Equity method
The equity method is an accounting method for accounting for shares in and business relationships with associated companies and joint ventures in the individual and consolidated financial statements .
The basic idea of the equity method is to develop the investment book value in the investor's balance sheet as a mirror image of the development of the proportionate equity in the company involved. If the realization principle is broken, the method makes it possible to collect profits from investments before they are realized.
In contrast to valuation according to the cost principle , the profits and losses of the associated company have a direct effect on the consolidated or individual financial statements of the company involved. In this respect, the equity method is similar to the full consolidation of subsidiaries in the consolidated financial statements and has features of a consolidation method (see also: consolidated financial statements ). In contrast to full and proportionate consolidation , the participation is shown and valued as an asset . The individual assets of the associated company are not included in the investor's balance sheet. In this respect, the equity method is also a valuation method.
scope of application
A company over which another company (investor) exercises significant but not controlling influence and in which the investor holds shares is referred to by several accounting systems as an associate of the investor. The investor has to account for the shares in associated companies and the business relationships with them in its consolidated financial statements, as a rule, using the equity method. US GAAP also provides for the use of the equity method in individual financial statements. While the IFRS provide for accounting using the equity method when exercising a significant influence, the German Commercial Code only provides for this when the significant influence is actually exercised.
An investor has " significant influence " on another company if he has the opportunity to participate in decisions about the company's financial and business policy but cannot control this company. To make this definition more concrete, several indicators have been developed which, individually or together, are intended to indicate that there is a significant influence. Common indicators are:
- The investor has a representative in the management and / or supervisory board or a similar management body of the investee company,
- There are significant business relationships between the shareholders and the investee,
- the investor takes part in the decision-making processes of the associated company,
- management personnel are exchanged between investor and associated company,
- the investor provides the associated company with significant technical information.
In the event that an investor has at least 20% and less than 50% of the voting rights in an associated company, all accounting systems assume that the investor has a significant influence on the associated company. Depending on the accounting system, voting rights are added that are exercised through subsidiaries. In addition, certain potential voting rights are also included in accounting according to IFRS (IAS 28.8). If the investor can prove that, contrary to the assumption, he does not or cannot exercise any significant influence, he does not need to use the equity method. Even if the investor has less than 20% of the voting rights, there may be a significant influence, which can be shown by the presence of one or more of the above-mentioned indicators.
The application of the equity method to shares in joint ventures is regulated differently depending on the accounting system:
US-GAAP, which does not use proportionate consolidation, require the application of the equity method also to joint ventures over which the investor exercises significant influence. This practice was also introduced in IFRS by the abolition of IAS 31. The German Commercial Code, on the other hand, provides for proportionate consolidation for joint ventures, but grants companies the option to use the equity method here as well.
Accounting of the shares using the equity method
As a rule, the equity method provides for the shares to be accounted for on the asset side of the balance sheet as an asset. There is no separate disclosure of the individual assets and liabilities of the associated company in the balance sheet, as is the case with full consolidation or proportionate consolidation .
In the following, a distinction is made between the initial assessment and the subsequent assessment. The initial assessment is i. d. As a rule, to be carried out at the point in time at which the investment first meets the criteria for valuation according to the equity method. The subsequent evaluation is i. d. As a rule, to carry out each subsequent quarterly and annual financial statement.
Initial assessment
The initial valuation of the shares in associated companies takes place at the original acquisition costs of the shares.
In the initial valuation, the investment is initially recognized at the book value with which it was recognized in the individual financial statements at the time of the initial valuation . If the time of the initial valuation coincides with the time of acquisition of the investment, the book value corresponds to the acquisition costs .
In an additional calculation, the book value is now divided into the components proportional equity, hidden reserves and goodwill. The values determined here are relevant for subsequent accounting.
First, the value of the investor's proportional equity in the associated company is determined. The value corresponds to the proportional book value of the equity in the balance sheet of the associated company. In the following, a difference is formed between the pro-rata book value of the equity and the acquisition costs of the investment.
In the next step, the hidden reserves are determined in the balance sheet of the associated company and proportionally allocated to the investor. However, this only happens up to the maximum amount of the difference. If the difference is higher than the proportional hidden reserves, the remaining amount is to be regarded as goodwill. When calculating the share of equity in all accounting systems, potential voting rights must be disregarded, cf. for example IAS 28.12.
Follow-up evaluation
On each subsequent reporting date, the stated value of the investment in the associated company is modified through increases or decreases. The increases or decreases include the following facts:
+/- Pro rata profits or losses of the associated company
- Distributions to the investor
+/- Other changes in the proportionate share of equity
- Depreciation of hidden reserves that were revealed at the time of acquisition
- Possibly. Update of goodwill
+/- if necessary Extraordinary depreciation of the book value of the investment and write-up
- Elimination of intercompany results
The "pro rata profits and losses of the associated company" attributable to the investor increase or decrease the investment value in the period in which they are shown at the associated company. In this period they are shown as investment profit or loss (investment result) in the investor's income statement .
Distributions to the investor reduce the book value of the shares in the associated company without a change in earnings being shown in the investor's consolidated or annual financial statements. If the distribution was shown as a participation profit in the individual financial statements of the investor, it must be eliminated when preparing the consolidated financial statements.
