# ASC 323-10-55: Investments—Equity Method and Joint Ventures — Overall — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/323/10/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:3fe6dc893cf41e2bd05979c8bf24532661cc65eee0f30c7d318bfb630652e36b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 323-10-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/323/10/#55-implementation-guidance-and-illustrations) SEC content: no #### Illustrations ##### [323-10-55-1](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-1) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:8a079636ebb0c2e8d3e910d32bbec2d76e63460cd630ba4fe08b22b6d685e904 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the application of the characteristics described in paragraphs [323-10-15-13](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and [323-10-15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-15) to various investments: 1. a Subordination substantially similar to [common stock](https://asc.understandingaccounting.org/glossary/c/#common-stock "A stock that is subordinate to all other stock of the issuer. Also called common shares.") (Case A) 2. b Subordination not substantially similar to common stock (Case B) 3. c Investment expected to participate in risks and rewards of ownership (Case C) 4. d Investment not expected to participate in risks and rewards of ownership (Case D) 5. e [Investee](https://asc.understandingaccounting.org/glossary/i/#investee "An entity that issued an equity instrument that is held by an investor.") not obligated to transfer substantive value (Case E) 6. f Investee obligated to transfer substantive value (Case F). ##### [323-10-55-2](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-2) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c6775f2245a9d9ec52a5be1bb5685dc1ea500113ba086b7c1aa5442768668176 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Each Case provides sufficient information to reach a conclusion about whether the investment contemplated in the Case has the characteristic of [in-substance common stock](https://asc.understandingaccounting.org/glossary/i/#in-substance-common-stock "An investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock.") being demonstrated in the Case. In each Case, assume that the [investor](https://asc.understandingaccounting.org/glossary/i/#investor "A business entity that holds an investment in voting stock of another entity.") is performing the analysis because it has determined that it is not required to consolidate the investee under Subtopic 810-10, that it has the ability to exercise [significant influence](https://asc.understandingaccounting.org/glossary/s/#significant-influence "Paragraphs 323-10-15-6323-10-15-7323-10-15-8323-10-15-9323-10-15-10323-10-15-11 define significant influence.") over the operating and financial policies of the investee, and that its investment does not meet the definition of a derivative instrument under Subtopic 815-10. ##### [323-10-55-3](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-3) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:d6ddbc0ba33f8c593ef41973c03d01ebb8041140e2f4a094ea9ecc38d1fdc364 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor organized Investee and acquired all of the common stock of Investee on January 1, 2003. On January 1, 2004, Investee sells 100,000 shares of preferred stock to a group of investors in exchange for $10,000,000 ($100 par value; liquidation preference of $100 per share). The fair value of the entity's common stock is approximately $100,000 on January 1, 2004. ##### [323-10-55-4](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-4) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:fdf898b5825c4a34d5f82e891b629c56382fc337fbde752a08d2a52f4a5a9511 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, the stated liquidation preference is equal to the fair value of the preferred stock. However, the fair value of the common stock ($100,000), if compared with the fair value of the preferred stock, indicates that Investee has little or no common stock from a fair value perspective. An investor should therefore conclude that the liquidation preference is not substantive and that the subordination characteristics of its preferred stock investment are substantially similar to the subordination characteristics of Investee's common stock. The investor should also evaluate whether the preferred stock has the characteristics in paragraph [323-10-15-13(b) through 15-13(c)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13), and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) (if necessary) to reach a conclusion about whether the preferred stock is in-substance common stock. ##### [323-10-55-5](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-5) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:56f46da20c357a683043d8f0b592f0f9124dd2e5386b18ebd2ceaf4dd5894fad Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume the same facts and circumstances as in Case A, except that the fair value of Investee's common stock is approximately $15,000,000 on January 1, 2004. ##### [323-10-55-6](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-6) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:027e2062f03cff36fb175fae2ef77563d1d0cf4a082fe4bdd8586619dc003ee8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, the stated liquidation preference is equal to the fair value of the preferred stock. In addition, Investee has adequate subordinated equity from a fair value perspective (more than little or no subordinated equity) to indicate that the liquidation preference is substantive. An investor therefore should conclude that the subordination characteristics of its preferred stock investment are not substantially similar to the subordination characteristics of Investee's common stock. Accordingly, the preferred stock investment is not in-substance common stock. Evaluation of the characteristics in paragraph [323-10-15-13(b) through 15-13(c)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) is not required. ##### [323-10-55-7](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-7) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:872dc4cbe2616a4ebe6b89c9b75453d3128a3600ae12e9f5010db96531e2f54d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor purchases a warrant in Investee for $2,003,900 on July 1, 20X4. The warrant enables Investor to acquire 100,000 shares of Investee's common stock at an exercise price of $1.00 per share (total exercise price of $100,000) on or before June 30, 20X5; the warrant does not participate in [dividends](https://asc.understandingaccounting.org/glossary/d/#dividends "Dividends paid or payable in cash, other assets, or another class of stock and does not include stock dividends or stock splits."). The fair value of the common stock is approximately $21.00 per share. The warrant is exercisable at any time. Investor does not expect