FASB Proposes One Equity Method Test and Clearer Rules on Payments to Customers

Oct 30

4 min read

Updated: 5 hours ago

The Financial Accounting Standards Board issued two exposure drafts within a week this October that could change how companies report joint venture income and revenue. On October 28, 2026, the board proposed targeted improvements to the equity method of accounting in Topic 323, with comments due January 11, 2027. On October 22, it proposed clarifying when a payment made on behalf of a customer, or to a customer's customer, counts as "consideration payable to a customer" under the revenue standard, Topic 606. Comments on that draft are due November 23, 2026.

Neither proposal has an effective date yet; the board will set dates after reviewing feedback. Both would allow early adoption.

The equity method: one test, whatever the legal form

Today the equity method rests on two tests. For an investment in a corporation, the question is significant influence, with a 20 percent voting stake as the familiar reference point. For partnerships and similar entities, the bar is much lower: the equity method generally applies unless the interest is "so minor" that the investor has virtually no influence. In practice that has commonly meant any stake above about 3 to 5 percent.

The FASB says stakeholders found the split costly, inconsistent and hard to explain. The draft would replace it with a single significant influence threshold for every type of investee. Its main changes:

No low-ownership safe harbor. The draft would remove the presumption that an investor holding less than 20 percent lacks significant influence. Stakeholders told the board that partnership investors often have real influence below that level.
Broader board indicator. A seat on a functionally equivalent governing body, such as a limited liability company's board of managers, would count as evidence of influence, not only a seat on a corporate board.
General partners. A noncontrolling general partner, or a functional equivalent such as a managing member, would be treated as having significant influence.
Special methods preserved. Investments now eligible for proportionate consolidation, used in construction and extractive industries, or for the proportional amortization method used for certain tax-credit investments would stay eligible.

A second part of the draft deals with complex allocation structures, such as distribution waterfalls that set how investors share earnings. Guidance that now applies only to real estate would move into the general equity method rules, with new illustrative examples. Entities would also apply it when allocating income to noncontrolling interests. Real estate investments would be evaluated for consolidation under the general rules in Topic 810 rather than industry-specific provisions.

One commentator quoted by CFO Dive expects real estate and construction companies to feel the change most. Another warned that a judgment-based influence test is more subjective than a numerical cutoff and could invite gaming.

Transition. Some partnership interests now on the equity method could fall out of it. An entity electing the Topic 321 measurement alternative would use the equity method carrying amount as the new cost basis. Others would record a cumulative-effect adjustment to retained earnings for the difference between carrying amount and fair value. The waterfall guidance would apply prospectively.

Payments to a customer's customer

Under Topic 606, consideration paid to a customer generally reduces revenue unless the payment buys a distinct good or service. The standard does not explicitly address payments to parties outside the direct distribution chain. According to the FASB, economically similar payments have been recorded as revenue reductions by some companies and as operating expenses by others.

The draft, which follows a recommendation of the board's Emerging Issues Task Force, would treat such a payment as consideration payable to a customer when it is made in connection with satisfying the entity's promise to its customer and either:

the entity explicitly promised to make it, or
the customer reasonably expects it, because of an implicit promise or because the payment is in substance a price concession.

The distinct goods or services test would not change, and a conforming amendment would extend the criteria to share-based payments.

The FASB expects the largest effects at platform businesses that give credits, rebates or discounts to end users. Its examples also include a retailer that pays a bank so shoppers can get 0 percent promotional financing. KPMG expects these payments generally to reduce revenue, which may differ from current practice at some companies. The board also seeks views on "negative revenue," which arises when payments to a customer exceed what the entity receives from it.

Entities could adopt using either a modified prospective or a modified retrospective approach. Both drafts ask whether effective dates should differ for entities that are not public business entities, including private companies.

Who is affected

Real estate, construction, extractive-industry and holding companies, and family businesses with partnership or LLC interests.
Investors that serve as general partner or managing member of an entity they do not consolidate.
Platforms that fund end-user incentives, and retailers that subsidize customer financing.
Lenders and boards that rely on revenue, EBITDA or investment income figures that could shift.

What to do now

List partnership and LLC interests between roughly 3 and 20 percent, and document governance rights and board or manager seats for each.
Identify unconsolidated entities where the company is general partner or managing member.
Gather waterfall agreements and test how earnings are allocated today.
Catalog payments to parties that are not direct customers, noting whether each was explicitly promised, expected by customers or functions as a discount.
Check whether reclassification would affect debt covenants, incentive pay or reported metrics.
Consider commenting by November 23 (customer payments) or January 11, 2027 (equity method).

Sources

This article is general information, not tax, legal, or accounting advice. Consult a qualified professional about your situation.