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. Accounting Method

    The method by which income and expenses are reported for taxation ...
  3. Equity

    1. A stock or any other security representing an ownership interest. ...
  4. Conglomerate

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

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

    1. A significant but non-controlling ownership of less than 5 ...
Related Articles
  1. Investing Basics

    What is the accounting treatment for discontinued operations in IFRS and U.S. GAAP?

    Find out what accountants define as "discontinued operations" under US GAAP and IFRS and the differences that exist between the two systems.
  2. Investing

    What are the sources of funding available for companies?

    Despite all the differences among companies, there are only a few sources of funds available to all firms. 1. They make profit by selling a product for more than it costs to produce. This is ...
  3. Personal Finance

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  4. Investing Basics

    Conglomerates: Cash Cows Or Corporate Chaos?

    Huge companies may not be as infallible as previously assumed. Find out why bigger isn't always better.
  5. Investing Basics

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  6. Investing

    What do people mean when they say debt is a relatively cheaper form of finance than equity?

    In this case, the "cost" being referred to is the measurable cost of obtaining capital. With debt, this is the interest expense a company pays on its debt. With equity, the cost of capital refers ...
  7. Investing

    What are the differences between affiliate, associate and subsidiary companies?

    All three of these terms refer to the degree of ownership that a parent company holds in another company. In most cases, the terms affiliate and associate are used synonymously to describe a ...
  8. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  9. Delivery duty paid (DDP) is a shipping term.
    Investing

    What does DDP Mean?

    Delivery duty paid (DDP) is a shipping term specifying that the seller is responsible for all costs associated with delivery of the goods to the buyer. It is usually used when goods are exported ...
  10. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center