The International Accounting Standards are similar to U. The equity method of accounting is sufficiently complex that we have dedicated a whole page to the topic.Give it a read to learn more about the equity method of accounting.When a parent has legal control of a subsidiary, the parent consolidates the subsidiary's financial results with its own.Ownership of 50% of the subsidiary's voting common stock generally implies legal control.However, the parent must own at least 80% of the vote and fair value of the subsidiary's common stock to consolidate for tax purposes.In preparing consolidated financial statements, intercompany balances and transactions are eliminated.
Classification of the investment depends on the intent of the investor.If the investor intends to profit from near-term (generally within than 12 months of initial investment) price movements, they are classified as either .Equity investments accounted for using the cost method must be periodically marked-to-market (fair value) if the securities have readily available market prices, creating unrealized gains and losses.Some countries require the lower of cost or market ("LCM" or "LOCOM") method of periodically revaluing equity investments, rather than mark-to-market.One key implication of LCM is that unrealized losses are reported, while unrealized gains are not.
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The disadvantage to companies using LCM should be clear. When an investor has significant influence over the investee—but not majority voting power—the investor accounts for its equity investment in the investee using the equity method.