SHOULD INVESTOR-INVESTEE RELATIONS DETERMINE INVESTOR ACCOUNTING FOR INVESTEE

As part of its Accounting for Financial Instruments joint project with the IASB, the FASB is considering changes to its requirements for equity method accounting. Although all board decisions are tentative prior to extensive due process and final approval, the FASB reported the following in 2010:

The Board decided that an investor should apply the equity method of accounting if the investor has significant influence over the investee and the investment is con- sidered related to the investors consolidated businesses. Otherwise, the investment would be measured at fair value with changes included in earnings. The Board di- rected the staff to develop the criteria for determining whether an investee is re- lated to the investors consolidated businesses.

The Board decided that an entity may not elect the fair value option for equity investments that would be accounted for under the equity method under the deci- sion reached above.

This tentative decision would add to the equity method a criterion that the investment is considered related to the investors consolidated businesses. Without such a relation- ship, the investment valuation for financial reporting would be fair value, even when ability to significantly influence the investee is present.

How would the FASBs decision affect firms future election of the fair-value option? Do you think the addition of a relationship criterion for equity method use would in- crease the relevance of financial reporting for investments?