An accounting standards update issued by the Financial Accounting Standards Board (FASB) has simplified the process for companies to change to the equity method of accounting.

The FASB, responsible for setting accounting standards for corporates in the US, issued the update as part of its Simplification Initiative, which aims to reduce cost and complexity by identifying, evaluating and improving areas of generally accepted accounting principles (GAAP).

FASB ditches 'costly and complex' requirement

In its introduction to the update, the FASB said that stakeholders felt the requirement to retroactively adopt the equity method of accounting is “costly and time consuming”, with “no clear benefit to users of financial statements”.

The FASB has therefore eliminated the requirement to retroactively adopt the equity method of accounting. The updated standard affects “all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence”.

No retroactive adjustment required

The current accounting standard requires that when an investment qualifies for use of the equity method (as a result of an increase in the level of ownership interest or degree of influence), an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.

The FASB statement read: “The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.”

The measure will be effective for all fiscal accounting periods that begin after 15 December 2016.