Your company holds a 4% limited partner interest in a real estate fund. You don’t sit on its board. You don’t vote on its decisions. Yet for years you’ve applied the equity method, because practice treats any partnership stake above 3–5% as “more than minor.”
That may be about to change. On October 28, 2026, the Financial Accounting Standards Board (FASB) proposed a single equity method test for every investee, whatever its legal form. By the end of this post, you’ll know what the proposal changes, how it treats general partners and complex profit waterfalls, who is most exposed, and what to put in your comment letter before January 11, 2027.
What did FASB propose on October 28, 2026?
FASB’s proposed Accounting Standards Update (ASU), Equity Method of Accounting—Targeted Improvements, would amend ASC 323 (Accounting Standards Codification Topic 323) in two ways. First, it would use one threshold, significant influence, to decide when the equity method applies, whatever the investee’s legal form. Second, it would clarify how investors calculate their share of earnings in complex allocation structures. Comments are due January 11, 2027.
Deloitte’s summary of the proposal says the changes are meant to make equity method accounting more operable. The Journal of Accountancy lists the problems stakeholders raised. Corporations and partnerships face different criteria, there’s no authoritative guidance on allocating earnings in complex structures outside real estate, and the equity method is costly to apply.
FASB says the proposal would affect every entity that holds an equity method investment, or that must evaluate whether the equity method applies, according to CPA Practice Advisor.
How does the equity method work for partnerships and LLCs today?
Today, US GAAP uses two different thresholds. For corporations, you apply the equity method when you have significant influence, which is presumed at 20% or more of voting stock. For partnerships, and for LLCs that keep a separate capital account for each owner, you apply it unless your interest is “so minor” that you have virtually no influence. In practice, that has meant anything above 3–5%.
Think of it as two doors into the same room. The corporate door asks, “Can you shape this company’s decisions?” The partnership door asks a much easier question: “Is your stake bigger than a rounding error?”
Where the 3–5% line comes from
According to a FASB staff memo to the Private Company Council, the “virtually no influence” test comes from a 1978 AICPA Statement of Position on real estate ventures, now codified in paragraph 970-323-25-6. In 1995, SEC staff said that investments in all limited partnerships should follow that test. They added that practice generally viewed investments above 3 to 5 percent as more than minor. That staff announcement now sits in paragraph 323-30-S99-1.
The memo notes that before 1995, SEC staff hadn’t objected to a 20% threshold for limited partnership investments. It also notes that although the guidance technically covers real estate partnerships and SEC registrants, practice applies it to all partnership-form investments, including those held by private companies.
Why might your 3–5% partnership investments no longer qualify?
A small limited partner interest with no governance role, no board seat and no material transactions with the investee would likely fail the significant influence test. Under the proposal, that investment would leave the equity method and move to ASC 321 (Investments—Equity Securities). It would then be measured at fair value, at net asset value (NAV) where the practical expedient applies, or under the measurement alternative.
A worked example
Your company owns a 4% LP interest in a private real estate fund. It contributed $10 million. The general partner makes all operating decisions, and the LPs have only standard protective rights.
- Today: 4% is above the 3–5% practice line, so you apply the equity method. You record 4% of the fund’s earnings each period, often on a lag.
- Under the proposal: You’d assess the significant influence indicators in Subtopic 323-10: representation on a governing body, participation in policy-making, material intra-entity transactions, interchange of managerial personnel, technological dependency, and the concentration of other holdings. With none present, you’d likely conclude there’s no significant influence.
- Result: The investment moves to ASC 321. If the fund reports NAV and qualifies for the practical expedient, you’d measure it at NAV, with changes through net income. Otherwise you might elect the measurement alternative: cost, less impairment, adjusted for observable price changes.
The flip side also matters. Removing the below-20% presumption means a 12% stake with a seat on an LLC’s managing board could clearly qualify for the equity method under the new indicators.
What the switch changes in your financial statements
- Earnings pattern: Equity method income follows the investee’s GAAP earnings. Fair value or NAV changes follow market values, which can be more volatile.
- Disclosures: Equity method disclosures, such as summarized investee financial information, would fall away for affected investments. Fair value disclosures under ASC 820 would take their place.
- Systems and timing: Lagged equity pickups and complex allocation calculations would end for affected investments. You’d need regular fair value or NAV data instead.
What does the general partner rule mean?
The proposal would require a general partner that doesn’t control a partnership to treat its interest as having significant influence, and so to apply the equity method. A general partner that does control the partnership would still consolidate under ASC 810, Consolidation. The rule codifies what was largely already practice.
SEC staff signaled this view in a 2016 Office of the Chief Accountant letter to FASB. It said they would anticipate the equity method generally applying to a general partner interest. The proposal would make that a requirement rather than an expectation.
The Board also decided to extend the “board of directors” indicator to “functionally equivalent governing bodies,” according to the FASB staff memo. That helps partnerships and LLCs that are run by managing members, an investment committee or a general partner rather than a board.
How would equity in earnings change for complex allocation structures?
For investees that split profits through preferred returns, catch-ups or distribution waterfalls, the proposal would move the real estate guidance in paragraph 970-323-35-17 into Subtopic 323-10, so it applies across industries. It would also add illustrative examples of one possible allocation method. Today, many investors use hypothetical liquidation at book value (HLBV), which isn’t in the Codification.
Why this matters
Paragraph 970-323-35-17 says an investor must look at how a change in the investee’s net assets affects the cash it will receive over the investee’s life and on liquidation. Stated profit-and-loss ratios shouldn’t be used if cash and liquidating distributions follow some other basis. Investors outside real estate have applied this only by analogy.
