Hello Eveyone,
Anyone here distuinguish b/w Equity method treatment v/s Accounting method ?
Text says : when an investee is profitable and its dividend payout ratio is less than 100 %, the equity method usually results higher earnings (ok sounds logical) as compared to accounting method used for minority passive investments- i didn’t get this, can someone please shed light here!
Thanks.
The equity method : The proportionate share of the net income is reported in the parent’s income statement. For example, If the parent’s net income(before equity method) = 100,000. Subsidiary net income = 30,000. Parent owns 40%. Then parent’s net income under equity method = 100,000 + 12000 = 112000. Accounting method for minority passive investment : This is usually the less than 20%, and is classified as held for trading or available for sale. In that case, only the dividend income and unrealised gains/losses from changes in fair value(for HFT) are included in the income statement. Therefore, the net income of the parent wont be as high as if it were under the equity method. Hope that clears it up, Sanjay.
Fantastic! That really helped, Salam.
thankyou! 