If your business owns 20% to 50% of another company — a joint venture with a supplier, a minority stake in a spun-off product line, a shared-ownership subsidiary — you've probably never given a second thought to how that investment gets valued on your books when things go badly for the investee. Most owners assume there's one clean answer. For almost a decade, there wasn't.
In December 2025, the Financial Accounting Standards Board quietly closed a gap that had been sitting in U.S. GAAP since 2016. It's a narrow, technical fix — the kind of thing that shows up as one bullet point in a 33-issue omnibus update — but it removes a choice that some companies were arguably relying on, and it's worth understanding if equity method investments show up anywhere on your balance sheet.
The Backstory: How a 2016 Cleanup Created a 2026 Problem
To understand what changed, you need a quick refresher on two accounting concepts that rarely interact — until they do.
Equity method accounting (ASC 323) is how you account for an investment where you have significant influence but not control, typically a 20%–50% ownership stake. Instead of marking the investment to market every quarter, you carry it at cost, then adjust that carrying value up or down each period by your share of the investee's profits or losses. It's a "look-through" approach: your investment balance moves with how the investee is actually doing.
The fair value option (ASC 825) is a separate, elective regime that lets a company choose, on specific election dates, to measure certain financial assets and liabilities at fair value instead of under their normal accounting model. Companies elect it to avoid "accounting mismatches" — situations where an asset and a related hedge or liability are measured under different rules, creating artificial earnings swings that don't reflect real economic performance.
Here's where it gets tangled. Before 2016, if an equity method investment took an other-than-temporary impairment (OTTI) — a formal recognition that a decline in value isn't going to bounce back — a company was explicitly barred from switching to the fair value option at that point. The rule existed because letting a company jump to fair value right after writing down an investment would open the door to earnings management: impair aggressively under one model, then re-measure favorably under another.
Then FASB issued ASU 2016-13, the standard that introduced the CECL (current expected credit loss) framework. That update eliminated the old OTTI model for available-for-sale debt securities and, as a "conforming amendment," stripped the OTTI exception out of the fair value option guidance in ASC 825 entirely. The problem: equity method investments were never part of the CECL overhaul. They kept their OTTI model. Nobody caught that the cleanup had removed the fair-value-option guardrail for an asset class it was never supposed to touch.
For close to ten years, the codification technically no longer said you couldn't elect the fair value option for an equity method investment after an OTTI. It just... didn't say anything.
What ASU 2025-12 Actually Does
ASU 2025-12 — one of FASB's periodic "Codification Improvements" releases, which bundle dozens of small corrections and clarifications rather than introduce new policy — restores the original intent. Issue 16 of that update amends ASC 825-10-25-4(e) to explicitly state that entities are not permitted to elect the fair value option for an equity method investment upon recognizing an OTTI.
In plain terms: the loophole is closed. If you write down an equity method investment as other-than-temporarily impaired, you cannot then switch that investment to fair value measurement. It stays under the equity method, carried at cost and adjusted for your share of the investee's results, impairment and all.
FASB was explicit that this is a correction, not a policy change — the board's position is that the ability to make this election was never intended to exist after 2016 and the amendment simply restates the original guardrail. But "not a policy change" doesn't mean "not consequential" for the (likely small) number of companies that had read the gap in the codification as a genuine, available option.
Effective Date and Transition
- Applies to annual reporting periods beginning after December 15, 2026, and interim periods within those years.
- Early adoption is permitted.
- Entities may apply the change prospectively or retrospectively, decided issue-by-issue (this ASU bundles 33 separate issues, and companies don't have to pick one transition method for all of them).
For a calendar-year company, that means the change is mandatory starting with fiscal year 2027 — but nothing stops you from adopting early if you want the clarity now, particularly if you're in the middle of restructuring how an underperforming joint venture is carried on your books.
Why This Matters Even If You're Not a Public Company
It's easy to read "FASB codification improvement" and assume this only matters to large public issuers with SEC reporting obligations and audit committees parsing footnote 14. That's not quite right, for a few reasons:
Private companies use equity method accounting too. Any business with a meaningful minority stake in another entity — a restaurant group that co-owns a commissary with two other operators, a manufacturer with a 30% stake in a shared distribution joint venture, a professional services firm that holds equity in a spun-out software product — is applying ASC 323 whether or not it's publicly traded. GAAP-basis financial statements, the kind banks and investors ask for, follow the same rules regardless of company size.
Lenders and investors read impairment signals closely. If your business has an equity method investment that's underperforming, how you account for that decline — and whether you have flexibility to switch measurement models afterward — directly affects the numbers a lender sees on your balance sheet and income statement. Removing an available (if likely unintended) option removes a lever some companies may have used to manage how a bad investment showed up in reported earnings.
It's a reminder that "GAAP" is not static. Business owners often treat their chart of accounts and accounting policies as something you set up once and leave alone. In reality, standards get patched, clarified, and occasionally reversed on a rolling basis — this is the 33rd bundle of such fixes in a series that runs every year or two. If you or your bookkeeper haven't looked at how your joint venture stakes are carried in a few years, an ASU like this is a good prompt to check.
What to Actually Do About It
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Inventory your equity method investments. List anything on your books carried under ASC 323 — 20%–50% ownership stakes where you have influence but not control. If you don't have any, this ASU doesn't affect you and you can stop reading.
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Check whether any of them have taken an OTTI. If an investee has had a rough stretch and you've already recognized (or are considering recognizing) an other-than-temporary impairment, this is the moment to confirm your accounting treatment matches the restored guidance — you can't use the impairment event as a springboard to fair value measurement.
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Talk to whoever prepares your financials about early adoption. If your business is currently in a gray area — an impairment that hasn't been finalized, or a joint venture whose future is uncertain — deciding now whether to adopt early (and prospectively vs. retrospectively) avoids restating anything later.
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Don't confuse this with your other 32 codification issues. ASU 2025-12 is an omnibus release. If your accountant mentions "the FASB update," ask specifically about Issue 16 (the fair value option / OTTI item) versus, say, treasury stock retirement or receivables factoring — several other issues in the same release affect completely different parts of the balance sheet, and they may have different transition elections.
Keep Your Financial Records Ready for Whatever FASB Fixes Next
Standards like ASU 2025-12 are a reminder that clean, auditable books matter even when the change itself is narrow — you need to be able to see exactly how an investment was carried, when an impairment was recognized, and under which model, without digging through spreadsheets. Beancount.io provides plain-text accounting that gives you complete transparency and version history over every entry, so tracing how a rule change like this touches your books is a diff, not an archaeology project. Get started for free and keep your records ready for the next codification update.