Equity accounting, usually called the equity method, is an accounting approach used when an investor has significant influence over another entity but does not control it. Instead of fully consolidating the investee, the investor records its share of the investee’s profit or loss and adjusts the carrying value of the investment over time.
This treatment is common for associates and some joint ventures.
Core idea
The investment starts at cost. After that:
- the carrying amount increases when the investee earns profit attributable to the investor
- the carrying amount decreases when losses are recognized
- dividends usually reduce the carrying amount rather than being treated as fresh income in full
Typical threshold
A holding of roughly 20% to 50% is often a practical starting point for considering significant influence, but the real issue is influence, not just the percentage alone.
Why it matters
- gives a more realistic picture than simple cost accounting for influenced investments
- avoids full consolidation when control is absent
- links investment carrying value to the underlying economics of the investee
Equity accounting vs. consolidation
- Equity accounting: significant influence, no control
- Consolidation: control over the investee
Equity accounting vs. fair-value treatment
Where significant influence does not exist, investments are often measured under other accounting frameworks rather than the equity method.
- Impairment
- Financial Accounting
- Equity Account
- Control
FAQs
Is equity accounting the same as owning stock?
No. It is a reporting method for certain investments, not a general synonym for equity ownership.
Does the investor record all of the investee's revenue and expenses?
No. Under the equity method, the investor typically records its share of net results rather than line-by-line consolidation.
Do dividends increase income under equity accounting?
Not in the same way as under simple investment accounting. Dividends generally reduce the carrying amount of the investment.