Other changes in equity , which are shown in the associated company with no effect on income, also lead to changes in the investment value of the associated company that do not affect income.
The hidden reserves determined at the time of the initial valuation are to be written off through profit or loss. Therefore, the participation rate of the associated company is reduced in favor of the investor's expense. The amount of the depreciation is based on the depreciation of the assets to which the hidden reserves relate.
In some accounting systems (e.g. according to the German Commercial Code), goodwill determined in the initial valuation must be amortized over its useful life.
In other accounting systems (e.g. IFRS and US GAAP), the goodwill or goodwill from the initial valuation is not subject to scheduled depreciation. According to IFRS, an indirect update of the goodwill is only carried out as part of the impairment test of the investment. A separate impairment test for goodwill is carried out in accordance with US GAAP.
Extraordinary depreciation of the investment book value and reversal of the value:
The book value of the investment determined using the equity method is subject as a whole to an impairment test.
Requirements for the financial statements of the associate
The annual financial statements of the associated company are fundamental for the valuation of the investor's shares in the associated company. Two problems can arise here:
1. If possible, the financial statements should be on the investor's record date .
2. The financial statements should be prepared according to the investor's accounting rules .
In principle, the underlying financial statements of the associated company should be on the date of the initial valuation or the closing date of the investor. If the reporting date of the associated company differs from the reporting date, an interim financial statement of the associated company should be used. However, it can be difficult for the investor to obtain or prepare these interim financial statements. In these cases, a financial statement can also be used as a basis, the reference date of which deviates by up to three months from the reference date of the investor. According to IFRS, however, these financial statements must be modified by significant business transactions that occur between the reporting date of the financial statements and the investor's reporting date. Deviating from this, according to US GAAP, it is sufficient if these business transactions are only given in the notes. According to German commercial law, it is only necessary if the last available financial statements of the associated company are used without modification.
It is also necessary that the financial statements of the associated company are prepared in accordance with the investor's accounting rules . For example, if the investor prepares its financial statements in accordance with the rules of IFRS, the underlying financial statements of the associated company should also be prepared in accordance with the rules of IFRS. The IFRS also require that the investor's accounting and valuation methods are used for similar business transactions (IAS 28.26). US GAAP does not require this. If only financial statements prepared in accordance with other accounting rules or methods are available, these must be modified accordingly (IAS 28.27) before they can be used for the equity method.
Some accounting systems, such as IFRS or US GAAP, are characterized by the notion of materiality. Therefore, the investor only needs to make the above-requested modifications to the financial statements of associated companies there to the extent that the effects on his financial statements are material.
Other aspects to consider when using the equity method
- Elimination of intercompany results from deliveries between balancing companies and associates
- Procedure for a negative investment book value
- Deferred taxes
- Additional disclosure requirements in the notes and the balance sheet
References
Accounting standards
| country | Accounting system | Norms |
|---|---|---|
| International | IFRS | IAS 28 |
| Germany | HGB / DRS | §§ 311, 312 HGB; DRS 8 |
| Austria | Corporate Code | § 263, 264 UGB |
| Switzerland | Swiss GAAP FER | FER 2 and FER 30 |
| United States | US GAAP | FASB ASC 323 |
| United Kingdom | FRS | FRS 9 |
literature
- Karlheinz Küting, Claus-Peter Weber: The consolidated financial statements: Practice of group accounting according to HGB and IFRS , 12th edition, Schäffer-Poeschel Verlag , Stuttgart 2010, ISBN 978-3791029887
- Frank Peffekoven, Thomas Crismann: IFRS: Consolidated Financial Statements: Consolidation and Group Specifics , Erich Schmidt Verlag , Berlin 2011, ISBN 978-3503103614
Web links
Equity method IFRS
US GAAP equity method
Individual evidence
- ↑ cf. Küting / Weber, The consolidated financial statements, 11th edition, Stuttgart 2008, p. 520
- ↑ So by § 311 HGB and IAS 28; US GAAP speaks of an investee .
- ↑ In very rare cases, the accounting systems have stipulated that shares in subsidiaries can be accounted for using the equity method or that the equity method does not need to be applied despite having a significant influence, cf. for example IAS 28 .13.
- ↑ IAS 28.35 in conjunction with IAS 27.38; §311f. HGB applies exclusively to consolidated financial statements, otherwise the acquisition cost principle § 253 (1) HGB applies.
- ↑ Pellens / Fülbier / Gassen / Sellhorn; International accounting, 7th edition Stuttgart 2008, p. 782
- ↑ IAS 31.30; indirect: §310 HGB
- ↑ cf. z. B. IAS 28.11
- ↑ cf. z. B. IAS 28.23
- ↑ cf. Section 312 (2) HGB and DRS 8; other options have been abolished with the BilMoG
- ↑ (IAS 28.31)
- ↑ cf. z. B. IAS 28.31
- ↑ IAS 28.24 and IAS 28.25
- ↑ Section 312 (6) HGB
- ↑ on the other hand contains DRS 8.12 f. a regulation analogous to IFRS
- ↑ cf. for example IAS 8.8
- ↑ side of the Accounting Standards Board (ASB) (Engl.) ( Memento of the original on 16 September 2009 at the Internet Archive ) Info: The archive link is automatically inserted and not yet tested. Please check the original and archive link according to the instructions and then remove this notice.
