Equity method.
In plain English
Under the equity method the investor records the investment at cost and then raises or lowers it by its share of the investee's profits, losses, and dividends each period. Its share of the investee's net income appears as a single line on the income statement, not as revenue. Dividends received reduce the carrying value of the investment rather than counting as income. This sits between two other treatments: small passive stakes are carried at fair value, and controlling stakes are fully consolidated. Because only one line flows through, a company can hold a large economic interest that barely shows up in its revenue.
01Why it matters
A company can own a meaningful chunk of another business, and unless you look for that one line, none of that revenue or those assets will appear anywhere you are reading.
02The math, step by step
Say a company buys 30 percent of a supplier for 5,000,000 dollars. The supplier earns 2,000,000 dollars and pays 500,000 dollars in total dividends. The investor adds 600,000 dollars (30 percent of profit) and subtracts 150,000 dollars (its dividend share), carrying the stake at 5,450,000 dollars.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Consolidation folds the whole subsidiary line by line into the parent's statements. The equity method does not. Revenue, assets, and debt of the investee stay off the investor's statements, and only the net share of profit and the carrying value appear.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
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