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]


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • equity method — An accounting method used to reflect an investor s interest in a company. This method is used when the investor owns 20 percent or more of the investee and has significant influence over the investee. Under the equity method, the investment is… …   Financial and business terms

  • equity method — A method of accounting for associated undertakings in which the investor initially discloses in its financial statements the amount of the investment at its cost, identifying any goodwill arising. In subsequent periods the carrying amount is… …   Accounting dictionary

  • Equity Method — An accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement and the reported value is based on the firm s share of the… …   Investment dictionary

  • equity method — nuosavybės metodas statusas Aprobuotas sritis buhalterinė apskaita ir finansinė atskaitomybė apibrėžtis Apskaitos metodas, kai investicija iš pradžių apskaitoje registruojama įsigijimo savikaina, o vėliau jos vertė didinama ar mažinama… …   Lithuanian dictionary (lietuvių žodynas)

  • equity method — A means of accounting for *business combinations in contexts where an investment in an organization is too small to effect control. The equity method operates through (i) the inclusion of an appropriate proportion of the organization’s *income in …   Auditor's dictionary

  • equity method of accounting — A method of accounting where the investor s proportionate share of net profit and net assets are included respectively as single lines in the consolidated profit and loss account and balance sheet of the investing group. Practical Law Dictionary …   Law dictionary

  • gross equity method — A method of accounting for associated undertakings in which the investor shows on the face of the balance sheet its share of the net amount of the investee s aggregate gross assets and liabilities; in the profit and loss account, the share of the …   Accounting dictionary

  • method — meth‧od [ˈmeθəd] noun [countable] a planned way of doing something, especially one that a lot of people use: method of • It is best to consider all methods of figuring your annual income tax before deciding on any one option. method for • A buy… …   Financial and business terms

  • equity accounting — ➔ accounting * * * equity accounting UK US noun [U] (also equity method [S]) ACCOUNTING ► a method of accounting that takes into account a percentage of profits from shares that a company owns in another company: »The group s equity accounting,… …   Financial and business terms

  • equity accounting — See equity method of accounting. Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010 …   Law dictionary


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.