FASB Proposes Targeted Improvements to Equity Method of Accounting (October 29, 2026)

FASB Proposes Targeted Improvements to Equity Method of Accounting

Overview

On October 28, 2026, the FASB issued a proposed ASU 1 that would amend ASC 3232 to (1) require entities to use a single model based on one threshold (significant influence) related to applying the equity method of accounting, irrespective of the investee’s legal form, and (2) clarify how investors should determine their share of an equity method investee’s earnings (also known as “equity in earnings”) when the investee has a complex allocation structure. The proposed ASU is intended to make the accounting for equity method investments more operable.

Comments on the proposed ASU are due by January 11, 2027.

Background

Stakeholder feedback on the FASB’s 2025 invitation to comment on its agenda consultation indicated that the accounting for equity method investments should be a priority for the Board. Specifically, stakeholders pointed to several key challenges with the equity method of accounting, including (1) identifying which investments should be accounted for under the equity method, specifically applying different models (e.g., criteria) to investments in corporations (and similar entities) than are applied to investments in partnerships (and similar entities); (2) determining equity in earnings for investments in non-real-estate entities with complex allocation structures; and (3) the cost and complexity of applying the equity method of accounting, particularly when the investor does not have significant influence over the investee. After considering this feedback, the Board added a project on equity method accounting to its technical agenda at its November 12, 2025, meeting. The Board subsequently decided to make targeted improvements to ASC 323, which the proposed ASU divides into two separate issues:

Issue A: Scope of ASC 323 — The proposed ASU would require entities to use a single model or threshold (significant influence) when determining whether to apply the equity method of accounting, regardless of the investee’s legal form.
Issue B: Complex Allocation Structures — The proposed ASU would illustrate how investors may determine equity in earnings for investees with complex allocation structures.

The proposed ASU’s amendments “would affect all entities with investments that are currently accounted for under the equity method and investments that must be evaluated to determine whether the equity method of accounting applies.”

Main Provisions

Issue A: Scope of ASC 323

Under current GAAP, the requirements to apply the equity method of accounting depend on the legal form of the investee. For corporations, corporate joint ventures, and limited liability companies (LLCs) that do not maintain specific ownership accounts for each investor (collectively, “corporations”), investments in common stock or in-substance common stock are accounted for under the equity method when an investor has significant influence over the investee. Significant influence is presumed to exist when the investor holds at least 20 percent of the investee’s voting stock.3 Alternatively, when an investor holds a more than minor interest (“more than minor” is often viewed as more than 3 to 5 percent), investments in partnerships, unincorporated joint ventures, and LLCs that maintain specific ownership accounts for each investor (collectively, “partnerships”) are accounted for under the equity method.4

The proposed ASU would amend ASC 323-10 to:

Require entities to use a single threshold (significant influence) for determining whether to apply the equity method of accounting, regardless of the legal form of the investee. Accordingly, application of the equity method would be based on an investor’s involvement with and influence over an investee (i.e., whether the investor has significant influence over the investee).
Make targeted changes to ASC 323-10-15-6 through 15-10, including the following:
1. Removing the presumption that an [investor] does not have significant influence when it holds less than 20 percent [of the voting stock] of an investee
2. Expanding the board of directors indicator to include functionally equivalent governing bodies in partnership structures
3. Specifying that a noncontrolling general partner or functional equivalent (such as a managing member in a limited liability company) has significant influence.

Connecting the Dots

Significant influence is the existing threshold used to identify whether the equity method is required for investments in the common stock or in-substance common stock of corporations. The proposed ASU is intended to reduce cost and complexity by eliminating the separate threshold for investments in partnerships and primarily leverages the existing significant influence framework for investments in corporations. In addition, the proposal is not intended to change the accounting method used for certain investments for which users indicated that the equity method of accounting is preferred (e.g., strategic investments and investments in certain industries), since, as described in paragraph BC20 of the proposal, “entities generally have significant influence over those types of investees.”

The proposed amendments would require investors in partnerships (other than general partners) to evaluate significant influence. The Board acknowledged in paragraph BC17 of the proposed ASU that an entity would incur additional costs to perform this evaluation, especially when it first applies the amendments, at which point it would need to reassess its existing portfolio of equity method investments. The Board indicated that these costs would most likely decrease on a continuing basis because, after initial adoption, the entity would generally only need to perform evaluations for new investments and would have established accounting policies supporting such evaluations.

The proposed amendments would represent a significant change from the existing framework for investments in partnerships. Entities with many investments in partnerships that are currently accounted for under the equity method should inventory their investments in preparation for the new requirements, if finalized. In addition, upon reviewing the exposure draft, such entities should consider providing the Board with feedback on whether the proposed amendments to ASC 323-10-15-6 through 15-10 contain an appropriate framework for evaluating whether they have significant influence over an investee. In Question 2 of the proposed ASU’s questions for respondents (see the appendix below), the Board is requesting feedback on the operability of evaluating significant influence for investments in partnerships.

