The Financial Accounting Standards Board issued an Accounting Standards Update (ASU) that clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. The ASU is based on a consensus of the FASB’s Emerging Issues Task Force (EITF).

In 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments—Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments.

Among other changes, the ASU provided a company with the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (the measurement alternative). Stakeholders asked the FASB to clarify how this guidance should interact with equity method investments.

The new ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

The changes in Update 2016-01 also prompted stakeholders to ask whether certain forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323, or Topic 815, Derivatives and Hedging.

The new ASU clarifies that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions.