Investments in associates, joint ventures and partnerships can create a deceptively difficult month-end process. The ownership percentage may look straightforward, but governance rights, contractual distribution waterfalls, acquisition-date fair-value adjustments, investee reporting delays and transactions between the investor and investee can all change the accounting. A missed ownership change or an unsupported earnings allocation can affect investment balances, earnings, other comprehensive income (OCI), cash-flow presentation and disclosures.
This topic is especially timely. On October 28, 2026, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) targeting equity-method accounting under Topic 323. The comment deadline is January 11, 2027. Separately, in September 2026 the International Accounting Standards Board (IASB) completed its technical deliberations on a revised IAS 28 and began the balloting process; it expects to issue the revised Standard in the first half of 2027, with a proposed effective date of January 1, 2029. Neither development should be treated as a change to current requirements before final issuance and applicable effective dates.
1. Start with the right accounting conclusion
Do not classify an investment from the ownership percentage alone. Distinguish control, joint control and significant influence, then identify the applicable reporting framework and the legal form of the investee.
Under US GAAP, ASC 323 generally applies the equity method to qualifying common-stock or in-substance common-stock investments when the investor can exercise significant influence. A 20% voting interest is a rebuttable presumption of significant influence; a lower interest is not conclusive if other facts demonstrate influence. Current US GAAP also has separate scope guidance for certain limited partnerships and similar entities, which is one reason the FASB proposal matters.
Under IFRS, IAS 28 defines significant influence as the power to participate in financial and operating policy decisions without control or joint control. A 20% or greater voting interest creates a rebuttable presumption of significant influence, while a lower interest creates a rebuttable presumption that significant influence is absent. Board representation, policy participation, material transactions, management interchange and essential technical information are relevant indicators.
For Canadian private enterprises, ASPE Sections 3051, 3056 and 1591 address investments, interests in joint arrangements and subsidiaries respectively. CPA Canada’s October 2020 non-authoritative briefing explains that Section 3051 permits a policy choice between the cost and equity methods for investments subject to significant influence, with the same choice applied consistently within that category; quoted investments in an active market have a different measurement choice. Confirm the current Handbook and the entity’s existing policy before applying this summary.
2. Ten controls to strengthen the equity-method close
Control 1 — Maintain a complete investment register
Keep one controlled register covering shares, partnership interests, LLC membership interests, preferred interests, options, convertible instruments, jointly controlled arrangements, long-term advances that may form part of a net investment, guarantees and side agreements. Record the legal entity, jurisdiction, ownership percentage, voting rights, reporting framework, accounting method, responsible owner and last assessment date. Reconcile the register to the general ledger, legal-entity chart, treasury records and board materials each quarter.
Control 2 — Reassess influence and control when facts change
Require a documented accounting memo at acquisition and whenever ownership, governance or contractual rights change. Capture board seats, appointment and removal rights, veto or consent rights, participation in budgets and operating policies, material supply or service arrangements, and rights held by other investors. Escalate changes in general-partner or managing-member status. A percentage-only review can miss significant influence—or a move to control or joint control.
Control 3 — Control the agreement and governance evidence
Maintain executed shareholder, partnership, operating and joint-venture agreements in a controlled repository. Legal, corporate development and finance should notify controllership before amendments, new capital classes, changes to voting rights, distributions or transfers are signed. The accounting conclusion should cite the operative clauses and identify who approved the analysis.
Control 4 — Lock the framework and accounting-policy decision
Use a framework matrix for each reporting entity. Do not carry a US GAAP conclusion into IFRS or ASPE without reassessment. Under IFRS, IAS 28 generally requires the equity method for associates and joint ventures, subject to specified exemptions. Under ASPE, the Section 3051 cost-versus-equity policy choice may produce a different result from IFRS; document the policy election and consistency. For US GAAP, assess both the current ASC 323 scope rules and the investee’s legal form.
Control 5 — Obtain a reliable investee reporting package
Agree a reporting calendar with each investee covering trial balance, income statement, balance sheet, cash flows, OCI where relevant, capital activity, distributions, related-party transactions, commitments and subsequent events. Require certification by an appropriate investee finance owner. Track late packages and use a documented estimate process only where permitted, with a true-up when final information arrives.
Control 6 — Reconcile the equity pick-up from source data
Prepare a rollforward for each investment: opening carrying amount, contributions, share of post-acquisition earnings or losses, share of OCI and other capital movements, distributions, foreign-currency effects where applicable, impairment and closing carrying amount. Reconcile the investor’s share to the investee’s approved results and ownership records. Have a reviewer independently recalculate the percentage and key adjustments.
