Equity Method or Fair Value: How Do You Know Which Accounting Applies?
Start with the investor's relationship to the investee, not with the dividend payment.
Fair-value accounting
When the investor does not have the level of influence required for the equity method, applicable investments may be accounted for under fair-value rules.
Equity method
The equity method is generally used when the investor has significant influence. Ownership percentage is an indicator, but the facts about influence matter.
Share of investee income
Under the equity method, the investor recognizes its share of investee earnings, generally increasing the investment account.
Dividends
Dividends generally reduce the investment carrying amount under the equity method because the investor already recognized its share of investee earnings.
Rollforward
Beginning investment + share of income − dividends ± required adjustments = ending investment.
The takeaway
Equity method tracks the investor's share of investee net assets, not just cash dividends.
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FAQ
Are dividends income under the equity method?
They generally reduce the investment account.
Does ownership percentage alone decide significant influence?
No. Facts and circumstances matter.
Does equity-method income require cash receipt?
No.