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In March 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,

The update 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.

When one entity (investor) owns 20 percent or more of the voting stock of another entity (investee) it is deemed to have the ability to exercise significant influence over an investee. Once this threshold is met, the investor is required to utilize the equity method, in which the value of the investment increases and decreases based on the investors proportionate share of the investee's income or loss.

Previously, when an investment qualified for use of the equity method as a result of an increase in ownership, an investor was required to adjust the investment, results of operations, and retained earnings retroactively, as if the equity method had been in effect during all previous periods that the investment had been held. This proved for many entities to be a costly and time consuming undertaking.

The standard update 2016-07, which was issued as part of the FASB's simplification initiative, eliminates the requirement to adjust the investment, results of earnings, and retained earnings retroactively. Instead, the investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the previously held interest and adopt the equity method as of the date the additional interest is acquired. Any of the investment's previously unrealized holding gain or loss - which, prior to adoption of the equity method, is recorded in accumulated other comprehensive income - is then recognized through earnings on the investor's income statement in the period in which the investment becomes qualified for use of the equity method.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after Dec.15, 2016. Earlier application is permitted.

For more information or questions on this topic, please contact your local UHY LLP professional, or visit us on the web at

By John Anderegg, CPA