FASB to refine equity method accounting, rejects tackling tax credit rules

Addressing long-standing industry concerns, the Financial Accounting Standards Board (FASB) has launched a new project to refine equity method accounting for partnerships and intricate ownership structures, even as it decided against broadening green energy tax credit rules due to a lack of a clear accounting solution.

The board unanimously voted on Nov. 12, 2025, to delve into the complexities of equity method accounting in response to ongoing challenges faced by companies. These challenges are particularly pronounced in partnership investments, where even small ownership interests, as low as 3 to 5%, can trigger full equity method accounting, a stark contrast to the 20% presumption for corporations. This disparity often leads to what the FASB has termed "unintuitive outcomes" for investors who, in essence, operate as passive stakeholders.

"The equity method of accounting does provide relevant information, but I do think the gating question for us is for non-traditional ownership structures, do we think it's one method of significant influence for the entity or do we think it's the ownership unit of account?" FASB Chair Richard Jones said.

The project will aim to re-evaluate the definition of "significant influence" across various legal entities and to provide clearer guidance for allocating profits and losses in investees with complex structures. This includes a critical examination of the Hypothetical Liquidation at Book Value (HLBV) method, a common allocation technique used in practice without explicit authoritative guidance. Board members highlighted that HLBV calculations are frequently incorrect, emphasizing the need for robust implementation guidance and illustrative examples.

FASB Vice Chair Hillary Salo also pointed to the evolving landscape of financial reporting. "It does seem like the question really is more focused on, do we have the appropriate scope of investments that are in the equity method?" Salo commented, noting the confusion created by differing thresholds for corporations and partnerships.

While distinct, the FASB's project on equity method complexities, particularly the HLBV method, is closely tied to the debate over green energy tax credits. Renewable energy partnerships, a significant focus for tax equity, face acute challenges in applying both the equity method and HLBV. This intersection meant both issues were deliberated in tandem, influencing the board's separate decision on whether to expand the proportional amortization method (PAM).

PAM expansion rejected amidst green tax credit complexity