The Financial Accounting Standards Board has issued a standards update aimed at clarifying the interaction between the rules related to equity securities, equity method investments and certain derivatives.

The new accounting standards update builds on an earlier one from 2016. Back then, FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments—Equity Securities. At the time, FASB made a set of targeted improvements aimed at addressing some aspects of accounting for financial instruments. Among other items, the 2016 standards update offered companies the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (known as the measurement alternative). Since that time some of FASB’s stakeholders have asked for further clarification about how this guidance should interact with equity method investments.

The new accounting standards update, which is based on a consensus of FASB’s Emerging Issues Task Force, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

The changes in Update 2016-01 also prompted some of FASB’s constituents to ask whether certain forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323, or Topic 815, Derivatives and Hedging.

The new accounting standards update clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

The standards update is expected to reduce differences in practice and increase the comparability of the accounting for these interactions.