Companies must use the equity method to report the income and equity associated with significant minority investments on their period-ending financial statements. The complete equity method is the full name for the equity method. A parent company may use the equity method to internally account for investments in wholly or majority-owned subsidiaries that will be consolidated in its period-ending financial statement.
Complete Equity Method Described
The complete equity method is also called the full equity method -- or simply the equity method. A company that acquires a significant minority ownership stake -- typically, 20 to 25 percent minimum to a maximum of 50 percent -- and exerts pronounced influence over the business uses the complete equity method. "Pronounced influence" means the investing firm must influence the strategic, financial and operational decisions of the business it invests in.
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Consolidated Financial Statements
To comply with generally accepted accounting principles, or GAAP, companies must consolidate all of their minority investments in other companies as separate line items shown on the income statement and balance sheet of their consolidated financials. For majority- or wholly owned subsidiaries, GAAP requires the parent company to combine the parent company's and subsidiary companies' financial statements into one, as if they were only one company. However, parent companies sometimes use the equity method to reflect subsidiary contributions on the parent's internal books before the required consolidation of financial statements.
Complete Financial Statements
Under the complete equity method, the investing company documents its earnings from the investment in another firm on one line on the income statement, reflecting the investor's proportionate share of profits or losses from that investment. The investor's income statement also shows any amortization and adjustments related to its investment. The investing company's value of its equity stake is documented under owner's equity on one line on the balance sheet. With the complete equity method, the investing company documents the original cost of the equity investment and shows any changes in later accounting periods due to the receipt of dividends or changes in the investment's value.
Parent Equity Method
The parent equity method occurs when the parent company of a wholly or majority-owned subsidiary accounts for its investment in the subsidiary's stock or membership interests using the equity method. In this case the parent tracks its investment using the equity method. At the end of the accounting period, the parent eliminates the items that would result in double counting on the consolidated financial statements. This means eliminating each subsidiary's retained earnings, dividend reductions and amortizations that appear on the unconsolidated books.