Equity Method

AAA

DEFINITION of 'Equity Method'

An accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement and the reported value is based on the firm's share of the company assets. The reported profit is proportional to the size of the equity investment. This is the standard technique used when one company has significant influence over another.

INVESTOPEDIA EXPLAINS 'Equity Method'

When a company holds approximately 20-25% or more of another company's stock, it is considered to have significant control, which signifies the power that a company can exert over another company. This power includes representation on the board of directors, partaking in company policy development and the interchanging of managerial personnel. If a firm owns 25% of a company with a $1 million net income, that firm would report earnings of $250,000.

When the equity method is used to account for ownership in a company, the investor records the initial investment in the stock at cost, and then that value is periodically adjusted to reflect the changes in value due to the investor's share in the company's income or losses.

RELATED TERMS
  1. Proportional Consolidation

    In accounting for joint ventures, a method of including items ...
  2. Conglomerate

    A corporation that is made up of a number of different, seemingly ...
  3. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  4. Minority Interest

    1. A significant but non-controlling ownership of less than 5 ...
  5. Parent Company

    A company that controls other companies by owning an influential ...
  6. Subsidiary

    A company whose voting stock is more than 50% controlled by another ...
Related Articles
  1. What are the sources of funding available ...
    Investing

    What are the sources of funding available ...

  2. Breaking Down The Balance Sheet
    Personal Finance

    Breaking Down The Balance Sheet

  3. Conglomerates: Cash Cows Or Corporate ...
    Investing Basics

    Conglomerates: Cash Cows Or Corporate ...

  4. Sneaky Subsidiary Tricks Can Cloud Financials
    Investing Basics

    Sneaky Subsidiary Tricks Can Cloud Financials

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center