Equity method

versus
Consolidation
How to account for the investments?
  Subsidiary S Parent P
EQUITY METHOD
Balance sheet Balance sheet
December 31, N December 31, N
The equity method is used to
Assets    
account for investments which
Current assets 10 100 provide significant influence on
Investment in subsidiary S - 90%x20 = 18 the subsidiary
Other non-current assets 40 382
Assume Parent P owns 90% of the
Total assets 50 500 capital of Subsidiary S but
Liabilities     subsidiary is not consolidated.
Current liabilities 10 100
Non-current liabilities 20 200 The value of shares owned by P in
Total liabilities 30 300 the capital of S appears on the
Equity     balance sheet of P as investment
(non-current assets)
Capital 10 90
Retained earnings 10 110 The value of the investment is
Total equity 20 200 determined according to the equity
method: Equity of subsidiary x
Total liabilities and equity 50 500 percentage of ownership
Consolidation

• The equity investments which provide a controlling interest to their owner must be accounted for
using the consolidation method.
• The shares owned by the parent will not appear as Investments on the balance sheet: the parent
will preapare a consolidated balance sheet for the group P+S.
• The financial situation of S will be consolidated with the financial situation of P.
• The account Investments (value=18) will be removed. Instead, all assets and all liabilities of S will
be consolidated (value of assets net of liabilities of S is 20).
• The consolidation will show a noncontrolling interest in the equity section of the consolidated
balance sheet for 20-18=2.
• The noncontrolling interest represents the value of the subsidiary S which relates to minority
shareholders: Parent P owns 90% of S (90%x20) whereas other shareholders own 10% of S
(10%x20)
  Subsidiary S Parent P CONSOLIDATION
Balance Balance   Consolidated
sheet sheet balance sheet
31/12/N 31/12/N P and S
Assets     31/12/N
Current assets 10 100 Assets  
Investment in subsidiary S - 18 Current assets 10+100=110
Other non-current assets 40 382 Other non-current assets 40+382=422
Total assets 50 500 Total assets 532
Liabilities     Liabilities  
Current liabilities 10 100 Current liabilities 10+100=110
Non-current liabilities 20 200 Non-current liabilities 20+200=220
Total liabilities 30 300 Total liabilities 330
Equity     Equity  
Capital 10 90 Capital 90
Retained earnings 10 110 Retained earnings 110
Total equity 20 200 Noncontrolling interest 2
Total liabilities and equity 50 500 Total equity 202
Total liabilities and equity 532