Control 7 — Maintain acquisition-date basis-difference schedules
At acquisition, document the investor’s cost against its share of the investee’s identifiable net assets and record the relevant fair-value differences. Track the related depreciation or amortization adjustments over the assets’ remaining lives, as well as any goodwill component embedded in the equity-method investment. Do not simply multiply the investee’s reported net income by the ownership percentage if acquisition-date basis adjustments remain.
Control 8 — Test investor–investee transactions for unrealized profit
Obtain a quarterly schedule of upstream and downstream sales, asset transfers, services and other transactions. Identify inventory or non-current assets still held by either party at period-end and calculate the unrealized portion requiring adjustment under the applicable framework. The CPA Canada ASPE briefing includes an example in which an investor’s share of an investee’s unrealized inventory profit reduces the equity-method income pickup. Reconcile the elimination and release it when the related asset is sold or otherwise realized.
Control 9 — Review contractual earnings waterfalls
Do not assume the investor’s share of earnings always equals its stated ownership percentage. Preferred returns, tiered distributions, promote arrangements, capital-account priorities and liquidation waterfalls may cause contractual economics to differ from simple pro-rata ownership. Retain the executed agreement, a model of the allocation mechanics, source data and an independent review of the calculation. This is a key area addressed by the FASB’s October 2026 proposal for complex allocation structures.
Control 10 — Review impairment, loss limits and disclosures
At each reporting date, evaluate adverse indicators, funding commitments, guarantees and obligations to support the investee. Apply the relevant framework’s requirements for recognizing losses and assessing impairment; do not continue recording losses below the permitted carrying amount without analyzing any additional obligations. Reconcile disclosures to the investment register, including ownership interests, summarized financial information where required, restrictions, commitments, contingencies, related parties and significant judgments.
3. What the October 2026 FASB proposal means
The proposed ASU would move toward a single significant-influence threshold for applying the equity method regardless of the investee’s legal form, removing the separate “virtually no influence” threshold currently relevant to certain partnership-type investments. It would also remove the presumption that an investor holding less than 20% lacks significant influence, expand the board indicator to functionally equivalent governing bodies, address noncontrolling general partners, and bring guidance on complex allocation structures into the broader Topic 323 framework with illustrative examples. The proposal is not final GAAP, and the FASB has not yet set an effective date. See the October 30, 2026 BDO technical summary and the Journal of Accountancy report dated October 30, 2026.
For IFRS reporters, monitor the IASB Equity Method project. The IASB’s September 2026 update says balloting has begun and identifies the first half of 2027 as the expected issuance window and January 1, 2029 as the expected effective date. These are project expectations, not a currently effective requirement.
4. A practical close checklist
| Close evidence | Controller review question |
|---|---|
| Investment register and ownership documents | Are all interests, rights and changes captured? |
| Framework and policy memo | Is the method correct for US GAAP, IFRS or ASPE? |
| Investee reporting package | Are results complete, approved and on a consistent basis? |
| Equity-method rollforward | Do earnings, OCI, contributions and distributions reconcile? |
| Basis-difference and elimination schedules | Are fair-value adjustments and unrealized profits addressed? |
| Waterfall model and impairment memo | Are contractual economics and downside indicators reflected? |
| Disclosure tie-out | Do notes agree to the ledger, agreements and supporting schedules? |
Conclusion
Equity-method accounting is not just a recurring journal entry. It is a controlled process connecting legal rights, governance, investee reporting, acquisition accounting, contractual economics and financial-statement disclosures. A complete investment register, documented influence assessment, reliable investee package and independently reviewed rollforward will improve close quality today—and make it easier to evaluate the FASB and IASB developments as they become final.
Informational only: This article is a practical overview, not accounting, legal or audit advice. Apply the current authoritative literature and obtain qualified advice for entity-specific facts. The CPA Canada ASPE briefing cited here is non-authoritative and was updated in October 2020; consult the current CPA Canada Handbook for current requirements.
Sources and further reading
- FASB Accounting Standards Codification — authoritative source of nongovernmental US GAAP.
- FASB Standards — Codification and issued updates.
- BDO: Equity Method—Changes to Scope and Other Targeted Improvements (October 30, 2026).
- Journal of Accountancy: FASB proposes changes to equity-method investments (October 30, 2026).
- IFRS Foundation: IAS 28, Investments in Associates and Joint Ventures.
- IFRS Foundation: Equity Method project status.
- CPA Canada: Accounting for Investments—ASPE Briefing (October 2020, non-authoritative).
