What is the Equity Method?
The equity method is a form of consolidation in the context of accounting in the group. It was developed as an economic basis method and is prescribed in the 7th EC directive.
In Germany, the equity method is mandatory for consolidated financial statements, but not permitted for individual company financial statements in accordance with Section 253 of the German Commercial Code (HGB).
According to Section 312 of the German Commercial Code (HGB), the equity method is a simplified consolidation method for associated companies (Section 311 (1) of the German Commercial Code). Participation in a company (Section 271 (1) HGB) over which significant influence is exercised is a prerequisite. The regulations according to IFRS are largely identical. A distinction must be made depending on the application:
Upon first-time application, neither the assets and debts nor the expenses and income of the associated company are included in the consolidated financial statements. Instead, the difference between the acquisition cost of the investment and the proportionate equity items of the associated company.
This positive or negative difference must - as with full consolidation - the hidden reserves, the excessively high book values of the individual balance sheet items or the business or Goodwill of the associated company.
In the following years, the value of the investment is updated in line with the development of the associated company's share of the equity capital. The pro-rata annual surplus is added to the value of the investment annually through profit or loss. The investment in an associated company is to be assessed either at the book value or at the amount that corresponds to the proportionate equity of the associated company.