38

3.4.1Investments Held by Real Estate Investment Trusts

38

3.4.2Investment in an Entity That Invests in QAHPs

39

3.5Reassessment of the Ability to Exercise Significant Influence

40

3.6SEC Staff's Views on Application of the Equity Method of Accounting

40

Chapter 4 -- Initial Measurement

41

4.1Overview

41

4.2Initial Measurement

41

4.2.1Commitments and Guarantees

43

4.3Contribution of Businesses or Assets for an Investment in an Equity Method Investee

45

4.3.1ADetermining Whether the Counterparty (Equity Method Investee) Is a Customer

47

4.3.1Contribution of a Business or Nonprofit Activity

47

4.3.2[Deleted]

47

4.3.3Contribution of Financial Assets

47

4.3.4AContribution of Nonfinancial Assets or In-Substance Nonfinancial Assets That Do

Not Constitute a Business or Nonprofit Activity

50

4.3.4Contributions of Real Estate or Intangibles

51

4.3.5Transactions Addressed by Other Guidance

52

4.4Contingent Consideration

52

4.5Basis Differences

54

4.5.1Bargain Purchase

56

4.5.2Tax Effects of Basis Differences

57

4.5.3Accumulated Other Comprehensive Income

59

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Chapter 5 -- Subsequent Measurement

60

5.1Equity Method Earnings and Losses

60

5.1.1Impact of Preferred Dividends on an Investor's Share of Earnings (Losses)

61

5.1.2Disproportionate Allocation of an Investee's Earnings or Losses in Relation to an Investor's

Ownership Interest

62

5.1.2.1Hypothetical Liquidation at Book Value Method

64

5.1.2.2Capital-Allocation-Based Arrangements

73

5.1.3Differences Between Investor and Investee Accounting Policies and Principles

75

5.1.3.1Equity Method Investee Does Not Follow U.S. GAAP

75

5.1.3.2Investee Has Elected a Private-Company Alternative

76

5.1.3.3Investee Applies Different Accounting Policies Under U.S. GAAP

78

5.1.3.4Investee Adopts a New Accounting Standard on a Different Date

78

5.1.3.5Investee Applies Investment Company Accounting

80

5.1.4Accounting for an Investor's Share of Earnings on a Time Lag

81

5.1.5Adjustments to Equity Method Earnings and Losses

83

5.1.5.1Intra-Entity Profits and Losses

83

5.1.5.2Amortization or Accretion of Basis Differences

90

5.1.5.3Investee Capital Transactions

92

5.1.5.4Other Comprehensive Income

95

5.1.6Dividends Received From an Investee

96

5.1.7Interests Held by an Investee

99

5.1.7.1Reciprocal Interests

99

5.1.7.2Earnings or Losses of an Investee's Subsidiary

101

5.1.8Contingent Consideration

102

5.2Equity Method Losses That Exceed the Investor's Equity Method Investment Carrying Amount

103

5.2.1Guarantee of an Equity Method Investee's Third-Party Debt

107

5.2.2Collateral of the Investee Held by the Investor When Equity Losses Exceed the

Investor's Investment

107

5.2.3Investee Losses If the Investor Has Other Investments in the Investee

108

5.2.3.1Percentage Used to Determine the Amount of Equity Method Losses

113

5.2.4Additional Investment After Suspension of Loss Recognition

117

5.3Stock-Based Compensation Granted by an Investor to Employees of an Equity Method Investee 118

5.3.1Accounting in the Financial Statements of the Contributing Investor Issuing the Awards

121

5.3.2Accounting in the Financial Statements of the Investee Receiving the Awards

121

5.3.3Accounting in the Financial Statements of the Noncontributing Investors

121

5.3.4Stock-Based Compensation Granted by an Investor to Employees of an Equity Method

Investee When the Investee Reimburses the Contributing Investor

129

5.4Costs Incurred on Behalf of an Investee

129

5.4.1Accounting for Costs Incurred on Behalf of an Investee in the Financial Statements

of the Investor

129

5.4.2Accounting for Costs Incurred on Behalf of an Investee in the Financial Statements

of the Investee

131

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Deloitte | A Roadmap to Accounting for Equity Method Investments and Joint Ventures (2019)

5.5Decrease in Investment Value and Impairment

131

5.5.1Identifying Impairments

132

5.5.2Measuring Impairment

134

5.5.2.1Consideration of Basis Differences After Recognizing an Impairment

135

5.5.2.2Consideration of Cumulative Translation Adjustment in an Impairment Analysis

137

5.5.2.3Consideration of Nonrecourse Debt

138

5.5.3Impairment of Investee Goodwill

138

5.5.4Events During a Lag Period -- Impact on Impairment Evaluation

138

5.5.5Qualified Affordable Housing Project Investments

139

5.6Change in Level of Ownership or Degree of Influence

140

5.6.1Increase in Level of Ownership or Degree of Influence -- Control Initially Obtained

(Equity Method to Consolidation)

141

5.6.2Increase in Level of Ownership or Degree of Influence -- Significant Influence Initially

Obtained (ASC 321 to Equity Method)

141

5.6.2.1Investee Bankruptcy

143

5.6.3Increase in Level of Ownership or Degree of Influence -- Significant Influence Retained

143

5.6.4Decrease in Level of Ownership or Degree of Influence -- Significant Influence Retained

144

5.6.5Decrease in Level of Ownership or Degree of Influence -- Significant Influence Lost

(Equity Method to ASC 321)

146

5.6.5.1OCI Upon Discontinuation of the Equity Method of Accounting

149

5.7Real Estate Investments151

5.7.1Sale of an Investment in a Real Estate Venture

151

5.8Interest Costs

151

5.8.1Capitalization of Interest Costs

151

5.8.2Interest on In-Substance Capital Contributions

154

Chapter 6 -- Presentation and Disclosure

6.1Overview 6.2Presentation

6.2.1Balance Sheet 6.2.1.1SEC Registrants 6.2.1.2Other Entities

6.2.2Income Statement 6.2.2.1Tax Effects 6.2.2.2Disposal Transactions

6.2.3Other Comprehensive Income 6.2.4Cash Flows 6.2.5Earnings per Share 6.3Disclosures 6.3.1Equity Method Investment Disclosures

6.3.1.1Other Disclosure Considerations 6.3.2Related-Party Disclosure Requirements 6.3.3Nonmonetary Transaction Disclosure Requirements 6.3.4Discontinued Operation Disclosure Requirements

155

155 155 155 156 156 156 158 158 159 160 161 162 162 166 167 167 168

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