Equity method accounting is used when an investing company owns stocks of another affiliate company. There are several different ways of accounting for this ownership, but this method is perhaps the most popular.
Equity method accounting factors in the increase or decease in profits of the invested company. These differences are usually unrealized and not actually obtained by the investing company. The increase or decease is, of course, calculated on the percentage of stocks owned and does not account for dividends paid. For example, if an investor owns 100 shares of an affiliate’s stock. And if that stock increases 10%, only those 100 shares will reflect the 10% increase. The investing company will then record that increase as profit on their ledger.
Before going further, it is important to note that if a parent company owns over 50% of a subsidiary company, equity method accounting is not allowed. Consolidated companies are required to combine the financial figures into one statement for the group of entities. Continue reading ‘Equity Method Accounting Makes a Big Difference’ »