Equity method
Encyclopedia
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.
Net income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
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
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
. 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
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
(if available for sale
Available for sale
Available for sale is an accounting term used to classify financial assets.AFS is one of the three general classifications, along with held for trading and held to maturity, under the U.S. Generally Accepted Accounting Principles , specifically, the FASB 115...
or held for trading) in the investor's balance sheet.
See also
- Business valuationBusiness valuationBusiness valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business...
- Enterprise valueEnterprise valueEnterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...
- Associate companyAssociate companyAn associate company in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its...
- Minority interestMinority interestMinority interest in business is an accounting concept that refers to the portion of a subsidiary corporation's stock that is not owned by the parent corporation...
- Consolidation (business)Consolidation (business)Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group...