Equity Method Accounting

An accounting technique used by an investor to account for profits earned through its investment in an associate company, typically when the investor has significant influence but not control.

The investor recognizes its share of the associate's earnings as an increase to the investment account and as investment income on its income statement.

Profits from transactions between the investor and associate are eliminated to the extent of the investor's ownership.

The investment is initially recorded at cost. The investment account is adjusted to reflect the investor's share of the associate's earnings or losses.

Upon achieving control (usually over 50% ownership), the investor consolidates the associate's financials and may need to adjust the previously held equity investment to fair value at the acquisition date.

The investor debits 'Investment in Associate' and credits 'Cash' for the initial investment.

Used when the investor has control, generally through majority ownership (more than 50%).

Occurs when the fair value of the investment falls below its carrying amount, and the decline is deemed other than temporary.

Significant information about investments accounted for using the equity method must be disclosed in the investor's financial statements.

Failing to eliminate intercompany profits and losses results in an overstatement of profit.