Equity method
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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. The investor's proportional share of the associate company's net income increases the investment (and a net loss decreases the investment), and proportional payment of dividends decreases it. In the investor’s income statement, the proportional share of the investee’s net income or net loss 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 or fair market value (if available for sale or held for trading) in the investor's balance sheet.
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 (1985). Consolidation, Translation, and the Equity Method: Concepts and Procedures. New York: John Wiley & Sons. ISBN 0-471-81357-5.
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