Corporate Accounting Report: Equity Accounting Methods Explained

This report delves into the realm of corporate accounting, focusing on equity accounting methods. It elucidates the distinctions between significant influence and control, providing a clear understanding of their implications in financial reporting. The report further differentiates between associates, joint ventures, and joint arrangements, outlining their unique characteristics and financial reporting requirements. It explains how the date of significant influence is determined and addresses the treatment of unrealized gains and losses within the context of consolidated financial statements, emphasizing the rationale behind their elimination. The report serves as a comprehensive guide for shareholders, offering insights into equity accounting and its practical application in assessing investments in associate companies.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Table of Contents
Introduction:...............................................................................................................................2
Differences between significant influence and control:.............................................................2
Differences between associates, joint venture and joint arrangement:......................................2
Determination of date of significant influence:.........................................................................3
Unrealised gains and losses and reasons for their elimination:..................................................4
Conclusion:................................................................................................................................4
References:.................................................................................................................................5

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Introduction:
Subsidiary is regarded as the entity that is controlled by another company. The word
control implies that the parent company can administer the financial and operating policies of
its subsidiaries so that it can gain benefits from the operations of subsidiary (Penman 2015).
Control is only gained when an investor has more than 50% of the voting rights that are
earned by the parent company. The present report is concerned with equity accounting and
providing the investors with better understanding regarding significant influence and control.
Differences between significant influence and control:
Significant influence can be defined as power of participating in the operating and
financial policy decision relating to equity and has not control over the policies. Control on
the other hand implies that when an interest or the group acting in kind holds majority of the
organizations voting stock (Kimmel et al. 2016). While in significant influence if the
investors hold a minimum of 20 per cent of voting power of investee, the investor is
consumed to have the significant influence. It is possible for the investor to not have
significant amount of influence even though with most of the ownership are investee. While
the controlling interest enables the shareholder or the shareholders to vote or overturn the
decision that is made by the current members of board. While it is possible to lose significant
influence over the investee even though in the absence of change in ownership. The
controlling interest provides ownership of operational and strategic decision making
procedure.
Differences between associates, joint venture and joint arrangement:
Basis of Distinction Associates Joint Arrangement Joint Venture
Characteristics An associate is
regarded as the
A joint arrangement
refers to
A joint venture
refers to joint

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company on which
the investors exerts
the significance
amount of influence
(Narayanaswamy
2017). It is neither
subsidiary nor it is
an interest in the
joint venture.
arrangement among
the parties that
possess joint control
of arrangement. The
owners have the
rights to assets and
obligation towards
liabilities associated
to joint arrangement.
arrangement among
the parties which has
joint control over the
arrangement and has
the rights to net
assets of the
arrangement.
Financial
Reporting
Material transactions
among the investors
and the investee.
The investors
participate in the
significant policy
making procedure.
The joint operator
identifies the assets
that includes the
share of assets held
jointly along with
liabilities, including
the share of any
liabilities occurred
jointly (Kusnadi and
Wei 2017).
Joint venture only
identifies the interest
as the investment by
using the equity
accounting method
by adhering with the
IAS 28 investments
in the Associates and
Joint Ventures.
Determination of date of significant influence:
Under the equity method of accounting, the investment is at first identified at cost by
recognizing any goodwill/capital reserve originating during the time of acquisition and
carrying sum is increased or decreased to identify the share of profits for the investor’s or
losses of investee following the date of acquisition (Warusawitharana and Whited 2015). The

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date of significant influence is determined from the time when the investment in the associate
is accounted under the equity method of accounting from the date on which it falls inside the
definition of the associate.
The most current available financial statements of the associate are used by the
investor in implementing the equity method. They are generally drawn up at the same date as
the financial reports of an investor. When the financial reports with the different reporting
date is used then the adjustment is made relating to the effects of any significant events or
transactions among the investors and the associate that takes place between the date of
associates financial reports and date of investor’s consolidated financial statements.
Unrealised gains and losses and reasons for their elimination:
Unrealized gains and losses can be defined as profits and losses that have taken place
on paper but they relevant transactions are not yet completed (Bougheas and Wang 2019). An
individual can assume the unrealized gain and loss on paper profit or loss since it is only
recorded on paper but in actual they are not realized.
The unrealized gains and losses are eliminated while preparing the consolidated
financial statements against the selling affiliate shareholders. Additionally, if the sale is
regarded as the downstream transfer then all the unrealized profit is eliminated from the share
of income of controlling interest while preparing the consolidated statements.
Conclusion:
Conclusively, the report clearly explains the shareholders regarding the equity
accounting method as the process of treating the investment in associate companies. The
method is can be applied by investors that holds 20 to 50 per cent of voting stock in associate
company.

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References:
Bougheas, S. and Wang, T., 2019. A theory of outside equity: Financing multiple projects.
Kimmel, P.D., Weygandt, J.J., Kieso, D.E. and Trenholm, B., 2016. Financial Accounting.
Wiley Custom Learning Solutions.
Kusnadi, Y. and Wei, K.J., 2017. The equity-financing channel, the catering channel, and
corporate investment: International evidence. Journal of Corporate Finance, 47, pp.236-252.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning
Pvt. Ltd..
Penman, S.H., 2015. Financial Ratios and Equity Valuation. Wiley Encyclopedia of
Management, pp.1-7.
Warusawitharana, M. and Whited, T.M., 2015. Equity market misvaluation, financing, and
investment. The Review of Financial Studies, 29(3), pp.603-654.