A Roadmap to Accounting for Equity Method Investments and Joint Ventures 2019 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. 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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 Complimentary printed copies of Deloitte Roadmaps can be ordered (or preordered) from Deloitte’s Roadmap Store. iii 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. iv Contents Preface xi Contacts xii Chapter 1 — Overview 1 Chapter 2 — Scope and Scope Exceptions 5 2.1 Overview 5 2.2 Investments in Partnerships, Unincorporated Joint Ventures, and LLCs 6 2.2.1 Limited Liability Companies 6 2.2.1.1 LLC That Does Maintain Specific Ownership Accounts 7 2.2.1.2 LLC That Does Not Maintain Specific Ownership Accounts 8 2.2.2 Limited Partnership Interests in Partnerships and Similar Entities 8 2.2.3 General Partnership Interests in Partnerships 8 2.2.4 Corporate Joint Ventures 9 2.3 Scope Exceptions 9 2.3.1 Investments Accounted for in Accordance With ASC 815-10 9 2.3.2 Investments in Common Stock Held by a Nonbusiness Entity 10 2.3.2.1 Investments Held by Real Estate Investment Trusts 10 2.3.3 Investments in Common Stock Within the Scope of ASC 810 10 2.3.4 Investments Held by Investment Companies Within the Scope of ASC 946 11 2.3.4.1 Investor Is an Investment Company 11 2.3.4.2 Investor Is Not an Investment Company 11 2.3.5 Investments in Certain Securitization Entities 11 2.4 Applicability of Equity Method to Other Investments 12 2.4.1 Investments Held by Not-for-Profit Entities 12 2.4.2 Equity Method Investments Eligible for Fair Value Option 12 2.4.2.1 Availability of the Fair Value Option for Financial Instruments With a Substantive Future Services Component 13 2.4.2.2 Change From the Equity Method to Other Method of Accounting 15 2.4.3 Qualified Affordable Housing Project Investments 16 2.4.3.1 Before the Adoption of ASU 2014-01 16 2.4.3.2 After the Adoption of ASU 2014-01 17 2.4.4 Proportionate Consolidation Method 17 v Deloitte | A Roadmap to Accounting for Equity Method Investments and Joint Ventures (2019) 2.5 Investments in In-Substance Common Stock 18 2.5.1 Characteristics of In-Substance Common Stock 18 2.5.1.1 Subordination 20 2.5.1.2 Risks and Rewards of Ownership 21 2.5.1.3 Obligation to Transfer Value 24 2.5.2 Initial Determination and Reconsideration Events 25 Chapter 3 — Applying the Equity Method of Accounting 27 3.1 Overview 27 3.2 General Presumption 27 3.2.1 Corporations 30 3.2.2 Limited Liability Companies 30 3.2.3 Partnerships and Unincorporated Joint Ventures 30 3.2.4 General Partnership Interest in Partnerships 31 3.2.5 Corporate Joint Ventures 31 3.2.6 Potential Voting Rights 31 3.2.7 Direct and Indirect Interest in an Investee 32 3.2.7.1 Earnings or Losses of an Investee’s Subsidiary 34 3.3 Other Indicators of Significant Influence 34 3.3.1 Conditions Indicating Lack of Significant Influence 37 3.4 Considerations Related to Certain Investments 38 3.4.1 Investments Held by Real Estate Investment Trusts 38 3.4.2 Investment in an Entity That Invests in QAHPs 39 3.5 Reassessment of the Ability to Exercise Significant Influence 40 3.6 SEC Staff’s Views on Application of the Equity Method of Accounting 40 Chapter 4 — Initial Measurement 41 4.1 Overview 41 4.2 Initial Measurement 41 4.2.1 Commitments and Guarantees 43 4.3 Contribution of Businesses or Assets for an Investment in an Equity Method Investee 45 4.3.1A Determining Whether the