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 AICPA See American Institute of Certified Public Accountants (AICPA). issued an exposure draft of a statement of position that would change how investors account in GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (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 To obliterate, replace, make void, or useless. Supersede means to take the place of, as by reason of superior worth or right. A recently enacted statute that repeals an older law is said to supersede the prior legislation. 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 APB opinion A determination by the former Accounting Principles Board regarding the way a certain financial transaction is to be treated for reporting purposes. 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 Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. if the investor is able to exercise significant influence and the stock does not meet the definition in FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 115, Accounting for Certain Investments in Debt and Equity Securities, of an equity security having a readily determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled. determinable adj. 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 The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy 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. Under HLBV, an investor determines its share of the investee's earnings or losses for a period by answering this question: How much better (or worse) off is the investor at the end of the period than it was at the beginning, taking into consideration only those transactions and other events the investee recognizes under GAAP? To answer that question, the investor calculates--at each balance sheet date--the amount it would receive (or be obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. to pay) if the investee had liquidated DAMAGES, LIQUIDATED, contracts. When the parties to a contract stipulate for the payment of a certain sum, as a satisfaction fixed and agreed upon by them, for the not doing of certain things particularly mentioned in the agreement, the sum so fixed upon is called liquidated damages. (q.v. all of its assets at recorded GAAP amounts and distributed the resulting cash to its creditors and investors in accordance with their respective priorities, including amounts distributed to investors to satisfy any loans, receivables or preferred securities they hold. The amount the investor receives (or is obligated to pay) is called the investor's claim on the investee's book value. The difference between this amount at the end of the period and the investor's claim at the beginning of the period represents the investor's share of the investee's earnings or losses for the period. The difference excludes the effects of any capital contributions or investments the investor had made during the period and any distributions it had received during the period. THE EQUITY METHOD UNDER HLBV The proposed SOP also includes additional guidance on how to apply equity method accounting under HLBV. It provides 25 numerical examples to illustrate the proposed guidance for accounting for negative investments; basis differences; additional investments; other comprehensive income and similar items; interaction with FASB Statement no. 114, Accounting by a Creditor for Impairment of a Loan, and Statement no. 115; investor sale of an investee; transactions between investor and investee; and presentation and disclosures. EFFECTIVE DATE The proposed SOP would be effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. An entity would recognize any changes caused by adopting the SOP's provisions as a cumulative effect in the adoption period. The comment deadline for the ED is April 15, 2001; see the box above for more information. How to Comment Comments on the exposure draft should be sent by April 15, 2001, to Marc Simon, Technical Manager, Accounting Standards, File 4210.VE, AICPA, 1211 Avenue of the Americas, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , NY, 10036-8775. Readers can also respond by e-mail to msimon@aicpa.org. To get a free copy of the proposed SOP, visit the accounting standards section of the AICPA Web site, www.aicpa.org/members/div/acctstd/edo/index.htm. MARC SIMON, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , is a technical manager in the AICPA accounting standards division in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . His e-mail address See Internet address. e-mail address - electronic mail address is msimon@aicpa.org. Mr. Simon is an employee of the American Institute of CPAs and his views, as reflected in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation deliberation n. the act of considering, discussing, and, hopefully, reaching a conclusion, such as a jury's discussions, voting and decision-making. DELIBERATION, contracts, crimes. . |
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