The IFRS equity method is used for companies that own 20-50% of another company through equity investment. The reporting company must claim a percentage of the other company’s net income equal to the portion of the equity it owns. Differences exist between IFRS and GAAP standards.
The IFRS equity method is an accounting style used for companies that own a significant amount of equity in another company. This method should be used when the company in question owns between 20 and 50 percent of another company through equity investment. As a result, International Financial Reporting Standards (IFRS) require such a company to take into account any changes in the fortunes of the company in which it has invested. If the IFRS equity method is used, the reporting company must claim a percentage of the other company’s net income equal to the portion of the equity it owns.
Corporations governed by IFRS must provide accurate financial statements as part of their business obligations. In this way, potential investors and shareholders can benefit from financial transparency. Part of doing business as a large corporation involves investing in other businesses, and there are certain rules that must be followed at such times. When the investment is significant enough for one company to gain some decision-making power in the other business, the IFRS equity method comes into play.
It is necessary for a company to use the equity method in IFRS when it owns between 20 and 50 percent of the equity of another company. This usually means that the investing company has enough capital to have some authority over the future of the second company. If the investment amount is less than 20 percent, the investing company can use the cost method, simply reporting the investment amount and dividends earned. An investment of more than 50 percent makes the investing company the parent company and the other its subsidiary, which requires consolidated financial statements.
To perform the IFRS equity method, a company must report a portion of the net income of the company in which it owns equity. This portion depends on the percentage of ownership. For example, imagine that Company A owns 25 percent of Company B’s common stock. In one year, Company B earns $1,000,000 United States Dollars (USD). As a result, Company A must report 25 percent. of that amount, or $250,000 USD, into your Proprietary Income Statement.
In the United States, a corporation may be required to follow another set of standards known as General Accepted Accounting Principles (GAAP). There are certain differences between IFRS and GAAP standards. With respect to the IFRS equity method, it is applied a little more strictly to companies that own 20 to 50 percent of another company compared to those that follow GAAP, allowing those companies some leverage to use the cost method.
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