The Codification contains several Topics for investments due to the differing accounting treatment for various forms of investments. The Topics include all of the following:
- a
Topic
320, Investments—Debt Securities
- aa
Topic 321, Investments—Equity Securities - b
Topic
323, Investments—Equity Method and Joint Ventures
- c
Topic
325, Investments—Other.
The Investments—Equity Method and Joint Ventures Topic includes the following Subtopics:
- a
Overall
- b
Partnerships, Joint Ventures, and Limited Liability Entities
- c
Income Taxes.
The Overall Subtopic addresses application of the equity method of accounting to investments within its scope.
Investments held in stock of entities other than subsidiaries, namely corporate joint ventures and other noncontrolled entities usually are accounted for in accordance with either the recognition and measurement guidance in Subtopic 321-10 or the equity method. This Subtopic provides guidance on application of the equity method.
The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles (GAAP) in the economic resources underlying the investments. Furthermore, the equity method of accounting closely meets the objectives of accrual accounting because the investor recognizes its share of the earnings and losses of the investee in the periods in which they are reflected in the accounts of the investee. The equity method also best enables investors in corporate joint ventures to reflect the underlying nature of their investment in those ventures. The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee. The investor then has a degree of responsibility for the return on its investment, and it is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee. Influence tends to be more effective as the investor's percent of ownership in the voting stock of the investee increases. Investments of relatively small percentages of voting stock of an investee tend to be passive in nature and enable the investor to have little or no influence on the operations of the investee.
In addition to the joint venture guidance included in this Topic, the accounting and reporting for real estate joint ventures is addressed in Subtopic
970-323.