Equity Method vs Consolidation Method (Accounting) - Explained
What is the Equity Method of Calculating Profits on Investments?
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What is the Equity Method?
The equity method is the accounting method used by Company A to report on its financial statements the earnings of Company B in which the reporting company holds an ownership interest. The amount included is calculated as:
Amount Reported = Earnings of Company B x Ownership Interest of Company A.
What is the Consolidation Method?
The consolidation method of reporting is when all of the revenue, expense, assets, and liabilities of Company B would be included in the financial statements of Company A.
The consolidation method is required for subsidiary companies. That is, it is required when Company A exercises full control over Company B (generally understood to be over 50% ownership) it must record its investment in the subsidiary using the Consolidation Method.