Equity accounting: how does it measure up?

This includes the investee’s consolidated subsidiaries and other investments accounted for using the equity method (IAS 28.10). While IAS 28 doesn’t provide specific guidance on how to treat non-controlling interest in the investee’s group, it is most logical for the investor to account only for the controlling interest’s share of P/L and OCI. This is because the net income attributable to non-controlling interest of the investee’s group will never accrue to the investor. The equity method of accounting is used to account for an organization’s investment in another entity (the investee).

For a comprehensive discussion of considerations related to the application of the equity method of accounting and the accounting for joint ventures, see Deloitte’s Roadmap Equity Method Investments and Joint Ventures. Owning 20% or more of the shares in a company doesn’t automatically mean the investor exerts significant influence. Operating agreements, ongoing litigation, or the presence of other majority stockholders may indicate that the investor doesn’t exert significant influence and the equity method accounting is inappropriate.

Change from fair value method to equity method.

The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income. With equity method investments and joint ventures, investors often have questions as to when they should use the equity method of accounting. There are a number of factors to consider, including whether an investor has significant influence over an investee, as well as basis differences. As such, there are questions an investor should ask to make this determination.

The remaining life of the equipment is 10 years, and the investee does not intend to sell the equipment and plans to depreciate it on a straight-line basis for its remaining useful life. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. In the case of both upstream and downstream sales, the profits are considered to be unrealized since the goods are flowing within the company, and there is no value addition in the form of sales to a third party. There is a key distinction to be made between the treatment of impairment losses under IFRS and GAAP. For example, if the investor directly appoints management in production, marketing, finance, and R&D departments, it can spread its control and reach across the investee company.

Share of Loss

For example, if the investee makes a profit it increases in value and the investor reflects its share of the increase in the carrying value shown on its investment account. If the investee makes a loss it decreases in value and the investor reflects its share of the decrease in the carrying value shown on its investment account. Notably, there’s no explicit guidance regarding which section of the P/L should include the share of profit or loss from equity-accounted investments.

• If the investing company has appointed certain individuals to sit on the board, these members are said to be company representatives.
• In the year 20X0, Entity B sold an item of inventory to Entity A for $1m, which was carried at a cost of $0.7m in B’s books.
• However, if the company produces net income of $5 million during the next year, you would take 40% of that amount, or $2 million, which you would add to your listed value, and record as income.
• It applies when an entity prepares separate financial statements that comply with IFRS.
• The equity method is used when one company has “significant influence,” but not control, over another company.
• Through them, the investor would be able to take part in key strategic decisions.

It has eschewed a detailed deliberation on tax accounting issues, but it has discussed certain tax accounting concepts that are an integral part of financial accounting. Therefore, the journal entries do not reflect deferred tax assets (DTA) or deferred tax liabilities (DTL). If the main objective of the proposals is to improve the relevance of information, then the IASB should first clarify what the equity method purports to achieve.