5.2.1 Guarantee of an Equity Method Investee’s Third-Party Debt 107 5.2.2 Collateral of the Investee Held by the Investor When Equity Losses Exceed the Investor’s Investment 107 5.2.3 Investee Losses If the Investor Has Other Investments in the Investee 108 5.2.3.1 Percentage Used to Determine the Amount of Equity Method Losses 113 The Fair Value or Equity Method. Consistent with IFRS, the fair value method may be chosen to avoid. This method is only used when the investor has significant influence over the investee. An investor stops applying the equity method when its investment ceases to be an associate or a joint venture. Equity Method Example. The equity method of accounting is used to account for an organization’s investment in another entity (the investee). IAS 28 outlines the accounting for investments in associates. You use the fair value method if you do not exert significant influence over the investee. All companies with equity method investments; Relevant dates. An associate is an entity over which an investor has significant influence, being the power to participate in the financial and operating policy decisions of the investee (but not control or joint control), and investments in associates are, with limited exceptions, required to be accounted for using the equity method. Suppose a business (the investor) buys 25% of the common stock of another business (the investee) for 220,000 in cash. A company must use the proper accounting method when it buys shares of another company. However, investor’s share when applying equity method is determined based on existing ownership interest, i.e. The choice of method usually boils down to the amount of influence the buyer has over the investee. 9 PwC | IFRS overview 2019 If a financial asset is reclassified out of the amortised cost measurement category so that it is measured at fair Effective immediately Key impacts. The equity method of accounting, sometimes referred to as “equity accounting,” is the accounting treatment for one entity’s partial ownership in another entity when the entity making the investment is able to influence the operating or financial decisions of the investee. 3.5 Associates and the equity method (Equity-method investees) 146 3.6 Joint arrangements (Ventures carried on jointly) 162 3.7 [Not used] 3.8 Inventories 167 3.9 Biological assets (Agriculture) 175 3.10 Impairment of non-financial assets 178 3.11 [Not used] 3.12 Provisions, contingent assets and liabilities the holding period typically is hours and days. The equity method is meant for investing companies that exert significant influence over the other company while still retaining minority ownership. This October 2020 edition incorporates updated guidance on: Carried interest and equity method investments; A ‘commitment to purchase’ subject to one or more contingencies; Investments resulting in a bargain purchase Under the equity method, of the fair value of the investee's inventory exceeds its carrying value, the inventory is assumed to be _____ in the following year. Share of the profit and loss of associates and joint ventures accounted for using the equity method. The intent of IFRS is to enhance financial statement comparability across borders, and for that reason is widely used outside the US. IASB did not want to expand this aspect of equity accounting without broader review of accounting for associates and joint ventures (IAS 28.BC15-BC16). The way of discontinuing depends on specific circumstances, for example if the investment becomes a subsidiary, then an investor stops equity method and starts full consolidation in line with IFRS 10/IFRS 3. What is the Equity Method? 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