Equity method

Equity method

Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. Proportional share of associate company's net income increases the investment, and proportional payment of dividends decreases it. In the investor’s income statement, the proportional share of the investee’s net income is reported as a single-line item.

The ownership of more than 50% of voting stock creates a subsidiary. Its financial statements consolidate into the parent's. The ownership of less than 20% creates investment position carried at historic book value in the investor's balance sheet.

Further reading

*citebook | author=Morris, James E. | title=Accounting for M&A, Equity, and Credit Analysts | publisher=McGraw-Hill | location=New York | year=2004 | id=ISBN 0-071-42969-7
*citebook | last=Rosenfield | first=Paul | coauthors=Steven Rubin | title=Consolidation, Translation, and the Equity Method: Concepts and Procedures | publisher=John Wiley & Sons | location=New York | year=1985 | id=ISBN 0-471-81357-5

ee also

*Business valuation
*Enterprise value
*Associate company
*Minority interest
*Consolidation (business)

External links

* [http://www.eagletraders.com/advice/securities/equity_method_of_accounting.htm Equity Method of Accounting]
* [http://www.iasplus.com/standard/ias28.htm IAS 28 INVESTMENTS IN ASSOCIATES]

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