Equity Method
Accounting glossary · Understand, connect, apply
Under the equity method, an investment starts at cost and is adjusted for the investor’s share of subsequent changes in the investee’s net assets, subject to applicable accounting adjustments.
Example
An investor buys 30% for 90,000. The associate earns 20,000 and pays total dividends of 5,000. Ignoring other adjustments, the carrying amount becomes 94,500.
Remember the difference
The investor recognises its share of the associate’s profit. Dividends received reduce the investment’s carrying amount under this method.
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Prepared with AI assistance. Examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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