Investee to declare dividends before exercise. ##### [323-10-55-8](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-8) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:4668984125f5cba1140fce79cf6dfe40eef277dd331d948aec50bff0cd6edcac Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should evaluate whether the warrant is expected to participate in Investee's earnings (and losses) and capital appreciation (and depreciation) in a manner that is substantially similar to common stock. To evaluate the extent to which the warrant is expected to participate with the common shareholders in Investee's earnings (and losses), Investor should evaluate whether the warrant allows Investor to currently participate in dividends on a basis substantially similar to common stock. In this Case, Investor does not participate in dividends. Investor, however, can exercise the warrant (convert into common stock) at any time, thereby enabling Investor to participate in Investee's earnings (and losses) on an equivalent basis to common stock. Because Investor does not expect Investee to declare dividends before exercise, Investor participates in Investee's earnings in a manner substantially similar to common stock. In addition, warrants that are exercisable into common stock are designed to participate equally with the common shareholders in increases in the Investee's fair value. Therefore, the warrant participates in Investee's capital appreciation. ##### [323-10-55-9](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-9) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:1b1097080257de23b2d1f85c3ef761594bb32405fd9f106eb1658ab9484d8d7a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should also evaluate whether the warrant is expected to participate in Investee's capital depreciation in a manner substantially similar to common stock. An investor has alternatives for making this evaluation. In this Case, Investor could compare the current fair value of Investee's common stock with the fair value of the warrant (on an equivalent unit basis) to determine whether the warrant is exposed to capital depreciation in a manner that is substantially similar to the entity's common stock. The current fair value of the Investee's common stock of $21.00 is substantially similar to the current fair value of each warrant of $20.04 (on an equivalent unit basis). Therefore, the warrant's expected participation in Investee's capital depreciation is substantially similar to the common shareholders' participation. This comparison of fair values is different from the paragraph [323-10-15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-15) evaluation that is performed (if necessary) to determine whether the future changes in fair value of the investment are expected to vary directly with the changes in the fair value of the entity's common stock. ##### [323-10-55-10](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-10) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:9dd32250a492a980d13a69737f0d7f2233dab4f66153ed61498e3e035e42d78b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, Investor should conclude that, before exercise, the warrants are expected to participate in Investee's earnings (and losses) and capital appreciation (and depreciation) in a manner that is substantially similar to common stock. Investor should also evaluate whether the warrant has the characteristics in paragraph [323-10-15-13(a)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and [323-10-15-13(c)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) (if necessary) to reach a conclusion about whether the warrant is in-substance common stock. ##### [323-10-55-11](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-11) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:f3f0f7b31c00968930c78b6231622e62822965c549f316b3bad2920b537b18bb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor purchases a warrant in Investee for $288,820 on July 1, 20X4. The warrant enables Investor to acquire 100,000 shares of Investee's common stock at an exercise price of $21.00 per share (total exercise price of $2,100,000) on or before June 30, 20X5; the warrant does not participate in dividends. The fair value of the common stock is approximately $21.00 per share. The warrant is exercisable at any time. Investor does not expect Investee to declare dividends before exercise. ##### [323-10-55-12](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-12) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:815733aa17578a1261b2a785a1d9b942239613bf65a7ded468d7ad56a25b9829 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should evaluate whether the warrant is expected to participate in Investee's earnings (and losses) and capital appreciation (and depreciation) in a manner that is substantially similar to common stock. To evaluate the extent to which the warrant is expected to participate with the common shareholders in Investee's earnings (and losses), Investor should evaluate whether the warrant allows Investor to currently participate in dividends on a basis substantially similar to common stock. In this Case, Investor does not participate in dividends. Investor, however, can exercise the warrant (convert into common stock) at any time, thereby enabling Investor to participate in Investee's earnings (and losses) on an equivalent basis to common stock. Because Investor does not expect Investee to declare dividends before exercise, Investor participates in Investee's earnings in a manner substantially similar to common stock. In addition, warrants that are exercisable into common stock are designed to participate equally with the common shareholders in increases in Investee's fair value. Therefore, the warrant participates in Investee's capital appreciation. ##### [323-10-55-13](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-13) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:29aac1a422607405b56d03a14439c1f679fd5f686f5bed93e5a2735ffc9f84ca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should also evaluate whether the warrant is expected to participate in Investee's capital depreciation in a manner substantially similar to common stock. An investor has alternatives for making this evaluation. In this Case, Investor could compare the current fair value of Investee's common stock with the current fair value of the warrant (on an equivalent unit basis) to determine whether the warrant is exposed to capital depreciation in a manner that is substantially similar to the entity's common stock. The current fair value of the Investee's common stock of $21.00 is substantially different from the current fair value of each warrant of $2.88 (on an equivalent unit basis). Therefore, the warrant's expected participation in Investee's capital depreciation is substantially different from the common shareholders' participation. This comparison of fair values is different from the paragraph [323-10-15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-15) evaluation that is performed (if necessary) to determine whether the future changes in fair value of the investment are expected to vary directly with the changes in the fair value of the entity's common stock. ##### [323-10-55-14](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-14) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:dab422ecda6b5dda0e8e2936f7409d4f70c419b6f486bb73634fcf01b412dc5f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, Investor should conclude that, before exercise, the warrants are not expected to participate in Investee's earnings (and losses) and capital appreciation (and depreciation) in a manner that is substantially similar to common stock and, accordingly, the warrants are not in-substance common stock. Evaluation of the characteristics in paragraph [323-10-15-13(a)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and [323-10-15-13(c)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) is not required. ##### [323-10-55-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-15) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c99c7e6c4ca34a8f1e91362770f1eaddcadfa16f1f4715ef4abc175b395599c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor purchases redeemable convertible preferred stock in Investee for $2,000,000. The investment can be (a) converted into common stock valued at $2,000,000 or (b) redeemed for $10,000 at the option of the Investor. The common shareholders do not have a similar redemption feature. ##### [323-10-55-16](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-16) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:df1ee1e537a3df41623589f497c1f8a68fb988fe58ce0ebba8c1a44729a21805 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should evaluate whether exercise of the $10,000 redemption feature obligates Investee to transfer substantive value to Investor and whether the common shareholders do not participate in a similar manner. In this Case, the $10,000 redemption feature is not substantive. Accordingly, Investor should conclude that redeemable convertible preferred stock does not require Investee to transfer substantive value to Investor and that common shareholders do not participate. Investor should also evaluate whether the redeemable convertible preferred stock has the characteristics in paragraph [323-10-15-13(a) through 15-13(b)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) (if necessary) to reach a conclusion about whether the redeemable convertible preferred stock is in-substance common stock. ##### [323-10-55-17](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-17) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:4d0848e6c75dc27de544d8da3ae91d45c9bb9df7aa81f778a69fe44c57dbf77f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor purchases redeemable convertible preferred stock in Investee for $2,000,000. The investment can be (a) converted into common stock valued at $2,000,000 or (b) redeemed for $2,000,000 at the option of the Investor. The common shareholders do not have a similar redemption feature. Investor expects that Investee will have the ability to pay the redemption amount. ##### [323-10-55-18](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-18) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:85fc9e2db16e3ca392ca528927f249edde2090157edeed4f7c1febe30cdb454d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor should evaluate whether exercise of the $2,000,000 redemption feature obligates Investee to transfer substantive value to Investor and whether the common shareholders do not participate in a similar manner. In this Case, the $2,000,000 redemption feature is substantive because the redemption amount is substantive as compared to the fair value of the investment and, based on Investor's expectation as of the date that the investment was made, Investee has the ability to pay the redemption amount. Accordingly, Investor shall conclude that redeemable convertible preferred stock requires Investee to transfer substantive value to Investor and that common shareholders do not participate. Accordingly, the redeemable convertible preferred stock is not in-substance common stock. Evaluation of the characteristics in paragraph [323-10-15-13(a) through 15-13(b)](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-13) and paragraphs [323-10-15-14 through 15-15](https://asc.understandingaccounting.org/asc/323/10/#323-10-15-14) is not required. ##### [323-10-55-19](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-19) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:ce743f7f367bfb7122c0ae8bcee3f4a75111bde3b8393aa0ea63bfe60fe26fc2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [323-10-25-3](https://asc.understandingaccounting.org/asc/323/10/#323-10-25-3) and [323-10-30-3](https://asc.understandingaccounting.org/asc/323/10/#323-10-30-3) for share-based compensation by an investor granted to employees of an equity method investee. This Example is equally applicable to share-based awards granted by an investor to nonemployees that provide goods or services to an equity method investee that are used or consumed in the investee's operations. ##### [323-10-55-20](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-20) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:5e5f2333a073e23ae782e8b43871258163f1481cda39bddb9878e760dcdf7d5e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A owns a 40 percent interest in Entity B and accounts for its investment under the equity method. On January 1, 20X1, Entity A grants 10,000 stock options (in the stock of Entity A) to employees of Entity B. The stock options cliff-vest in three years. If an employee of Entity B fails to vest in a stock option, the option is returned to Entity A (that is, Entity B does not retain the underlying stock). The owners of the remaining 60 percent interest in Entity B have not shared in the funding of the stock options granted to employees of Entity B on any basis and Entity A was not obligated to grant the stock options under any preexisting agreement with Entity B or the other investors. Entity B will capitalize the share-based compensation costs recognized over the first year of the three-year vesting period as part of the cost of an internally constructed fixed asset (the internally constructed fixed asset will be completed on December 31, 20X1). ##### [323-10-55-21](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-21) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:747723916d64387f1ad9d4c0550e13e50be2c4f9bf259301d6d1997380526b8f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Before granting the stock options, Entity A's investment balance is $800,000, and the book value of Entity B's net assets equals $2,000,000. Entity B will not begin depreciating the internally constructed fixed asset until it is complete and ready for its intended use