Counterparty (Equity Method Investee) Is a Customer 47 4.3.1 Contribution of a Business or Nonprofit Activity 47 4.3.2 [Deleted] 47 4.3.3 Contribution of Financial Assets 47 4.3.4A Contribution of Nonfinancial Assets or In-Substance Nonfinancial Assets That Do Not Constitute a Business or Nonprofit Activity 50 4.3.4 Contributions of Real Estate or Intangibles 51 4.3.5 Transactions Addressed by Other Guidance 52 4.4 Contingent Consideration 52 4.5 Basis Differences 54 4.5.1 Bargain Purchase 56 4.5.2 Tax Effects of Basis Differences 57 4.5.3 Accumulated Other Comprehensive Income 59 vi Contents Chapter 5 — Subsequent Measurement 60 5.1 Equity Method Earnings and Losses 60 5.1.1 Impact of Preferred Dividends on an Investor’s Share of Earnings (Losses) 61 5.1.2 Disproportionate Allocation of an Investee’s Earnings or Losses in Relation to an Investor’s Ownership Interest 62 5.1.2.1 Hypothetical Liquidation at Book Value Method 64 5.1.2.2 Capital-Allocation-Based Arrangements 73 5.1.3 Differences Between Investor and Investee Accounting Policies and Principles 75 5.1.3.1 Equity Method Investee Does Not Follow U.S. GAAP 75 5.1.3.2 Investee Has Elected a Private-Company Alternative 76 5.1.3.3 Investee Applies Different Accounting Policies Under U.S. GAAP 78 5.1.3.4 Investee Adopts a New Accounting Standard on a Different Date 78 5.1.3.5 Investee Applies Investment Company Accounting 80 5.1.4 Accounting for an Investor’s Share of Earnings on a Time Lag 81 5.1.5 Adjustments to Equity Method Earnings and Losses 83 5.1.5.1 Intra-Entity Profits and Losses 83 5.1.5.2 Amortization or Accretion of Basis Differences 90 5.1.5.3 Investee Capital Transactions 92 5.1.5.4 Other Comprehensive Income 95 5.1.6 Dividends Received From an Investee 96 5.1.7 Interests Held by an Investee 99 5.1.7.1 Reciprocal Interests 99 5.1.7.2 Earnings or Losses of an Investee’s Subsidiary 101 5.1.8 Contingent Consideration 102 5.2 Equity Method Losses That Exceed the Investor’s Equity Method Investment Carrying Amount 103 5.2.1 Guarantee of an Equity Method Investee’s Third-Party Debt 107 5.2.2 Collateral of the Investee Held by the Investor When Equity Losses Exceed the Investor’s Investment 107 5.2.3 Investee Losses If the Investor Has Other Investments in the Investee 108 5.2.3.1 Percentage Used to Determine the Amount of Equity Method Losses 113 5.2.4 Additional Investment After Suspension of Loss Recognition 117 5.3 Stock-Based Compensation Granted by an Investor to Employees of an Equity Method Investee 118 5.3.1 Accounting in the Financial Statements of the Contributing Investor Issuing the Awards 121 5.3.2 Accounting in the Financial Statements of the Investee Receiving the Awards 121 5.3.3 Accounting in the Financial Statements of the Noncontributing Investors 121 5.3.4 Stock-Based Compensation Granted by an Investor to Employees of an Equity Method Investee When the Investee Reimburses the Contributing Investor 129 5.4 Costs Incurred on Behalf of an Investee 129 5.4.1 Accounting for Costs Incurred on Behalf of an Investee in the Financial Statements of the Investor 129 5.4.2 Accounting for Costs Incurred on Behalf of an Investee in the Financial Statements of the Investee 131 vii Deloitte | A Roadmap to Accounting for Equity Method Investments and Joint Ventures (2019) 5.5 Decrease in Investment Value and Impairment 131 5.5.1 Identifying Impairments 132 5.5.2 Measuring Impairment 134 5.5.2.1 Consideration of Basis Differences