Equity Method Accounting Examples, Templates

financial reporting standards

This determination may require extensive analysis depending on the terms and nature of the See CG 1.3 for further information regarding the application of the VIE and VOE consolidation models. To better understand the equity method of accounting for investment examples above, it’s also helpful to contrast equity with consolidation and cost methods.

substance common stock

One such occasion arose recently with a third-year student analysing the financial statements of Marks & Spencer, the UK retailer. The student knew that Marks & Spencer had entered into an agreement with Ocado to sell M&S food products online but was struggling to see where that was reflected in the overall revenue in the consolidated financial statements. If Saks stock rose to $10 per share, the 10 million shares would be worth $100 million. Macy’s balance sheet would be changed to reflect $50 million in unrealized gains, less a deferred tax allowance for the taxes it would owe if it sold the shares.

An example of accounting for an investment using the equity method

If the investor has 20% or more of the voting stock of the investee, this creates a presumption that, in the absence of evidence to the contrary, the investor has the ability to exercise significant influence over the investee. Conversely, if the ownership percentage is less than 20%, there is a presumption that the investor does not have significant influence over the investee, unless it can otherwise demonstrate such ability.

Essentially, a dividend under the equity method is just a repayment of the investment. A company might qualify for the equity method with less than a 20 percent stake in an investee if it can show evidence of influence. The FASB has made sweeping changes in the last two decades to the accounting for investments in consolidated subsidiaries and equity securities. However, it has left the accounting for equity method investments largely unchanged since the Accounting Principles Board released APB 18 in 1971. From time to time, the investee may issue cash dividends or distributions to its owners. Dividends or distributions received from the investee decrease the value of the equity investment as a portion of the asset the investor owns is no longer outstanding. The ability to exercise significant influence is often related to an investor’s ownership interest in the investee on the basis of common stock and in-substance common stock.

Difference Between the Full Equity & Partial Equity Method

If chosen, the investment is reported at fair value despite the degree of ownership with gains and losses in the change of fair value reported in net income. This ~3% ownership percentage is much lower than the normal 20% required for the equity method of accounting.


You treat dividends as a return of investment by posting to a contra-asset account linked to XYZ Corp. securities, thereby reducing the net carrying value of the investment. Sometimes it’s just an investment; other times it reflects the desire to exert influence over the investee. The dividing line between the two motivations is 20 percent of outstanding shares, according to generally accepted accounting principles. If you own less than 20 percent of the investee shares, you use the cost method to record the investment.

Deloitte comment letter on IASB ED/2015/7 ‘Effective Date of Amendments to IFRS 10 and IAS 28’

If the company owns 20% or less of the other company, it will use the cost method, which reports dividend income and the asset value of the investment. There are several ways a minority interest might be reported for tax reasons. For example, if Macy’s Inc. bought a portion of Saks Fifth Avenue, it stands to reason that Macy’s would be entitled to that same portion of Saks’ earnings. This raises the question of how Macy’s would report its share of Saks’s earnings on its income statement. The answer depends on the amount of the company’s voting stock that Macy’s would own. The equity method treats an investment another company almost like an expansion or merger of the two companies.

The investor also records its portion of the earnings/losses of the investee in a single amount on the income statement. The investor’s portion of the investee’s OCI will be recorded within their OCI accounts but can be aggregated with the investor’s OCI. Items recorded through OCI may include foreign currency translation adjustments, pension adjustments, or gains/losses on available-for-sale securities. Once the investor determines the type of investment and the applicable accounting treatment, it is time to record the equity investment. At the end of Year One, the investment in Little account appearing on Big’s balance sheet reports $968,000 ($900,000 + 80,000 – 12,000). This total does not reflect fair value as with investments in trading securities and available-for-sale securities.

Equity Method Earnings and Losses

That’s a separate and more complicated topic, so we’re going to focus on just the equity method here. Another group of shareholders has majority ownership, and operate it without regard to the investor’s views. One of the joys of teaching students about IFRS Standards and then setting them projects is seeing how they bring fresh eyes to some of the oddities in the application of the standards. Studying this article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD, and the content is relevant to your learning and development needs. Register a user account to print out study notes and all practice questions. Any inter-company transactions between the investor and investee should be eliminated. The goodwill is simply the residual excess not allocated to identifiable assets or liabilities.


The GoCardless equity method of accounting team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments.

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