According to the FASB staff memo, under HLBV an investor calculates its share of earnings from the change in its claim on the investee’s net assets, assuming the investee liquidated at GAAP carrying amounts. HLBV was described in a 2000 AICPA proposal that was never finalized.
What the Board decided not to change
The Board chose not to require entities to ignore terms that apply only in remote circumstances, or to follow only the terms currently in effect, according to the staff memo. The examples would illustrate “a possible method,” which suggests HLBV-style approaches would stay acceptable rather than mandatory. Check the final proposal text for the exact wording.
The Board also decided on consequential amendments to ASC 810. When allocating income to noncontrolling interests, consolidating entities would refer to the same complex-allocation guidance in Topic 323.
Who could be affected?
The investors most affected are those holding small, passive interests in partnerships or LLCs that they account for under the equity method today. That includes real estate investors, holders of private equity and venture fund interests, insurers with alternative investment portfolios, and energy companies with minority joint venture stakes. Low-income housing tax credit investments using proportional amortization would not be affected.
What the policy language looks like on EDGAR
Many companies state the 3–5% practice directly in their accounting policies. For example, Crescent Energy’s 2021 Form 10-K said it generally applies the equity method to LPs and LLCs with separate ownership accounts when its interest is between 3% and 50%. Rattler Midstream’s 2020 Form 10-K stated that investments above 3% to 5% are considered more than minor.
The move has happened before, in the opposite direction. In its 2005 Form 10-K, Enterprise Products Partners described switching its 13.1% investment in an LLC from the cost method to the equity method in 2004 under EITF 03-16. That guidance brought LLCs with separate ownership accounts into the partnership model. The company recorded a $3.8 million cumulative-effect benefit.
Find exposure in your peer set
Use EDGAR full-text search to find 10-Ks that contain phrases such as “more than minor,” “3% to 5%” or “virtually no influence.” Filter by your industry. Each hit is a company whose policy is built on the threshold the proposal would remove.
[Editor: if you run this search in Finrep across current 10-Ks, add a sentence with the number of filers and the top industries here. The examples above are older filings and illustrate the policy language only.]
What should go in your comment letter?
Your comment letter is most useful when it shows FASB the real effect on your portfolio. Quantify the investments that would leave the equity method, test whether the new indicators work for your governance structures, and say whether the proposed transition and examples are workable. Comments are due January 11, 2027.
- Inventory affected investments. List every partnership and LLC interest under 20% that you account for under the equity method, with the carrying amount and income recognized.
- Apply the new indicators. For each investment, decide whether you’d have significant influence under the expanded indicators, including functionally equivalent governing bodies.
- Measure the switch. Estimate the earnings and balance sheet effect of moving to fair value, NAV or the measurement alternative, including data you’d need that you don’t collect today.
- Test the general partner rule. Confirm it fits your noncontrolling GP structures, including co-GP and managing member arrangements.
- Try the allocation examples. Run one of your real waterfalls through FASB’s illustrative examples and report where the method is unclear or produces odd results.
- Weigh in on transition and timing. Say whether the modified prospective and modified retrospective methods are workable, and how much lead time you need.
Tip: Include numbers. A comment letter saying “this would move 40 investments worth $X to NAV” carries more weight than one that only says the change is costly.
Frequently asked questions
What is FASB’s equity method proposed ASU?
FASB’s proposed ASU, Equity Method of Accounting—Targeted Improvements, was issued on October 28, 2026. It would require a single threshold, significant influence, for applying the equity method, regardless of an investee’s legal form. It would also clarify how investors determine their share of earnings in complex allocation structures. Comments are due January 11, 2027.
Would 3–5% partnership investments still use the equity method?
Not automatically. Today, partnership and LLC investments above roughly 3–5% generally use the equity method because they’re more than “minor.” Under the proposal, they would use the equity method only if the investor has significant influence. Small passive stakes without governance rights would likely move to ASC 321, measured at fair value, NAV or the measurement alternative.
Does the proposal remove the 20% presumption?
It removes only half of it. The proposal would remove the presumption that an investor holding less than 20% lacks significant influence, so investors would evaluate all facts and circumstances. The presumption that a holding of 20% or more gives significant influence would remain.
Do general partners have to use the equity method under the proposal?
Yes, if they don’t control the partnership. The proposal would require a noncontrolling general partner, or its functional equivalent, to be treated as having significant influence, so it would apply the equity method. A general partner that controls the partnership would continue to consolidate under ASC 810.
How would the proposal affect HLBV?
The proposal would move the complex allocation guidance in paragraph 970-323-35-17 into Subtopic 323-10 for all industries. It would add illustrative examples of one possible method for allocating equity in earnings. HLBV-style approaches would likely remain acceptable, but investors outside real estate would have authoritative guidance instead of relying on analogy.
How can Finrep help with the equity method proposal?
Finrep searches more than 10 million SEC filings on EDGAR and returns cited answers. Accounting teams use it to find peers that apply the equity method to small partnership stakes, compare policy language and disclosures, and research past threshold changes such as EITF 03-16. Finrep’s Accounting Memos help document significant influence assessments for auditors.
Key takeaways
- One test for all investees. The proposal replaces the partnership “virtually no influence” test with significant influence.
- Small passive stakes may move out. Partnership and LLC interests of 3–5% without governance rights would likely shift to ASC 321.
- Below 20% isn’t presumed passive. Removing that presumption pushes every holding below 20% to a facts-and-circumstances judgment.
- Noncontrolling GPs must use the equity method. The proposal makes current practice a requirement.
- Waterfall guidance goes industry-wide. Complex allocation guidance moves into 323-10, with examples.
- Comment by January 11, 2027. Quantify your affected investments so FASB sees the real impact.
Want to see which of your peers apply the equity method to small partnership stakes? Finrep gives your team cited answers from more than 10 million SEC filings.
