06 November 2017
When one company purchases a minority stake in another, the purchasing firm is called the investor, and the company it buys into is called the investee. Companies that own minority stakes in other businesses use the equity method as their standard accounting technique to account for those holdings in which their stake is significant but below 50 percent. These minority stakes lie between 20 to 25 percent at a minimum and 50 percent stake at a maximum. With such sizable interests, investor companies exert considerable influence over the strategy and operations of the investees.
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06 November 2017
Equity method of accounting in consolidated financials refers to picking of proportionate profits of associate in the consolidated financials. For example -
A holds 25% in B at a cost of Rs. 50. For FY 16-17, B earned a profit of Rs. 500. In consol financials of A, following entry will be passed -
Investment in associate (B) Dr. 500*25% = 125 Profit / (Loss) of associate Cr. 125
In Consol BS of A, Investment of B will now be shown at 50+125 = Rs.175
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