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Equity method

The equity method in accounting is the process of treating equity investments in associate companies. The investor keeps his or her equities as an asset. The investor’s proportional share of the associate company’s net income increases the investment but the opposite is also true if a net loss is recorded. Even the 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.

Equity accounting is usually applied where the entity holds between 20 to 50 percent of voting stock. This implies the 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 it may be inappropriate for some entities within this range. It all depends on the nature of the actual relationship between the investor and investee. The ownership of more than 50 percent of the voting stock will create a subsidiary. Its financial statements consolidate into the parent’s. The ownership of less than 20 percent will create an investment position carried at historic book or fair market value, if it is available for sale or trade, in the investor’s balance sheet.