Equity method

Accounting for an investment with significant influence as one asset that grows with the investor's share of profits and falls with dividends received. The investee's revenue, assets and debt stay off the investor's statements.

Where you will meet it

Equity method appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Work out underlying earnings and explain them, set out ways to normalise earnings per share (EPS), and compute normalised EPS
  CFA Level II · Equities

  “The average return on equity method multiplies the average ROE over the cycle by current book value per share.”

• Set out how IFRS classifies, measures and requires disclosure of: (1) financial asset investments; (2) associates; (3) joint ventures; (4) business combinations; (5) special purpose entities and variable interest entities
  CFA Level II · Financial Statement Analysis

  “Significant influence, usually 20% to 50%, means the equity method for associates, and joint ventures also use it.”

• Analyse how the choice of accounting method for intercorporate investments changes financial statements and ratios
  CFA Level II · Financial Statement Analysis

  “The equity method shows a single line on the balance sheet and income statement, so revenue, assets and liabilities are smallest and margins and return on assets look highest.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with E · Glossary