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, and therefore has significant influence on the latter's management. Under
International Financial Reporting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any spec ...
s, equity method is also required in accounting for
joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
s. The investor records such investments as an asset on its balance sheet. The investor's proportional share of the associate company's
net income In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization ...
increases the investment (and a net loss decreases the investment), and proportional payments of dividends decrease it. In the investor’s income statement Equity accounting may also be appropriate where the investor has a smaller interest, 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 A subsidiary, subsidiary company or daughter company is a company (law), company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company ...
, 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 Available for sale (AFS) is an accounting jargon, term used to classify financial assets. AFS is one of the three general classifications, along with held for trading and held to maturity, under US GAAP, U.S. Generally Accepted Accounting Principl ...
or held for trading) in the investor's balance sheet.

See also

Business valuation Business valuation is a process and a set of procedures used to estimate the valuation (finance), economic value of an owner's interest in a business. Here Valuation (finance), various valuation techniques are used by financial market participants ...
Enterprise value Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) ...
Minority interest In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 5 ...


Further reading

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External links

{{Authority control Mergers and acquisitions Accounting systems Financial accounting