Equity method

Equity method in accounting is the process of treating investments in associate companies. Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company. The investor records such investments as an asset on its balance sheet. The investor's proportional share of the associate company's net income increases the investment (and a net loss decreases the investment), and proportional payments of dividends decrease it. In the investor’s income statement, the proportional share of the investor’s net income or net loss is reported as a single-line item.

Equity accounting is usually applied where the entity holds 20–50% of voting stock, since this implies significant influence on the decisions of the associate by the holding company. Equity accounting may also be appropriate where the holding falls outside this range and may be inappropriate for some entities within this range depending on the nature of the actual relationship between the investor and investee. Control of the investee, usually through ownership of more than 50% of voting stock, results in recognition of a subsidiary, whose financial statements must be consolidated with the parent's. The ownership of less than 20% creates an investment position, carried at historic book or fair market value (if available for sale or held for trading) in the investor's balance sheet.

See also

Further reading

  • Morris, James E. (2004). Accounting for M&A, Equity, and Credit Analysts. New York: McGraw-Hill. ISBN 0-071-42969-7.
  • Rosenfield, Paul; Steven Rubin (1985). Consolidation, Translation, and the Equity Method: Concepts and Procedures. New York: John Wiley & Sons. ISBN 0-471-81357-5.
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