The Who and How of the Equity Accounting Method
Some users may apply AcSEC's proposed SOP to investments other than real estate. The AICPA issued an exposure draft of a statement of position that would change how investors account in GAAP financial statements for certain interests in unconsolidated investments. AcSEC issued the ED, Accounting for Investors' Interests in Unconsolidated Real Estate Investments, in November 2000. The proposed SOP focuses on who should apply the equity method of accounting to unconsolidated real estate investments and how they should do so. It would Supersede SOP 78-9, Accounting for Investments in Real Estate Ventures. Because users applied SOP 78-9 more broadly to investments other than real estate, those interested in accounting for investors' interests in unconsolidated investments other than real estate also may want to comment on the proposed SOP. THE WHO The proposed SOP is broader than both SOP 78-9 and APB Opinion no. 18, The Equity Method of Accounting for Investments in Common Stock. Under the proposal, holders of the following investments should apply the equity method of accounting: * A corporate joint venture meeting the requirements of Opinion no. 18. * Voting common stock if the investor is able to exercise significant influence. * Nonvoting common stock or nonredeemable preferred stock if the investor is able to exercise significant influence and the stock does not meet the definition in FASB Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities, of an equity security having a readily determinable fair value. An ownership interest in a noncorporate investee if the investor is able to exercise significant influence. * An ownership interest in an investee organized in a "specific ownership account" structure if the investor is not able to exercise significant influence and the ownership interest does not meet the Statement no. 115 definition of an equity security with a readily determinable fair value. A specific ownership account structure is one in which each owner (partner, member) has a specific ownership account to which the owner's share of profits and losses, contributions and distributions accrue directly. For purposes of the proposed SOP, this includes general partnerships, limited partnerships, limited liability partnerships (LLPs) and limited liability companies (LLCs) but does not cover S corporations or real estate investment trusts. THE HOW The proposed SOP takes a balance sheet approach that differs from the conventional income statement approach whereby an investor applies its "percentage ownership interest" to the investee's GAAP net income to determine the investor's share of earnings or losses. If the investee's capital structure gives different rights and priorities to its owners, the income statement approach has been difficult to apply in practice. The approach in the proposed SOP is called the hypothetical liquidation at book value (HLBV) method. It takes into account all forms of financial interest an investor has with respect to an investee, including common stock, preferred stock, partnership interests, debt securities, loans, advances, notes receivable and other obligations. …