Consolidating equity investment

Give it a read to learn more about the equity method of accounting.When a parent has legal control of a subsidiary, the parent consolidates the subsidiary's financial results with its own.If the investor intends to profit from near-term (generally within than 12 months of initial investment) price movements, they are classified as either .

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The disadvantage to companies using LCM should be clear. When an investor has significant influence over the investee—but not majority voting power—the investor accounts for its equity investment in the investee using the equity method.The International Accounting Standards are similar to U. The equity method of accounting is sufficiently complex that we have dedicated a whole page to the topic.For now, let's just point out that FAS 160 drops the term The parent consolidates 100% of the subsidiary's assets and liabilities, regardless of the parent's actual percent equity ownership, and records any goodwill created in the acquisition of the controlling interest.The parent also records in the section of the consolidated balance sheet any noncontrolling interest representing the value of the subsidiary's equity (net assets) not owned by the parent.Ownership of 50% of the subsidiary's voting common stock generally implies legal control.

However, the parent must own at least 80% of the vote and fair value of the subsidiary's common stock to consolidate for tax purposes.

Alpha's pre-transaction balance sheet is shown below. Note that even though Alpha acquires just 80% of Tango, Alpha records all of Tango on its balance sheet as if it acquired the whole company.

The excess of what Alpha "pays" for Tango over the FV of Tango's identifiable assets is allocated to goodwill ( = 0 - ).

If Saks rose to per share, the 10 million shares would be worth 0 million ( per share x 10 million shares = 0 million).

The balance sheet would be adjusted to reflect million in unrealized gains, less a deferred tax allowance for the taxes that would be owed if the shares were sold.

Equity Method (If Federated owned 21-49%)In most cases, Federated would include a single-entry line on their income statement reporting their share of Saks' earnings.