Objectives and use the equity method

Investment enterprise should be how to account for the Investment of the investee? From the current view, Investment in the investee include cost accounting method, equity method and the fair value method. In the three methods, the use of the equity method is more difficult understanding. This paper attempts to target the equity method in the analysis, based on the use of the equity method to analyze the problem.

First, the goal of equity method

Usually that means the equity method Investment company at cost of Investment in the investee, the carrying amount of Investments to be invested with the rights of owners and change an accounting method. In which changes in equity including the net gains or losses and net Investment gains and losses other than the interests of change. the equity method of this definition shows that the initial goal of using the equity method is by adjusting the Investment account to reflect the owner's equity investee changes, and ultimately Investment book value of the account owner's equity investee's share is equal, so investors can clearly understand the direct share of the investee's equity share.

Under the equity method, Investment companies and are often taken as a whole investment units, which with the parent company and subsidiaries as a whole (economic body treatment is essentially the same. Thus, the U.S. Accounting Principles Board Opinion No. 18 Books <<common stock investments in the equity method of accounting methods>> (APB opinion No. 18 pointed out that if investments in investee equity method, then, by the equity method and full consolidation method (obtained by the preparation of consolidated financial statements The investment enterprise should be attributed to the net profit or loss and equity should normally be the same (unless the excess loss and so on. the difference between the two methods is mainly reflected in the financial statements of the specific projects. For example, under the equity method, the investee units of investment in the balance sheet is usually a single account (such as "long-term equity investment" lists, too, gains and losses from investments, usually in the income statement is also a single account (such as "investment income" listed, so interest Law Consolidation Act, also known as single. and under the full consolidation method, you will need a similar long-term equity investment or investment income of a single project specific, to revert to the specific assets, liabilities, income and expense items (also known as progressive consolidation method.

Therefore, the evolution of the equity method from the point of view, the goal can be summarized as follows: (1 so that the book value of investments with the owner's equity investee changes, and ultimately the book value of the investment account is the owner of investment units equal share of interest (target one, (2 as a combination method, obtained by this method makes the investment enterprise should be attributed to the net profit or loss and equity consistent with the full consolidation method (objective II.

The equity method of target location on the different steps and procedures of the accounting would be different.

Second, the use of equity method

(A time should use the equity method

Usually only when the investment enterprises have a significant impact on the invested units or greater influence, to be able to use the equity method. When the investment enterprises have a significant impact on the invested units or greater influence, using the cost method is usually inappropriate. This because:

(1 will be recognized as income dividends received may not be invested enterprises on income earned by the investee full measure, because the dividends received from investment in units may be no relationship between the performance of the current period. By making long-term equity investment With the amount of equity investee changes, you can make the investment business in a timely manner due recognition of investment increased and decreased economic resources to better meet the accrual requirements.

(2 investment dividends paid by companies to manipulate earnings point in time. Therefore, APB opinion No. 18 provides that the issuing company, for the following companies (not consolidated subsidiaries, joint ventures, holding 50 of investee % or less of the shares, but its operating and financial activities can exercise significant influence over the company's investment shall be consolidated and parent company statements using the equity method. and the parent company should also report the parent company's investment in subsidiaries using the equity method.

(B how to use the equity method

Using the equity method equity method depends on the target. Different objectives using the equity method steps shown in Table 1. If the equity method is regarded as a combination method, the accounting of the steps and procedures should be more complete consolidation of the steps and procedures be.

In the use of the above steps, you need to note the following:

Table 1 using the equity method

1. The equity method as a single combination method, the investment companies in the balance sheet and income statement are usually only a single item to reflect the cost of the investee and the investee's net profit or loss and other changes in equity.

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2. Initial recognition, long-term equity investments are generally carried at cost, but our guidelines will be divided into a business combination under common control business combinations and non-merger of enterprises under common control. Therefore, my long-term equity investment guidelines also distinguish the corresponding business combination and the long-term equity investment obtained by other means than a business combination of long-term equity investments. of a business combination of long-term equity investment should be further divided into the same holding under the control of mergers and holding under the same control two cases were consolidated treatment.

3. On the investment cost and the investment at equity accounted share of the investee difference (the difference between the treatment of long-term equity investments. Long-term equity investment difference (if the formation of mother-child relationship, the preparation of consolidated statements, the composition called Consolidated Price by investment costs, Japanese share of the investment unit of investment interest in the fair value of share and investment share of the investment unit at the book value of the share of net assets to be decomposed.