and, therefore, no related depreciation expense (or compensation expense relating to the stock options) will be recognized between January 1, 20X1, and December 31, 20X1. For the years ending December 31, 20X2, and December 31, 20X3, Entity B will recognize depreciation expense (on the internally constructed fixed asset) and compensation expense (for the cost of the stock options relating to Years 2 and 3 of the vesting period). After recognizing those expenses, Entity B has net income of $200,000 for the fiscal years ending December 31, 20X1, December 31, 20X2, and December 31, 20X3. ##### [323-10-55-22](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-22) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:e43201629ce25b4b9a786a7f33865605e1095ea733bf00f5299945d08f7e9f9b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity C also owns a 40 percent interest in Entity B. On January 1, 20X1, before granting the stock options, Entity C's investment balance is $800,000. ##### [323-10-55-23](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-23) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c7e847369a5eceabcd8fe1e968746531292a19e0794890fbfe0bf520d4a22cab Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume that the fair value of the stock options granted by Entity A to employees of Entity B is $120,000 on January 1, 20X1. Under Topic 718, the fair value of share-based compensation should be measured at the grant date. This Example assumes that the stock options issued are classified as equity and ignores the effect of forfeitures. ##### [323-10-55-24](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-24) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c1376a9f8a450f2aa76ea36081c936abdb0d9ab9b09f281cf77698eb9b727f82 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A would make the following journal entries. - ![](https://asc.understandingaccounting.org/asc-img/GUID-41FD6BC9-203E-4446-B405-28C07ED4C93F-low.gif) 12/31/20X1 12/31/20X2 12/31/20X3 To record cost of stock compensation and Entity C's additional investment for costs incurred by Entity A on behalf of investee Entity A (Contributing Investor) Investment in Entity B (a) " $16,000 " " $16,000 " " $16,000 " Expense (b) " 24,000 " " 24,000 " " 24,000 " Additional paid-in capital " $40,000 " " $40,000 " " $40,000 " Entity B (investee) Fixed asset " $40,000 " — — Expense — " $40,000 " " $40,000 " Additional paid-in capital " $40,000 " " $40,000 " " $40,000 " Entity C (noncontributing investor) Investment In Entity B " $16,000 " " $16,000 " " $16,000 " Contribution income (c) " $16,000 " " $16,000 " " $16,000 " To record Entity A's and Entity C's share of the earnings of investee (same entry for both Entity A and Entity C) Entity A and Entity C Investment in Entity B " $80,000 " " $80,000 " " $80,000 " Equity in earnings of Entity B " $80,000 " " $80,000 " " $80,000 " Consolidated impact of all the entries made by Entity A and Entity C Entity A Investment in Entity B " $96,000 " " $96,000 " " $96,000 " Expense " 24,000 " " 24,000 " " 24,000 " Additional paid-in capital " $40,000 " " $40,000 " " $40,000 " Equity in earnings of Entity B " 80,000 " " 80,000 " " 80,000 " Entity C Investment in Entity B " $96,000 " " $96,000 " " $96,000 " Contribution income " $16,000 " " $16,000 " " $16,000 " Equity in earnings of Entity B " 80,000 " " 80,000 " " 80,000 " (a) "Entity A recognizes as an expense the portion of the costs incurred that benefits the other investors (in this Example, 60 percent of the cost or $24,000 in 20X1, 20X2, and 20X3) and recognizes the remaining cost (40 percent) as an increase to the investment in Entity B. As Entity B has recognized the cost associated with the share-based compensation incurred on its behalf, the portion of the cost recognized by Entity A as an increase to its investment in Entity B (40 percent) is expensed in the appropriate period when Entity A recognizes its share of the earnings of Entity B." (b) It may be appropriate to classify the debit (expense) within the same income statement caption as equity in earnings of Entity B. (c) This amount represents Entity C's 40 percent interest in the additional paid-in capital recognized by Entity B related to the cost incurred by the third-party investor. It may be appropriate to classify the credit (income) within the same income statement caption as equity in earnings of Entity B. ##### [323-10-55-25](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-25) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:b47fdad95d62f3a714c4b012f9ef33d0552bac9e4d571e3fcecc9db0cfd6b791 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A rollforward of Entity B's net assets and a reconciliation to Entity A's and Entity C's ending investment accounts follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-14AAB1A9-CDE7-4CD6-BB24-DDCB6D513642-low.gif) 12/31/20X1 12/31/20X2 12/31/20X3 Net assets of Entity B Beginning net assets " $2,000,000 " " $2,240,000 " " $2,480,000 " Contributed capital " 40,000 " " 40,000 " " 40,000 " Net income " 200,000 " " 200,000 " " 200,000 " Ending net assets " $2,240,000 " " $2,480,000 " " $2,720,000 " Entity A's and Entity C's share x 40% x 40% x 40% Entity A's and Entity C's equity in net assets of Entity B " 896,000 " " 992,000 " " 1,088,000 " Entity A's and Entity C's ending investment balance " 896,000 " " 992,000 " " 1,088,000 " Remaining unamortized basis difference ##### [323-10-55-26](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-26) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:bf5451bc0d830aab18ebae5e735e5e323416717c8df9c9b73f52dd3bd7feed24 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A summary of the calculation of share-based compensation cost by year follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-2E005D9B-0D66-4427-9956-FB4328CBA6A1-low.gif) Calculation of the Share-Based Compensation Cost by Year Year Ended A = Grant Date Fair Value of Options B = % Vested C = (A x B) Amount of Cumulative Compensation Cost to Be Recognized D = Cumulative Cost Previously Recognized E = C - D Current Year Cost 20X1 " $120,000 " 33% " $40,000 " $- " $40,000 " 20X2 " $120,000 " 66% " $80,000 " " $40,000 " " $40,000 " 20X3 " $120,000 " 100% " $120,000 " " $80,000 " " $40,000 " ##### [323-10-55-27](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-27) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:85adc565da96cfec11de52bd6f51d6a382c8caed9f255741ad25a1348094db5b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate how eliminations of intra-entity profits might be made in accordance with paragraph [323-10-35-7](https://asc.understandingaccounting.org/asc/323/10/#323-10-35-7). Both Cases assume that an investor owns 30 percent of the common stock of an investee, the investment is accounted for under the equity method, the income tax rate to both the investor and the investee is 40 percent, the inventory is a good that is an output of