The Board also noted in paragraph BC26 of the proposed ASU that removing the presumption that an investor does not have significant influence when it holds less than 20 percent of an investee’s voting stock “would address concerns that investors in partnerships with significant influence would incur undue cost to overcome a presumption that significant influence does not exist.” Some Board members, however, were concerned that removing the presumption, “which is intended to improve the operability of the guidance for investments in partnerships,” could also increase costs and potentially change practice with respect to accounting for investments in corporations.

Operability for Partnerships and Limited Partners

While the proposed amendments are intended to “clarify how to evaluate significant influence [indicators] across all types of investees,” entities should carefully consider how those indicators, originally developed for corporations, apply to partnerships. For example, in many limited partnerships, there is no board of directors and the general partner, not the limited partners, is typically responsible for managing the partnership and its decision making. In such structures, the amended board of directors or functionally equivalent governing bodies indicator5 may not be clearly relevant, because there may be no board or functionally equivalent governing body in which a limited partner can participate. The remaining indicators, such as participation in policymaking processes and interchange of managerial personnel, may likewise be difficult to apply to a limited partnership that, by legal design, has limited involvement with the operations of its limited partners.

Despite these potential challenges, the Board decided that it did not need to make significant changes to the guidance on significant influence, given the stakeholder feedback indicating that the “guidance is well understood and could apply more broadly to investments in partnerships.”

Connecting the Dots

The scope guidance in ASC 323-10 does not, by itself, apply directly to investments in partnerships, unincorporated joint ventures, and LLCs that maintain specific ownership accounts; those investments are addressed in ASC 323-30 (see proposed ASC 323-10-15-5). Under the proposed ASU, however, an investor would use the amended criteria in ASC 323-10 to evaluate significant influence for all legal forms of investees, and ASC 323-30 continues to require investors to apply the guidance in ASC 323-10 to investments in partnerships accounted for under the equity method (see proposed ASC 323-30-25-1). When an investor concludes that it does not have significant influence over a partnership (or other investee) that it would previously have accounted for under the equity method, that investment would generally be within the scope of ASC 321 on investments in equity securities.

Issue B: Complex Allocation Structures

Under the equity method, an entity recognizes its share of an investee’s earnings (i.e., equity in earnings) in its reported income. While the guidance in ASC 323 requires an investor to recognize its share of an investee’s earnings, it does not prescribe which allocation method should be applied.

In a simple allocation structure, an investor may recognize equity in earnings on the basis of its ownership percentage. In contrast, in a complex allocation structure, such as one in which an investee uses a contractually specified distribution waterfall to distribute earnings and losses or cash, an investor’s share of earnings may differ from its ownership percentage. In such cases, an entity must carefully consider the substance of the allocation arrangement to determine equity in earnings.

ASC 970-323 provides guidance related to investments in real estate ventures and indicates that investors must carefully consider “substance over form” when determining the equity in earnings of investees with complex allocation structures. In paragraph BC14, the Board observed that, in practice, entities generally apply the guidance in ASC 970-323-35-17 even “when accounting for equity method investments with complex allocation structures in non-real-estate ventures.” ASC 970-323-35-17 states, in part:

[A]greements or arrangements shall be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Specified profit and loss allocation ratios shall not be used to determine an investor’s equity in venture earnings if the allocation of cash distributions and liquidating distributions are determined on some other basis.

Proposed Improvements to Navigability and Operability

The proposed amendments would streamline the navigability of the accounting literature by moving the guidance in ASC 970-323 on complex allocation structures — along with other guidance in that subtopic that is not specific to industries or transactions — to ASC 323-10 (and other applicable Codification subtopics).

In addition, the amendments would improve the operability of the accounting for investments with complex allocation structures by adding to ASC 323 two examples illustrating one possible method for allocating equity in earnings in those structures.6

Connecting the Dots

In applying the guidance in ASC 970-323 on determining equity in earnings for investees with complex allocation structures, investors often calculate their equity in earnings by using the hypothetical liquidation at book value (HLBV) method. Under the HLBV method, equity in earnings is calculated on the basis of a change in the investor’s interest in the investee’s net assets, provided that the investee liquidates all of its assets at their GAAP carrying amounts at the end of the reporting period. Although the methods illustrated in the proposed ASU’s examples are similar to the HLBV method, the proposed amendments do not prescribe a specific allocation method and do not explicitly refer to the HLBV method.7

Furthermore, although the illustrative examples would show one possible method for allocating equity in earnings in complex allocation structures, an entity would still need to use significant judgment in determining equity in earnings in these arrangements and carefully analyze the substance of the arrangement, including how changes in the investee’s net assets affect the cash the investor would receive over the life of the investment and upon liquidation.

