The equity method is the consolidation method that carries an investment at the group's share of the investee's equity, updated at each closing, instead of integrating that entity's individual lines. Nothing of the investee's revenue, costs, assets or liabilities appears in the group accounts. The whole holding is condensed into one line on each statement.
The mechanics are compact. On acquisition, the investment is recorded at cost. At each close, its carrying amount is increased by the group's share of the profit and reduced by the share of dividends received. The balance sheet shows a single asset line, investments accounted for under the equity method. The income statement shows a single line, share of profit of equity accounted entities.
It applies in two situations within the consolidation scope. Significant influence without control, typically a holding between 20 and 50 percent with board representation. Joint ventures under IFRS 11, which since 2013 can no longer be accounted for by proportionate consolidation in that framework.
The method changes what a reader sees, not what the group owns. A 40 percent stake in a company generating 50 million euros of revenue contributes nothing to consolidated revenue: only the share of profit appears. Analysts describe the effect as off-balance-sheet activity, and it is the main reason the choice of method is scrutinised.
Internal flows with an equity accounted entity are eliminated only up to the group's percentage, and only on the unrealised portion. That partial elimination still requires the underlying intercompany transaction to be recorded identically on both sides. Phacet's intercompany flow reconciliation agent establishes that agreed base before any percentage is applied, and documents it with a traceable audit trail.