the entity's ordinary activities, and the contract is with a customer that is within the scope of Topic 606 on revenue from contracts with customers: 1. a Investor sells inventory downstream to investee (Case A) 2. b Investee sells inventory upstream to investor (Case B). ##### [323-10-55-28](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-28) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:98770a312d91a1f5c6a59f49d6faf7c6f3094f592a09e5aa4ca3f54372b6a45d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume an investor sells inventory items to the investee (downstream). At the investee's balance sheet date, the investee holds inventory for which the investor has recorded a gross profit of $100,000. The investor's net income would be reduced $18,000 to reflect a $30,000 reduction in gross profit and a $12,000 reduction in income tax expense. The elimination of intra-entity profit might be reflected in the investor's balance sheet in various ways. The income statement and balance sheet presentations will depend on what is the most meaningful in the circumstances. ##### [323-10-55-29](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-29) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c5e9f30ed79d06d39e66f4605c14715900865bcdec943bba1bd389b10afdfe1e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume an investee sells inventory items to the investor (upstream). At the investor's balance sheet date, the investor holds inventory for which the investee has recorded a gross profit of $100,000. In computing the investor's equity pickup, $60,000 ($100,000 less 40 percent of income tax) would be deducted from the investee's net income and $18,000 (the investor's share of the intra-entity gross profit after income tax) would thereby be eliminated from the investor's equity income. Usually, the investor's investment account would also reflect the $18,000 intra-entity profit elimination, but the elimination might also be reflected in various other ways; for example, the investor's inventory might be reduced $18,000. ##### [323-10-55-30](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-30) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:9a3d2fb4f829ba9ce1104d32a450e70e1ddb7c815383b470ba81cdf4c2ea0e06 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the application of paragraph [323-10-35-24](https://asc.understandingaccounting.org/asc/323/10/#323-10-35-24) to an investment involving all of the following circumstances: 1. a Investor owns 40 percent of the outstanding common stock of Investee. 2. b The common stock investment has been reduced to zero at the beginning of 20X1 because of previous losses. 3. c Investor also has done both of the following: 1. 1 Invested $100 in redeemable preferred stock (that meets the definition of debt security and is classified as an available-for-sale debt security) of Investee (40 percent of the outstanding preferred stock of Investee) 2. 2 Extended $100 in loans to Investee (which represent 40 percent of all loans extended to Investee). 4. d Investor is not obligated to provide any additional funding to Investee. ##### [323-10-55-31](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-31) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:5765afdc7abb6da33ae17068878a38e9645cd07d8d897e51dc1af3c49ad2552e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraphs [323-10-35-7](https://asc.understandingaccounting.org/asc/323/10/#323-10-35-7) and [323-10-35-16](https://asc.understandingaccounting.org/asc/323/10/#323-10-35-16), Investee's operating income and losses in the following table have been adjusted for intra-entity interest on the loan and dividends received or receivable on the preferred stock. As of the beginning of year 20X1, the carrying value of Investor's total combined investment in Investee is $200, as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-3BFCE84F-4B5A-4D24-83EB-7D40E141EFF4-low.gif) Carrying Balance Common stock $- Loan $100 Preferred stock $100 ##### [323-10-55-32](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-32) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:aecb499567293bbf59d31be8b71e336652939ba14d928c42e55699147aeff8b0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume the following facts for years 20X1 through 20X7. - ![](https://asc.understandingaccounting.org/asc-img/GUID-FCF9DF25-6E23-4313-9183-0EB7FA3B8D14-low.gif) Year Investee Operating Income (Loss) "Carrying Value of the Loan Under Subtopic 310-10" "Fair Value of the Preferred Stock Under Subtopic 320-10" 20X1 $(200) $95 $90 20X2 (400) 95 90 20X3 - 60 50 20X4 400 95 90 20X5 - 45 55 20X6 - 95 90 20X7 " 1,000 " 100 (a) (a) "Preferred stock was sold for $90 on January 2, 20X7." ##### [323-10-55-33](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-33) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:e6213516b07bac34752464195c7d093aefa393437546958ea96a53cfaeb31be0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Following are the steps Investor would follow in applying the equity method of accounting to its investment in Investee during the years 20X1 through 20X7. ##### [323-10-55-34](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-34) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:49b343d7f0805c57cc0be469bc69929e16f28f709ca7a68d292e4341a7a80f3a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor would make all of the following entries in 20X1: 1. a In accordance with this Subtopic, record the equity method loss (40% × $200 = $80) to the cost basis of the preferred stock (the next level of capital) at the time that the common stock investment becomes zero. - ![](https://asc.understandingaccounting.org/asc-img/GUID-F130DDD4-F172-4A17-87E1-2E062B654693-low.gif) Equity method loss $80 Preferred stock investment $80 2. b In accordance with Subtopic 326-20 on financial instruments measured at amortized cost, record an allowance for credit losses on the loan. - ![](https://asc.understandingaccounting.org/asc-img/GUID-6DCC3DB0-82E3-447F-A81F-93A502F66B27-low.gif) Credit loss expense $5 Allowance for credit losses $5 3. c In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (market price of $90 less the carrying amount after entry \[a\] of $20, equals $70 unrealized gain). - ![](https://asc.understandingaccounting.org/asc-img/GUID-B9A7F2AC-853D-4E30-84CF-A74A4D50E9E3-low.gif) Preferred stock investment $70 Unrealized gain—other comprehensive income $70 ##### [323-10-55-35](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-35) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:b4a0abc722554715401b7b3ba435bb942c89991e441e093544cee0ef9267dfb0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X1, the total profit-and-loss charge is $85 ($80 for the equity method loss and $5 for the loan). Other comprehensive income is credited $70 for the preferred stock investment. The carrying amount of the total combined investment in Investee is reduced to $185 ($0 for the common stock investment, $95 for the loan, and $90 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $70. The adjusted basis of the total combined investment in Investee is reduced to $115 ($0 for the common stock investment, $95 for the loan, and $20 for the preferred stock investment). ##### [323-10-55-36](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-36) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:ab715a76b72ce63d4426412145864b23ebd713535b8fe0e12a6f7a8b1fdca7fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor would make both of the following entries in 20X2: 1. a In accordance with this Subtopic, record the equity method loss (40% × $400 = $160) to the adjusted basis of the preferred stock of $20 and, because the adjusted basis of the preferred stock will then be reduced to zero, record the remaining equity method loss to the adjusted basis of the loan (the next level of capital). The total equity method loss recorded would be limited, however, to the adjusted basis of the total combined investment in Investee of $115; therefore, $45 of equity method losses are unreported. - ![](https://asc.understandingaccounting.org/asc-img/GUID-C1E0B042-EF2C-41FA-889C-A62D27D05115-low.gif) Equity method loss $115 Preferred stock investment $20 Loan 95 2. b In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (market price of $90 less the carrying amount after entry \[a\] of $70, equals $20 unrealized gain). - ![](https://asc.understandingaccounting.org/asc-img/GUID-D72A2D8E-F6C9-47D7-B3B3-BEAB74051384-low.gif) Preferred stock investment $20 Unrealized gain—other comprehensive income $20 ##### [323-10-55-37](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-37) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:a834e6435c168ccfd06fd1ad8c2f7e12ac15f5b6b7945a0f49eab2fe2c9c503f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X2, the total profit-and-loss charge is $115 (equity method loss). Other comprehensive income is credited $20 for the preferred stock investment. The carrying amount of the total combined investment in Investee is reduced to $90 ($0 for the common stock investment, $0 for the loan, and $90 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $90. The adjusted basis of the total combined investment in Investee is reduced to $0 ($0 for the common stock investment, $0 for the loan, and $0 for the preferred stock investment). ##### [323-10-55-38](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-38) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:fcfba2b7c92062389ed25795f55823106e47f4af5fa5b9d5f037c67d8ffb3769 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X3, there is no equity method income or loss (40% × $0 = $0). Investor would make both of the following entries in 20X3: 1. a Because the adjusted basis of the loan was reduced to zero in 20X2 as a result of applying equity method losses to the loan, no entry is needed to reflect the Subtopic 326-20 reduction in carrying amount from $95 to $60. 2. b In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (fair value of $50 less the carrying amount of $90 equals $40 unrealized loss). - ![](https://asc.understandingaccounting.org/asc-img/GUID-D66CE8FC-C8AD-48B9-A1AC-3422C4726E3B-low.gif) Unrealized loss—other comprehensive income $40 Preferred stock investment $40 ##### [323-10-55-39](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-39) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c313cf6f11e378ae216c544836fecdc801a15871c3425bda2534e6fe482bfd20 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X3, other comprehensive income is debited $40 for the preferred stock investment. The carrying amount of the total combined investment in Investee is reduced to $50 ($0 for the common stock investment, $0 for the loan, and $50 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $50. The adjusted basis of the total combined investment in Investee remains $0. ##### [323-10-55-40](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-40) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:7f7956720897cb279632ac68eb9ea662e872551c31213175cf4cc5446dea0a77 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor would make both of the following entries in 20X4: 1. a In accordance with this Subtopic, record the equity method income (40% × $400 = $160). However, in accordance with this Subtopic, Investor resumes applying the equity method only after its share of that income equals the unreported equity method losses of $45. Therefore, the equity method income to be reported for the period is $115 ($160-$45). The adjusted bases of the other investments are restored in the reverse order of the application of the equity method losses (loan first, then preferred stock). - ![](https://asc.understandingaccounting.org/asc-img/GUID-9F3C3D8E-242A-4298-A1E0-CB7179B642FD-low.gif) Loan $95 Preferred stock investment 20 Equity method income $115 2. b In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (market price of $90 less the carrying amount of $70 equals $20 unrealized gain). - ![](https://asc.understandingaccounting.org/asc-img/GUID-981E220D-47CA-4F0E-8014-8387CC0900F0-low.gif) Preferred stock investment $20 Unrealized gain—other comprehensive income $20 ##### [323-10-55-41](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-41) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:2515b803a165345396b93cac7c0f7ea33dd8c78e5500f27871709a5931a4df57 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X4, the total profit-and-loss credit is $115 (the equity method income after Investor's share of unreported equity method losses of $45 in 20X2). Other comprehensive income is credited $20 for the preferred stock investment. The carrying amount of the total combined investment in Investee is increased to $185 ($0 for the common stock investment, $95 for the loan, and $90 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $70. The adjusted basis of the total combined investment in Investee is increased to $115 ($0 for the common stock investment, $95 for the loan, and $20 for the preferred stock investment). ##### [323-10-55-42](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-42) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:2fa5d30dbc204267fe66248ed81cb7213b6ee54b616eb8f9ea497faa36555fc7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X5, there is no equity method income or loss (40% × $0 = $0). Investor would make both of the following entries in 20X5: 1. a In accordance with Subtopic 326-20, record an allowance for credit loss for the loan. - ![](https://asc.understandingaccounting.org/asc-img/GUID-06AD473A-1890-4142-AC93-49FAA87820D0-low.gif) credit loss expense $50 allowance for credit losses $50 2. b In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (market price of $55 less the carrying amount of $90 equals $35 unrealized loss). - ![](https://asc.understandingaccounting.org/asc-img/GUID-5E5842DB-956E-48F3-9C01-91F0F1268C39-low.gif) Unrealized