Long-term equity investment differences (combined spread = investment cost - investment at equity accounted share of the investee = (cost of investment - investment by Japanese investors accounted for the fair value of identifiable net assets of shares + (investment share of investment at the net identifiable fair value of assets - investment at equity accounted share of the investee = Goodwill + investment at the amount of change in fair value of net assets

From an accounting point of view, the difference between long-term treatment of equity investment at least the following ways: (1 does not independently confirmed, did not take into account when investment income is recognized, (2 separately recognized, but not the amortization, (3 separately recognized in the Consolidated amortization within a certain period, (4 not independently confirmed, but should be considered investment income recognized, (5 push down to the investee is recognized.

In China, the equity method of accounting system reform in the use of the changes are mainly reflected in the handling of long-term equity investment difference is basically a year ago by .1995 (1 kinds of methods used mainly in 1997, 1995-section (2 methods ,1998-2006 in year (3 and (5 ways, in 2007 after the implementation of new accounting standards are used (4 and (5 methods. Clearly, only the first (3, (4 and (5 ways, ie long-term equity the difference between the amortization and impairment of investments, or take into account when investment income is recognized, or push down to the investee is recognized only one possible target.

Second in the target under the need to compare the difference of the full consolidation method for processing:

(1 initial measurement, the initial investment gains (investment cost is less than the net assets of the investee share of the fair value of the part to be independently confirmed. As a single combined method, the cost of investment over net assets of investee value of the shares are not recognized as a separate part of goodwill, but rather reflects the initial investment amount recorded.

(2 for purchase in the future, the preparation of consolidated financial statements should be based on the day the company purchased the assets and liabilities at fair value of the net profit attributable to parent company, so the equity method, the subsequent measurement of investment at the time should be based on identifiable net assets invested share of the fair value of net investment income is recognized.

4. To be invested in investment companies and internal transactions between the processing units.

Under the equity method, the use of two target different steps mainly in the investment business and internal transactions between the investee treatment. Look at the target, without being invested in investment companies and internal transactions between units of processing, especially in "downstream" transactions, unrealized gains and losses do not affect the internal units of the net investment gains and losses, so adjust the carrying amount of long-term lack of equity investment basis. Conversely, if insider trading based on the carrying amount of long-term equity investment adjustments, do not a possible target. However, under the second target, you need to practice more complete consolidation of internal transactions, the appropriate treatment.

Overall, the new accounting standards of the main objectives of the second set in accordance with the equity method of use of steps, but to be invested in investment companies and internal transactions between the processing unit is slightly different. Mainly in the following areas:

(1 on the smooth sales transactions, only a proportionate offset the unrealized gains and losses, but not completely offset.

(2 if the investment companies need to prepare consolidated financial statements, then the investment companies in their first book on the following accounting treatment (assuming the sales for the downstream unrealized losses on sales profits, not sales:

By: Investment income

Credit: Long-term equity investments

But also the working papers in the consolidated financial statements for further adjustments in the processing (following the adjustment in the consolidated financial statements only on the working papers, do not need to book in the investment business to reflect. Ji: If it is counter sales of goods, because of the insider trading impact of unrealized gains and losses reflected in the investments held by an enterprise of which the book value of the underlying assets, it should be in the consolidated financial statements prepared working papers in the following adjusting entries (assuming the counter sales of unrealized losses on sales profits, not sales :

By: Long-term equity investment - profit and loss adjustment

Credit: inventory, fixed assets, etc.

If the downstream product sales in the consolidated financial statements of the unrealized gain or loss shall be recognized in investment income for individual statements on the basis of the following adjustments:

By: operating income

Credit: Operating costs

Investment Income

5. Lead to cost an additional investment into the equity method of treatment.

When the additional investment cost is converted to lead the equity method, the goal of what should normally be in the retrospective adjustment, and in the target under the need to compare the two-step approach to achieve a business combination for processing. Taking into account the main accounting standards in China will be the equity method regarded as a single combined methods, therefore, lead to additional investment cost method investment enterprises into equity method of accounting for business combinations achieved in stages with the treatment of similar.

It should be noted that when there is excess loss of the investee, taking into account the limited liability companies, investment companies usually only to the amount of long-term equity investment write-down to 0, in this case, the target and the target of a second are difficult to achieved. Similarly, when investment companies and investment units are cross-holdings exist, the different objectives set by the equity method, the use of the steps will be different.

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