Equity method
Accounting for an investment with significant influence as one asset that grows with the investor's share of profits and falls with dividends received. The investee's revenue, assets and debt stay off the investor's statements.
Where you will meet it
Equity method appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Work out underlying earnings and explain them, set out ways to normalise earnings per share (EPS), and compute normalised EPS
“The average return on equity method multiplies the average ROE over the cycle by current book value per share.”
- Set out how IFRS classifies, measures and requires disclosure of: (1) financial asset investments; (2) associates; (3) joint ventures; (4) business combinations; (5) special purpose entities and variable interest entities
“Significant influence, usually 20% to 50%, means the equity method for associates, and joint ventures also use it.”
- Analyse how the choice of accounting method for intercorporate investments changes financial statements and ratios
“The equity method shows a single line on the balance sheet and income statement, so revenue, assets and liabilities are smallest and margins and return on assets look highest.”
Practise it
Practise equity method until it is automatic: questions that explain every wrong option.
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