2.12 Equity Method Goodwill

In accordance with ASC 323-10-35-13, the amount an investor pays to acquire an equity method investment may be different from the investor’s proportionate share of the carrying value of the investee’s underlying assets and liabilities. This difference is generally referred to as a “basis difference.” The investor is required to account for this basis difference as if the investee were a consolidated subsidiary in a manner consistent with the provisions of ASC 805; however, the equity method investment is presented as a single line in an investor’s balance sheet.

If the investor is unable to attribute all of the basis difference to specific assets or liabilities of the investee, the residual excess of the cost of the investment over the proportional fair value of the investee’s assets and liabilities (commonly referred to as “equity method goodwill”) is recognized within the equity investment balance, not as a separate balance sheet line item in the investor’s financial statements. See Section 4.5 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information.

ASC 350-20-35-59 clarifies that the amount of equity method goodwill should not be amortized and should not be tested for impairment in the investor’s financial statements in accordance with ASC 350-20. Rather, the equity method investment, as a whole, should be tested for impairment in accordance with ASC 323-10-35-32. If an equity method investee recognizes a goodwill impairment loss in its separate financial statements, the investor should recognize its share of the impairment in its financial statements in the same manner in which it recognizes other earnings (or losses) of the investee. However, if an equity method investee recognizes a goodwill impairment loss, that could indicate that the carrying amount of the investment might be impaired. See Section 5.5 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information.

An investor who applies the general goodwill accounting model and whose equity method investee has elected to amortize goodwill may need to adjust its share of the investee’s earnings or losses to reflect to remove the effects of the private-company alternatives. See Section 5.1.3.2 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information.