Equity Method Accounting Definition, Explanation, Examples

Consider an example where the investor has a 40% equity investment in a foreign entity, which has a book value of $4,600, and accounts for it based on the equity method. The investor has $400 (credit) as CTA/OCI and $200 (credit) in its retained earnings. 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. Under the equity method of accounting, dividends are treated as a return on investment. Equity accounting reflects a measurement approach as well as a consolidation approach.

When a company holds approximately 20% or more of a company’s stock, it is considered to have significant influence. The significant influence means that the investor company can impact the value of the investee company, which in turn benefits the investor. As a result, the change in value of that investment must be reported on the investor’s income statement. The investor share of the equity method equity method of accounting goodwill of 27,500 is part of the initial cost of the investment of 220,000 and is included in the debit entry to the investment account. In summary the carrying value shown on the investors equity method investment account is calculated as follows. 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.

Purposes of the equity method of accounting for investments

Through them, the investor would be able to take part in key strategic decisions. However, you never deal with those statements if you’re analyzing normal companies. Just like normal Shareholders’ Equity (also known as the Statement of Owner’s Equity), it increases when Net Income flows in and decreases when Dividends are paid. So, the company is most likely classifying this investment as “Equity Securities,” which means that Realized and Unrealized Gains and Losses show up on the Income Statement.

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IAS 28 — Investments in Associates and Joint Ventures (

In the year 20X0, Entity A sold an item of inventory to Entity B for $1m, which was carried at a cost of $0.7m in A’s books. During the year 20X1, Entity B sold this inventory to its client for $1.5 million. Constituent feedback in the IASB’ Agenda consultation 2011 revealed a level of criticism of the equity method of accounting. Since INV owns 40% of ASC, it is entitled to a proportionate amount of these profits.