loss—other comprehensive income $35 Preferred stock investment $35 ##### [323-10-55-43](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-43) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:51b4f2f47c9f75e80bca4dcffdbffbf45d0a66f0a0aade811a263b03f81f8a6f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X5, the total profit-and-loss charge is $50 (from the loan). Other comprehensive income is debited $35 for the preferred stock investment. The carrying amount for the total combined investment in Investee is reduced to $100 ($0 for the common stock investment, $45 for the loan, and $55 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $35. The adjusted basis of the total combined investment in Investee is reduced to $65 ($0 for the common stock investment, $45 for the loan, and $20 for the preferred stock investment). ##### [323-10-55-44](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-44) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:5e61fc08ef595b313f556f752217a02efce47d0a713b174583da5fc4dd35a11a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X6, there is no equity method income or loss (40% × $0 = $0). Investor would make both of the following entries in 20X6: 1. a In accordance with Subtopic 326-20, adjust the allowance for credit losses on the loan. - ![](https://asc.understandingaccounting.org/asc-img/GUID-C9ACB6FF-B7AC-4D4A-8754-C41515BFB357-low.gif) allowance for credit losses $50 credit loss expense $50 2. b In accordance with Subtopic 320-10, record the changes in fair value for the available-for-sale preferred stock investment (market price of $90 less the carrying amount of $55 equals $35 unrealized gain). - ![](https://asc.understandingaccounting.org/asc-img/GUID-46461BC6-2F91-40D0-9748-525261470AEB-low.gif) Preferred stock investment $35 Unrealized gain—other comprehensive income $35 ##### [323-10-55-45](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-45) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:1fa71bc43d8db301d10ed4476e4bfcede9380e0e6ba0c891333561eb8b77750f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X6, the total profit-and-loss credit is $50 (from the loan). Other comprehensive income is credited $35 for the preferred stock investment. The carrying amount of the total combined investment in Investee is increased to $185 ($0 for the common stock investment, $95 for the loan, and $90 for the preferred stock investment), and the balance in accumulated other comprehensive income is a credit of $70. The adjusted basis of the total combined investment in Investee is increased to $115 ($0 for the common stock investment, $95 for the loan, and $20 for the preferred stock investment). ##### [323-10-55-46](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-46) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:356b0d8433deb67436bac8cdd19ee2a3b2bad598bfd518db5877203ce73da90e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investor would make all of the following entries in 20X7: 1. a Record the sale of the preferred stock. - ![](https://asc.understandingaccounting.org/asc-img/GUID-620E6AA9-2228-44F1-A87B-04BDA1C49E5A-low.gif) Cash $90 Other comprehensive income 70 Preferred stock investment $90 Gain on sale of security 70 2. b In accordance with this Subtopic, record the equity method income (40% × $1,000 = $400). Although Investor has recorded losses for all prior Investee losses, $80 of such recorded losses (representing the difference between the cost basis of the preferred stock investment of $100 and its adjusted basis of $20) have effectively been reversed in entry (a) by recording a $70 gain on the sale of the preferred stock when an actual loss of $10 (representing the difference between the cost basis of the preferred stock investment of $100 and the proceeds of $90) was incurred. Accordingly, only $320 of equity method income should be recorded ($400-$80). - ![](https://asc.understandingaccounting.org/asc-img/GUID-633E1C14-4095-4A41-AC97-885F4AA15DEF-low.gif) Investment in investee (common) $320 Equity method income $320 3. c In accordance with Subtopic 326-20, adjust the allowance for credit losses on the loan. - ![](https://asc.understandingaccounting.org/asc-img/GUID-8E434C14-D06F-4FA9-9043-70E63E26EBAD-low.gif) Allowance for credit losses $5 Credit loss expense $5 ##### [323-10-55-47](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-47) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:e63bf2b345bf63c6a4ec611617fe41b8fdaa885cebea3bc0ca93441303df4902 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X7, the total profit-and-loss credit is $395 ($70 gain from the sale of the preferred stock, $320 for the equity method income, and $5 from the loan). The carrying value of the total combined investment in Investee is increased to $420 ($320 for the common stock investment and $100 for the loan), and the balance in accumulated other comprehensive income is $0. The adjusted basis of the total combined investment in Investee is increased to $420 ($320 for the common stock investment, $100 for the loan, and $0 for the preferred stock investment). ##### [323-10-55-48](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-48) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:b3335f035cea662c8fa8a44953236e3707ac3dbe4e9d5c2856f7d23861e23e82 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate possible approaches to recognizing equity method losses in accordance with paragraph [323-10-35-28](https://asc.understandingaccounting.org/asc/323/10/#323-10-35-28): 1. a Ownership level of particular investment (Case A) 2. b Change in investor claim on investee book value (Case B). ##### [323-10-55-49](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-49) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:5be838552bb89b7d62c2385defc098aa3a9adacacb54c912d94f857690f16a63 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share all of the following assumptions: 1. a Investee was formed on January 1, 20X0. 2. b Five investors each made investments in and loans to Investee on that date and there have not been any changes in those investment levels (that is, no new money, reacquisition of interests by Investee, principal payments by Investee, or dividends) during the period from January 1, 20X0, through December 31, 20X3. 3. c Investor A owns 40 percent of the outstanding common stock of Investee; the common stock investment has been reduced to zero at the beginning of 20X1 because of previous losses. 4. d Investor A also has invested $100 in preferred stock of Investee (50 percent of the outstanding preferred stock of Investee) and has extended $100 in loans to Investee (which represents 60 percent of all loans extended to Investee). 5. e Investor A is not obligated to provide any additional funding to Investee. As of the beginning of 20X1, the adjusted basis of Investor's total combined investment in Investee is $200, as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-628B212C-2D0F-40F9-AB5E-7F151A9D31B2-low.gif) Common stock $- Preferred stock $100 Loan $100 6. f Investee operating income (loss) from 20X1 through 20X3 is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-CA589954-7FCE-439A-BB8B-EF394D6BF139-low.gif) 20X1 $(160) 20X2 $(200) 20X3 $500 7. g Investee's balance sheet is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-7802F4CB-3E08-4A8A-A353-81F9EBAE4660-low.gif) 1/1/X1 12/31/X1 12/31/X2 12/31/X3 Assets $367 $207 $7 $507 Loan $167 $167 $167 $167 Preferred stock 200 200 200 200 Common stock 300 300 300 300 Accumulated deficit (300) (460) (660) (160) $367 $207 $7 $507 ##### [323-10-55-50](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-50) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:3647cfeeb123bd70e49a95f83d89ddf4a418f9dc312e2fa01aae745f98427bc3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under this approach, Investor A would recognize equity method losses based on the ownership level of the particular investee security, loan, or advance held by the investor to which equity method losses are being applied. ##### [323-10-55-51](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-51) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:f40d8e91cca2b3e7f66f086a7c2972a274edf54048c41cb4427431f56bded888 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X1, in accordance with this Subtopic, Investor A would record the equity method loss to the adjusted basis of the preferred stock (the next most senior level of capital) after the common stock investment becomes zero (50% × $160 = $80). Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-93B8870B-10F9-4D6B-82DC-C1A43C6392FE-low.gif) Equity method loss $80 Preferred stock investment $80 ##### [323-10-55-52](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-52) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:4f2b72f81a42c5ba16a6b47947d9cd2e8449000cecdf20c32a3d7be104353fae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X2, in accordance with this Subtopic, Investor A would record the equity method loss to the extent of the adjusted basis of the preferred stock of $20 (50% × $40 = $20) and, because the adjusted basis of the preferred stock will then be reduced to zero, record the remaining equity method loss to the adjusted basis of the loan (the next most senior level of capital) (60% × $160 \[that is, $200-$40 applied to the preferred stock\] = $96). Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-B7264A42-B1EF-4F56-A8C3-BB3C3E4F77DE-low.gif) Equity method loss $116 Preferred stock investment $20 Loan 96 ##### [323-10-55-53](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-53) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:0f3b97e76559bc9b283c9554044370a1db174ef157a83cec501c154c1afd255a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X3, in accordance with this Subtopic, Investor A would record the equity method income first to the loan until its adjusted basis is restored (60% × $160 = $96), then to the preferred stock until its adjusted basis is restored (50% × $200 = $100), and finally to the common stock (40% × $140 = $56). Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-25D0500F-F066-4B0C-BC54-48C12AA55CBF-low.gif) Loan $96 Preferred stock 100 Investment in investee 56 Equity method income $252 ##### [323-10-55-54](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-54) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:0d3e2afc0f840e895b02307b60ac1d196eca2c9614a6bed000ed53a429ca9b72 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under this approach, Investor A would recognize equity method losses based on the change in the investor's claim on the investee's book value. ##### [323-10-55-55](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-55) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:c62455dcc1b78860cfb76cc5ee06759ce989d30c711a73ae06bac01bf78f0605 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With respect to 20X1, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X1, it would have $207 available to distribute. Investor A would receive $120 (Investor A's 60% share of a priority claim from the loan \[$100\] and a priority distribution of its preferred stock investment of $20 \[which is 50% of the $40 remaining to distribute after the creditors are paid\]). Investor A's claim on Investee's book value at January 1, 20X1, was $200 (60% × $167 = $100 and 50% × $200 = $100). Therefore, during 20X1, Investor A's claim on Investee's book value decreased by $80 and that is the amount Investor A would recognize in 20X1 as its share of Investee's losses. Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E0CFBAF2-91E3-49D5-9D5F-1FFE78AA5651-low.gif) Equity method loss $80 Preferred stock investment $80 ##### [323-10-55-56](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-56) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:b2d4fb899c56cc502ecc165d462613b1ff89bd5c2e061feaee900d97295c5c7d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With respect to 20X2, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X2, it would have $7 available to distribute. Investor A would receive $4 (Investor A's 60% share of a priority claim from the loan). Investor A's claim on Investee's book value at December 31, 20X1, was $120 (see the preceding paragraph). Therefore, during 20X2, Investor A's claim on Investee's book value decreased by $116 and that is the amount Investor A would recognize in 20X2 as its share of Investee's losses. Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-752AE4C6-68BD-4861-80B7-E04138F893AA-low.gif) Equity method loss $116 Preferred stock investment $20 Loan 96 ##### [323-10-55-57](https://asc.understandingaccounting.org/asc/323/10/#323-10-55-57) Pending content: no Source downloaded (UTC): 2026-09-09T23:40:17.084Z to 2026-09-09T23:40:17.084Z Record version: sha256:0d59a14314057de2d15ecc93a2012789aa9054b777d939444db36a3603be8db0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With respect to 20X3, if Investee hypothetically liquidated its assets and liabilities at book value at December 31, 20X3, it would have $507 available to distribute. Investor A would receive $256 (Investor A's 60% share of a priority claim from the loan \[$100\], Investor A's 50% share of a priority distribution from its preferred stock investment \[$100\], and 40% of the remaining cash available to distribute \[$140 × 40% = $56\]). Investor A's claim on Investee's book value at December 31, 20X2, was $4 (see above). Therefore, during 20X3, Investor A's claim on Investee's book value increased by $252 and that is the amount Investor A would recognize in 20X3 as its share of Investee's earnings. Investor A would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-A2E61C18-0CEE-4579-BCF2-35BCF37CCBC8-low.gif) Loan $96 Preferred stock 100 Investment in investee 56 Equity method income $252