Equity Method
An investment accounting method used when the investor has significant influence over the investee.
FAR tests this as a roll-forward: starting investment + (share of net income) − (share of dividends received) − (amortization of basis differences) = ending balance. The “tell” is a purchase price above book value: you allocate the excess to undervalued identifiable assets and amortize it, so the income pickup is share of investee income minus that extra depreciation/amortization (the slice tied to goodwill is not amortized). Watch the directional trap: dividends received reduce the investment account (a return of capital), they are not income. Losses can drive the carrying amount only to zero; you then stop recording further losses unless you’ve guaranteed the investee’s obligations or committed to fund it.
The classic confusion is the threshold cascade: fair value (ASC 321) below 20%, equity method at 20–50%, consolidation when there is control (usually above 50%). These are rebuttable presumptions, not bright lines. Don’t fully eliminate intercompany items here — instead defer your proportionate share of unrealized intra-entity profit until it’s realized with a third party. Memory hook: EQ = “Earn your Quota” — book your slice of earnings, then subtract dividends and amortization.
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