What Is an Equity Method?

Equity method: A method of valuing a long-term equity investment based on the proportion of the investment enterprise in the equity capital of the invested enterprise. When the equity method is adopted for long-term equity investment, in addition to increasing or decreasing the change in the book value caused by the equity affecting the long-term equity investment, the investee company has a profit or loss, and the book value of the long-term equity investment of the investing enterprise should be increased or decreased accordingly. . ^[1]

Equity method

Equity investment accounting method adopted when the investment company has significant influence on the operating activities of the investee company, that is, the long-term equity investment account is adjusted as the investment company's equity in the investee company changes, which is truly reflected in the ownership of the investee company A method of equity. Internationally, when the investment ratio reaches or exceeds 20% or 50%, the equity method is adopted. Under the equity method, the investment income of an investing enterprise is the amount that should be allocated to the investee's after-tax profits based on the proportion of its shares held by the investee company, regardless of whether the investee company

Factors to be considered for the recognition of investment income by equity method accounting:

In the case of long-term equity investments accounted for using the equity method, when confirming that they should enjoy or share the net profit or net loss of the investee, based on the net profit of the investee's book, the following factors should be taken into account to make appropriate adjustments:

1. If the accounting policies and accounting periods adopted by the investee are inconsistent with those of the investing enterprise, the financial statements of the investee shall be adjusted in accordance with the accounting policies and accounting periods of the investing enterprise, and the profit and loss of the investee shall be determined on this basis .

2. Based on the fair value of the identifiable assets and other identifiable assets of the investee at the time of obtaining the investment, the net profit of the investee is adjusted and confirmed.

3. When an investment enterprise uses the equity method to recognize investment income, it shall offset the unrealized internal transaction gains and losses that occur between it and its associates and joint ventures. This unrealized internal transaction includes both downstream and upstream transactions.

The unrealized internal transaction profit and loss offset between the investment enterprise and its associates and joint ventures is different from the unrealized internal transaction profit and loss offset between the investment enterprise and its subsidiaries. The unrealized internal transaction profit and loss between the parent and subsidiary companies are being merged. The financial statements are fully offset, and the unrealized internal transaction gains and losses between the investment company and its associates and joint ventures are only offset by the investment company or the subsidiary included in the scope of the consolidated financial statements of the investment enterprise. Enterprise equity.

Counter-current transactions

For counter-current transactions in which an associate or joint venture sells assets to an investment enterprise, in the event that the transaction has not realized internal transaction gains and losses (that is, the relevant assets have not been sold to an external independent third party), the investment enterprise shall enjoy the equity method of calculation and confirmation of enjoyment of When investing in profit or loss from an associate or joint venture, the effect of this unrealized internal transaction gain or loss should be offset. When an investment enterprise purchases assets from its associates or joint ventures, it shall not recognize the portion of the joint venture or joint venture that should be enjoyed by the enterprise before the assets are sold to an external independent third party.

Unrealized internal transaction gains and losses due to countercurrent transactions are reflected in the book value of the assets held by the investment company before being sold to external independent third parties. When an investment enterprise compiles consolidated financial statements externally, it shall adjust the long-term equity investment and the book value of assets containing unrealized internal transaction gains and losses in the consolidated financial statements, offset the unrealized internal transaction gains and losses included in the book value of relevant assets, and correspondingly Adjust long-term equity investments in associates or joint ventures.

Downstream transactions

For downstream transactions in which an investment company sells assets to associates or joint ventures, in the event that the transaction has not realized internal transaction profits and losses (that is, the relevant assets have not been sold to external independent third parties), the investment company should use the equity method to calculate and confirm the application. When enjoying the investment profit or loss of an associate or a joint venture, it shall offset the effect of the unrealized internal transaction gains and losses, and at the same time adjust the book value of the long-term equity investment of the associate or joint venture.

The complex equity method treats an investment company s investment in an investee as a merger. It is also called a single-line merger method. It requires

1. Initial investment cost

If the initial investment cost of a long-term equity investment is greater than the fair value share of the identifiable net assets of the investee when investing, the initial investment cost of the long-term equity investment is not adjusted; when the initial investment cost of the long-term equity investment is less than the investment, To identify the fair value share of net assets, deduct the account of "long-term equity investmentXX company (cost)" and credit the account of "non-operating income" based on the difference.

2. Profit and loss adjustment

After an investment enterprise obtains a long-term equity investment, it shall confirm the investment gains and losses and adjust the book value of the long-term equity investment in accordance with the share of the net profit or loss realized by the investee. The investment enterprise shall calculate the portion it shall distribute according to the profit or cash dividend declared by the invested unit, and shall reduce the book value of the long-term equity investment accordingly.

When an investment enterprise confirms that it should enjoy the share of the net profit or loss realized by the investee, it should be based on the fair value of the identifiable assets and other identifiable assets of the investee at the time of obtaining the investment.

For example, if the depreciation or amortization amount based on the fair value of the fixed assets and intangible assets of the invested unit at the time of obtaining the investment is different from the depreciation or amortization amount that the invested unit has already accrued, The net profit or loss of the invested unit shall be adjusted according to the difference, and the investment profit or loss shall be calculated and confirmed according to the adjusted net profit or loss and the shareholding ratio. When making relevant adjustments, important items should be considered.

3.Recognition of excess losses

The investment company's confirmation of the net loss incurred by the investee shall be limited to the book value of the long-term equity investment and other long-term equity that substantially constitutes a net investment in the investee. .

When confirming that the losses incurred by the investee should be shared, the following procedures shall be followed.

(1) Deduct the book value of long-term equity investment.

(2) If the book value of the long-term equity investment is not sufficient to offset, the investment loss shall continue to be recognized within the limit of the book value of other long-term equity that substantially constitutes a net investment in the investee, and the book value of long-term receivables shall be offset.

(3) After the above treatment, if the enterprise still bears additional obligations in accordance with the investment contract or agreement, it shall recognize the estimated liabilities according to the estimated obligations and account for the current investment loss.

4. Changes in other equity

The investment enterprise shall adjust the book value of the long-term equity investment and account for the owner's equity for other changes in the owner's equity other than the net profit or loss of the investee.

In the case of the same shareholding ratio, other changes in the owner's equity other than net profit or loss of the investee, the enterprise's share calculated according to the shareholding ratio, debit or credit the "long-term equity investment" account, Debit "Capital Reserves-Other Capital Reserves"

Borrow: Long-term equity investmentXX company (other changes in equity)

Loan: Capital reserve-other capital reserve (or borrowing)