3.7 Equity Method Investments

In accordance with ASC 323-10-35-13, the amount an investor pays to acquire an equity method investment often differs 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 (i.e., the excess is attributed to the individual assets and liabilities on the basis of their acquisition-date fair values); however, the equity method investment is presented as a single line in an investor’s balance sheet.

If the investor is unable to attribute the entire 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 identifiable assets and liabilities (commonly referred to as “equity method goodwill”) is recognized in 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.

For entities that have elected to amortize goodwill, ASC 350-20-35-81 requires that equity method goodwill “be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate.”

While equity method goodwill must be amortized in the investor’s financial statements, equity method goodwill is not separately tested for impairment under ASC 350-20. Rather, the equity method investment should be tested for impairment in accordance with ASC 323-10-35-32. See Section 5.5 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for more information.