Consequential Amendments

In connection with the Issue A and Issue B amendments described above, the proposed ASU also would make certain consequential amendments. Topics addressed in the consequential amendments include the following:

Proportionate consolidation — Under current GAAP, as an alternative to applying the equity method, an entity can “apply proportionate consolidation to equity investments in an unincorporated legal entity in the construction industry or an extractive industry . . . if those investments are unconsolidated.” The proposal ensures that these investments continue to be eligible for proportionate consolidation while expanding the population of eligible investments to include any investment in an unincorporated legal entity in the construction and extractive industry if the investor does not consolidate the investee. That is, these investments would be eligible for proportionate consolidation regardless of whether the equity method would otherwise be required. Further, the proposal “would not change the requirements for when proportionate consolidation can be applied to investments in real property owned by undivided interests.”
Proportional amortization method —The proposal “would clarify that an entity should first evaluate whether a tax equity investment qualifies for the proportional amortization method . . . before evaluating how to account for that investment under other GAAP, including the equity method of accounting.” However, “the population of investments that are currently eligible for . . . the proportional amortization method” would be unaffected.
Allocation of income to noncontrolling interests — Entities would be required to “consider the guidance in [ASC] 323 on complex allocation structures when allocating income to noncontrolling interests under [ASC] 810.”
Consolidation for real estate ventures — The guidance in ASC 970-810-25-1 through 25-3 on consolidation of real estate ventures would be removed, and entities would instead be required to “evaluate investments in the real estate industry for consolidation under [ASC] 810.”

Proposed Effective Date and Transition

The transition requirements for Issue A would differ from those for Issue B.

For the Issue A amendments (i.e., those related to the scope of ASC 323), the approach would depend on whether, as of the adoption date, the investment is accounted for under the measurement alternative in ASC 3218 once it is no longer accounted for under the equity method after applying the proposed amendments. For an investment accounted for under the measurement alternative, an entity would apply a modified prospective approach and, “use the carrying amount of its equity method investment on the date of adoption as the new cost basis for that investment.” For an investment not accounted for under the measurement alternative, an entity would use a modified retrospective approach, applying “the proposed amendments as of the beginning of the period of adoption” and recognizing a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the date of adoption. This adjustment would be “calculated as the difference, as of the date of adoption, between the carrying amount of the equity method investment and its fair value.”

For the Issue B amendments (i.e., those related to complex allocation structures), the proposed amendments would be applied to “new and existing equity method investments on a prospective basis as of the date of adoption.”

An entity would be required to disclose “the nature of and reason for the change in accounting principle . . . in both the interim reporting period (if applicable) and the annual reporting period of the change” and, for the Issue A amendments, the cumulative effect of the change, if applicable.

All entities would be permitted to early adopt the amendments “in an interim or annual reporting period in which financial statements have not been issued or made available for issuance.” An entity adopting the proposed amendments “in an interim reporting period . . . would be required to adopt them as of the beginning of the annual reporting period that includes that interim reporting period.”

The FASB will decide on the effective date of the amendments after considering feedback from stakeholders on the proposal.

Appendix — Questions for Respondents

The proposed ASU’s questions for respondents are reproduced below for reference.

Issue A: Scope of Topic 323

Question 1: Would the amendments in this proposed Update improve the accounting for equity method investments by requiring a single threshold (significant influence) for applying the equity method? Would the proposed amendments result in a significant change to how investments in partnerships are accounted for? Is that outcome appropriate? Are the proposed amendments clear and operable? Do you anticipate any operational or auditing challenges? Please explain why or why not.

Question 2: Would the proposed amendments to the evaluation of significant influence improve the operability of evaluating significant influence for investments in partnerships? Please explain.

Question 3: Would the proposed amendments to the evaluation of significant influence significantly change practice for investments in corporations? For example, would removing the presumption that an entity does not have significant influence when it holds less than 20 percent of an investee significantly increase the cost and complexity of applying that guidance to investments in corporations or result in significant changes to the method used to account for those investments? Would the proposed amendments create operational or auditing challenges for those investments? Please explain.

Question 4: The proposed amendments would specify that a noncontrolling general partner or functional equivalent (such as a managing member in a limited liability company) has significant influence. Are you aware of any circumstances where a noncontrolling general partner (or functional equivalent) would not have significant influence? Please explain.

Question 5: Would the proposed amendments to the proportionate consolidation guidance result in investments that currently qualify for proportionate consolidation continuing to qualify under those amendments? Would the proposed amendments result in new investments qualifying for proportionate consolidation that do not currently qualify and why? How significant would those new investments be and would applying proportionate consolidation be a better accounting method for those investments? Please explain.

