in accounting is the process of treating investments inassociate companies. Equity accounting is usually applied where an investor entity holds 2050% of the voting stock of the associate company. The investor records such investments as an asset on its balance sheet. The investors proportional share of the associate companysnet incomeincreases the investment (and a net loss decreases the investment), and proportional payments of dividends decrease it. In the investors income statement, the proportional share of the investors net income or net loss is reported as a single-line item.
Equity accounting is usually applied where the entity holds 2050% of voting stock, since this implies significant influence on the decisions of the associate by the holding company. Equity accounting may also be appropriate where the holding falls outside this range and may be inappropriate for some entities within this range 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 asubsidiary, whose financial statements must beconsolidatedwith the parents. The ownership of less than 20% creates an investment position, carried at historic book orfair market value(ifavailable for saleor held for trading) in the investors balance sheet.
Accounting for M&A, Equity, and Credit Analysts
. New York:McGraw-HillISBN0-071-42969-7.
Consolidation, Translation, and the Equity Method: Concepts and Procedures
. New York:John Wiley & SonsISBN0-471-81357-5.
This page was last edited on 3 July 2017, at 10:08