Dịch investments valued using the equity method trong kế toán năm 2024
Luckily, this post clearly explains the equity method investment formula, providing actionable insights you can apply for improved financial reporting. Show
You'll discover what the equity method is, how to calculate it, record journal entries, compare it to other methods like cost and consolidation, adhere to accounting standards, and more through practical examples. Introduction to Equity Method of Accounting for InvestmentsThe equity method of accounting is used when an investor has significant influence over an investee company but does not have majority control. This method requires the investor to record its share of the investee's earnings and losses on its income statement, with a corresponding adjustment to the carrying value of the investment on its balance sheet. Understanding the Equity Method of AccountingThe equity method is an accounting approach whereby the investment is initially recorded at cost but is subsequently adjusted to reflect the investor's share of the investee's net income or loss. The investor reports its share of the investee's net income or loss in its income statement, and the carrying value of the investment on the investor's balance sheet is also adjusted accordingly. Key things to know about equity method accounting:
The equity method provides more accurate reporting than other methods like the cost method, since the investor's net income reflects its share of the investee's operational results each period. Criteria for Applying the Equity MethodThe equity method investment accounting is applied when:
Meeting the above criteria requires an investor to use the equity method of accounting for recording income and losses from its investment. This provides a more accurate picture of financial performance than other methods. What is the equity method of investment accounting?The equity method is an accounting technique used by a company to record the profits earned through its investment in another company. Here is a brief overview of how it works:
So in summary, the equity method allows the investor to recognize its share of investee income directly on its financial statements, rather than just holding the investment at cost. This reflects the significant influence over the investee company. The equity method investment formula to calculate the investor's share of income is:
For example, if the investor owns 30% of the investee, and the investee reports $100,000 net income, the investor would report $30,000 as its share of the investee's income for the period. The equity method provides more accurate reporting than other methods like the cost method. However, there are some complexities involved in applying it properly in practice. What are investments accounted for under the equity method?Investments accounted for under the equity method include situations where an investor holds significant influence over the investee company. Significant influence generally means the investor owns 20-50% of the voting stock in the investee. Some key things to know about equity method investments:
So in summary, the equity method applies when an investor can exercise significant influence over the operating policies of the investee company. The investor then accounts for its share of the investee's income and adjusts the carrying value of the investment accordingly each period. What is the equity method of ASC 323?The equity method of accounting is a way for an investor to account for an investment in another company when the investor has significant influence over the investee. The FASB Accounting Standards Codification (ASC) 323 outlines the guidance for applying the equity method. Here are some key points about the equity method under ASC 323:
So in summary, ASC 323 mandates the equity method for investments that meet the criteria for significant influence. This gives a more accurate picture of the investor's share of the profits and losses in the investee company. What is the equity method of JV accounting?The equity method of accounting is used when an investor has significant influence over the investee company, but does not have majority control. Significant influence typically means the investor owns 20-50% of the investee. With the equity method, the initial investment is recorded at cost on the investor's balance sheet. The investor's share of the investee's earnings or losses are then recorded in the income statement and added to or subtracted from the investment account on the balance sheet. For example, if Company A purchases 40% of Company B for $100,000, Company A would make the following entry:
If Company B then earns $50,000 in net income for the year, Company A would record their share of 40% or $20,000 as follows:
The equity method allows the investor to recognize its share of the profits and losses of the investee. This helps reflect the true performance of the investment over time. The equity method differs from the cost method, where earnings are not recognized, and from full consolidation, where 100% of the investee's accounts are combined with the investor's. The equity method applies when significant influence over the investee exists without outright control. Breaking Down the Equity Method Investment FormulaThe equity method is an accounting technique used by investors to account for investments in which they exert significant influence over the investee company. The equity method investment formula helps capture the investor's share of the investee's earnings. Initial Investment and the Equity Method FormulaWhen an investor makes an initial investment under the equity method, they record the investment at cost. For example, if Company A purchases 25% ownership in Company B for $100,000, Company A would make the following journal entry:
The initial investment is recorded at historical cost on Company A's balance sheet. Under the equity method, the investor then adjusts the investment balance each period to account for its share of the investee's net income or loss. The formula is: Investor's Share of Earnings = Investee's Net Income x Investor's Ownership Percentage For example, if Company B reported net income of $200,000 for the year, Company A would record $50,000 as its share of Company B's earnings (25% x $200,000). The journal entry would be:
This increases the investment account on Company A's balance sheet. Investee's Net Income and Investor's Balance SheetBy recording its proportional share of the investee's earnings, the investor is able to reflect the increasing value of its investment over time. The equity method provides a more accurate picture on the balance sheet compared to other methods like the cost method. The equity method investment account will continue to be updated each period based on the investee's financial performance. This impacts the asset value on the investor's balance sheet. Recording Equity Method Investment Journal EntriesInitial Recognition of Equity Method InvestmentWhen a company first acquires an equity investment that qualifies for the equity method, it records the initial cost of the investment as an asset on the balance sheet. The corresponding journal entry is a debit to the equity investment asset account and a credit to cash or payables, depending on how the investment was acquired. For example, if Company A purchases a 25% ownership share of Company B for $100,000, the journal entry would be:
This establishes the initial carrying value of the equity investment on Company A's books. Under the equity method, the investor records its proportionate share of the investee's net income or loss as part of its own earnings. The investor's ownership percentage is used to determine its allocable share of the investee's profit or loss each period. The journal entry to record the investor's share of the investee's net income involves debiting Equity Income and crediting the Equity Investment account. For example, if Company A determined its 25% share of Company B's net income was $10,000 for the year, the journal entry would be:
This increases the carrying value of the investment and reports equity income to represent the investor's return. If the investee had a net loss, equity income would show a negative amount instead. Dividends and the Impact on Retained EarningsWhen the investee pays dividends, the investor company cannot record dividend income like a typical stock investment. Instead, the dividends reduce the carrying value of the equity investment on the investor's books. For example, if Company B pays $5,000 in dividends and Company A is entitled to 25% of those dividends based on its ownership percentage, Company A would make this journal entry:
The credit to cash reflects the actual dividends received, while the debit to the investment account reduces the carrying value. This aligns with the equity method principle that the investment account should reflect the investor's claim on the investee's book value. In terms of retained earnings, the investor's share of the investee income increases retained earnings, while dividends from the investee reduce retained earnings. The equity income and dividend amounts flow through to the investor's equity section accordingly. Comparing Equity Method to Cost and Consolidation MethodsEquity Method vs Cost Method in AccountingThe key difference between the equity method and cost method is in how the investor accounts for its share of the investee's earnings. With the equity method, the investor recognizes its proportionate share of the investee's net income or loss in its income statement. The investor's share of the investee's earnings increases the investment account on the balance sheet, and dividends received from the investee reduce the investment account. In contrast, under the cost method, the investor only recognizes dividends received from the investee as income. The investee's earnings are not included in the investor's income. The investment account on the investor's balance sheet is carried at cost and only adjusted for dividends received. So in summary:
The equity method is generally used when the investor has significant influence over the investee, whereas the cost method is used when the investor does not have significant influence. Consolidation Method vs Equity Method of AccountingThe key difference between the consolidation method and equity method lies in the presentation of the investee company's financial statements. Under the consolidation method, the investor essentially combines its financial statements with the investee's as if they were a single economic entity. The consolidated statements report 100% of the investee's assets, liabilities, revenues and expenses rather than just the investor's share. In contrast, under the equity method, the investee's accounts are not combined with the investor's accounts. The investor reports its share of the investee's net assets and net income as single line items on its balance sheet and income statement respectively. There is no detailed breakdown of the investee's accounts. Another key difference relates to minority interest. Under the consolidation method, minority interest represents the portion of the subsidiary's equity that is not owned by the parent. Minority interest is presented as a separate component within equity on the consolidated balance sheet. The equity method does not have a minority interest component. Only the parent company's investment in and share of the subsidiary's income is recognized. In summary, the consolidation method combines all accounts while the equity method shows a single investment account. Only consolidation has minority interest. Adhering to IFRS and GAAP: Equity Method of AccountingThis section examines the requirements for equity method accounting under International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Equity Method of Accounting Under GAAPThe equity method of accounting is used under U.S. GAAP when an investor has significant influence over an investee. Significant influence is presumed with an ownership stake between 20-50%. The key guidelines for applying the equity method under GAAP include:
Overall, the equity method allows the investor to record its share of income/losses without having to fully consolidate the investee's financial statements. Equity Method of Accounting IFRS ConsiderationsUnder IFRS, the equity method is referred to as the equity accounted investments method. The criteria for applying this method is similar to GAAP:
However, there are some key differences in how the equity method is applied under IFRS:
So while the rationale for equity method accounting is similar between GAAP and IFRS, there are notable differences in its application worth considering. Practical Examples of Equity Method AccountingThis section provides real-world scenarios to illustrate how the equity method of accounting is applied in practice. Equity Method of Accounting Example: Initial InvestmentHere is a hypothetical example of the journal entries for an initial investment under the equity method:
The journal entry for Company A would be: Account Debit Credit Investment in Company B $100,000 Cash $100,000 To align the initial investment to Company A's share of book value: Account Debit Credit Investment in Company B $20,000 Equity Investments Adjustment $20,000 The $20,000 represents the difference between the initial investment ($100,000) and Company A's share of book value ($120,000). This aligns the investment account balance to equity method accounting rules. Ongoing Application of Equity Method FormulaHere is an example of applying the equity method formula to record Company A's share of Company B's net income:
The journal entry would be: Account Debit Credit Investment in Company B $20,000 Equity Investments Income $20,000 This records Company A's $20,000 proportional share of Company B's net income for the year. The investment account balance is increased to continue reflecting Company A's share of ownership of Company B under the equity method. Conclusion: Synthesizing Equity Method Investment InsightsRecap of Equity Method Investment Formula and EntriesThe equity method investment formula calculates an investor's share of the investee's net income based on the percentage of ownership. The formula is: Investor's Share of Net Income = Percentage Ownership x Investee's Net Income The corresponding journal entries are:
Final Thoughts on Equity Method vs Other Accounting ApproachesThe equity method is appropriate when an investor holds significant influence over the investee, generally 20-50% ownership. For controlling interests above 50%, use consolidation method. For ownership below 20% with no significant influence, use the cost method. Compared to the cost method, the equity method better reflects economic reality by showing the investor's share of income. The consolidation method fully combines financial statements. The equity method strikes a balance between the two. Considerations for Applying Equity Method of AccountingWhen applying the equity method, accountants should:
Review investee financial statements and disclosures to accurately calculate proportional net income and equity changes. |