Question 6: Under current GAAP, tax equity investments that are not accounted for under the proportional amortization method are generally accounted for under the equity method because the investor typically meets the more-than-minor threshold. Would the proposed amendments for Issue A result in significant changes in the method used to account for tax equity investments that are not accounted for under the proportional amortization method? Do you agree with that outcome? Please explain.

Issue B: Complex Allocation Structures

Question 7: Would the proposed amendments improve the accounting for equity method investments with complex allocation structures? Are the proposed amendments clear and operable? Do you anticipate any operational or auditing challenges? Please explain why or why not.

Question 8: Would the proposed amendments to move the guidance in Subtopic 970-323 that is not industry or transaction specific to Subtopic 323-10 have a significant effect on practice for investments in real estate ventures or non-real-estate entities accounted for under the equity method? Please explain.

Question 9: Would the proposed amendments to Topic 810 improve the accounting for allocating income to noncontrolling interests in complex allocation structures? Are the proposed amendments clear and operable? Do you anticipate any operational or auditing challenges? Please explain why or why not.

Question 10: Would the proposed amendments to remove paragraphs 970-810-25-1 through 25-3 and instead require that entities evaluate investments in the real estate industry for consolidation under Topic 810 have a significant effect on practice? Please explain.

Transition

Question 11: Are the proposed transition requirements clear and operable? If not, why not, and what transition method would be more appropriate and why? Do you anticipate any operational or auditing challenges? Would the proposed transition disclosures be decision useful? Please explain.

Question 12: Would it be preferable to have a single transition method for Issue A? If so, which transition method would be more appropriate (the modified prospective approach or the modified retrospective approach)? Please explain.

Question 13: The proposed transition methods for Issue A assume that investments affected by the proposed amendments for that issue would transition from Topic 323 to Topic 321. Are you aware of any circumstances where an investment currently within the scope of Topic 321 would be within the scope of Topic 323 as a result of applying those proposed amendments? If so, would an approach similar to the modified prospective approach (for example, leveraging existing guidance for a change in accounting method from Topic 321 to Topic 323) or a modified retrospective approach be operable for those investments? If not, why not, and what transition method would be more appropriate and why? Are you aware of any other changes in the accounting methods applied to investments in partnerships that are currently accounted for under the equity method that could result from the proposed amendments? Please explain.

Question 14: The proposed amendments would expand the use of proportionate consolidation to some investments that are currently not eligible for that method. Would a modified retrospective approach be operable for those investments? If not, why not, and what transition method would be more appropriate and why? Please explain.

Effective Date

Question 15: In evaluating the effective date, how much time would be needed to implement the proposed amendments? Should the effective date for entities other than public business entities be different from the effective date for public business entities? If the effective date(s) should be different, how much additional time would entities other than public business entities need to implement the proposed amendments? Please explain.

Benefits and Costs

Question 16: Would the expected benefits of the proposed amendments justify the expected costs? If not, please describe the nature and magnitude of those costs, differentiating between one-time costs and recurring costs.

Contacts

	Andrew Winters Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3355 anwinters@deloitte.com		Charlie Steward Audit & Assurance Partner Deloitte & Touche LLP +1 404 220 1102 csteward@deloitte.com
	James Christenson Audit & Assurance Senior Manager Deloitte & Touche LLP +1 617 437 2653 jachristenson@deloitte.com		Debopriya Das Audit & Assurance Senior Manager Deloitte & Touche LLP +1 678 336 0772 debodas@deloitte.com
	Doug Jepsen Audit & Assurance Senior Manager Deloitte & Touche LLP +1 212 492 4213 djepsen@deloitte.com		Tim Kane Audit & Assurance Manager Deloitte & Touche LLP +1 617 437 3373 tikane@deloitte.com

Footnotes

FASB Proposed Accounting Standards Update (ASU), Investments — Equity Method and Joint Ventures (Topic 323): Equity Method of Accounting — Targeted Improvements.

For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

See ASC 323-10-15-6 through 15-10.

See ASC 323-30-S99-1.

See the indicators of significant influence in proposed ASC 323-10-15-6.

See Case A and Case B in Example 6 of proposed ASC 323-10-55-58 through 55-71.

The HLBV method was described in the proposed (not finalized) AICPA Statement of Position, Accounting for Investors’ Interests in Unconsolidated Real Estate Investments.

Under ASC 321, entities may elect a practicability exception to fair value measurement if (1) they do not qualify for the practical expedient in ASC 820-10-35-59 and (2) the equity security does not have a readily determinable fair value. Specifically, ASC 321-10-35-2 states, in part, that an entity may “measure an equity security without a readily determinable fair value that does not qualify for the practical expedient to estimate fair value in accordance with paragraph 820-10-35-59 at its cost minus impairment, if any. If an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it shall measure the equity security at fair value as of the date that the observable transaction occurred.”

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