Equity investment accounting runs a spectrum depending on total ownership.
The equity method is used when one company owns >=20% in another
company. When a company accounts for stock ownership under the equity
method, they recognize their "share" of that company's net income for
the year (if 20% ownership, recognize 20% NI), and increase the
associated investment account. This investment account is also
decreased by their "share" of the dividends paid that year. This is
counter-intuitive at first glace, but it helps to think of it in this
way: the Equity Method considers the investing company as owning that
company, not that stock. Therefore, the income recognized is derived
from that invested company's NI. The investee company recognizes a
liability for dividends declared, therefore the investor company, from
an ownership standpoint, also recognizes a "liability" for its share
of the dividends.
Michael Kidd, CPA |
