Complete or full equity method of accounting is the combination of simple equity method of accounting and partial equity method of accounting.

It is important to note the percentage of the affiliate/subsidiary company that the investor/parent company owns. This percentage plays a large roll in how the figures are actually calculated and which statement it will be recorded on.

IAS 28, Investments in Associates, requires equity method of accounting to be used for all company investments in which the investor has significant influence. This rule has very few exceptions, so let's look at the definition of when an investing company has a significant influence over the affiliate entity.

Significant influence is normally considered when an investor owns at least 20% of the common stock. In some cases, significant influence can be exercised with less than 20% ownership when the investor participates in the affiliate company procedures. Examples include when an investing company decides some company policies, has representation on the board of directors, selects managerial personnel, and supplies primary technological operations.

If the invested company owns 50% or more of the stocks, it has control of the subsidiary. Control gives the power to govern financial and operating policies and reaps the benefit from its profits. When this control is obtained the relationship becomes a parent to subsidiary rather than investor to affiliate.

According to international accounting standards, when control over another company is present, the entities must consolidate. In a consolidation the accounting records are merged into one ledger of financial statements for the group of entities. Contrary to those standards, some countries have laws that do not permit consolidation. An example of this would be if the subsidiary company does not operate in the same industry or type of business.

Joint ventures that are 50/50 partners will use equity method of accounting. If a different amount of control is exhibited in joint ventures, they normally use proportionate consolidation accounting for determining assets, liabilities, expenses, and profit.

In summary, investing companies with less than 20% ownership of stocks may or may not use equity method of accounting. It is not recommended because the investor does not have access to these shares and does not make decisions. Investors with over 20% ownership are required to use equity method of accounting to record capital gains. And parent companies that control over 50% of a subsidiary must consolidate bookkeeping records, therefore unable to use equity method of accounting. Look at accounting practice sales to be one of those investing companies.


About the author:
Joe Coffee is an entrepreneur for the online marketing firm, Web Shepherd. He has written many articles about accounting, but is not a certified public accountant and any laws or procedures referenced should be verified with a tax professional before they are used.