Investee Accounting

Investee Accounting

A company can account for an investee in one of three ways. 

The way that’s used depends on how much control the company has over the investee.

Control is assumed to depend on how much of the investee the company owns.

So the accounting method is usually determined by percentage ownership.

This is flawed.

Ownership doesn’t mean control. 

Just ask an entrepreneur with a start-up that’s 10 percent owned by the leading public company in its industry. 

What really drives control is 

• the prospect of more funding, 
• access to customers, or 
• a potential buyout. 

Nonetheless, percentage ownership is what’s commonly used.


1.  Owns less than 20 percent of the investee  (Cost Method)
If the company owns less than 20 percent of the investee, the cost method is used.

The investment is carried on the balance sheet as an asset at cost, and that’s it.



2.  Owns between 20 percent and 50 percent of the investee (Equity Method)
If the company owns between 20 percent and 50 percent of the investee, the equity method is used. 

The investment is initially carried on the balance sheet at cost. 

When the investee has net income, that net income is multiplied by the percent of the investee that the company owns.   This proportionate share of investee net income is then added to the company’s income statement.

It’s called something like earnings in affiliate. It flows through to the balance sheet as an addition to the carrying value of the investment.

If the equity method is used, the investee is an unconsolidated subsidiary of the company.


3.  Owns over half of the investee (Consolidation Method)
If the company owns over half of the investee, the consolidation method is used.

This makes the investee a consolidated subsidiary. 

The investee’s revenue and expenses are consolidated—mashed in—with the company’s revenue and expenses on the income statement.

Further down there’s a line called something like earnings attributable to noncontrolling interest. 

That’s the amount of the investee’s earnings that belong to its other owners. 

It’s the proportionate share of  earnings that aren’t the company’s. It’s subtracted.

The top part of the income statement dreams that the company owns all of the subsidiary. The lower part wakes it up.

The consolidation method also calls for all of the investee’s assets and liabilities to be included on the company’s balance sheet.

Noncontrolling interest —which appears in either the liabilities or equity section, as noted earlier—corrects for the portion of the investee that the company doesn’t own.

That is, earnings attributable to noncontrolling interest is to the income statement what noncontrolling interest is to the balance sheet.

Consolidated Accounts

A large group may have a hundred or more companies.

It would obviously give an incomplete picture if each of these companies gave information just about its own activities.

This is especially true when companies in a group trade with each other.

This is why the holding company must include consolidated accounts as well as its own figures.

The effect of inter-group trading is eliminated and the Consolidated Balance Sheet gives the group's position in relation to the outside world.

This does not remove the obligation for every group company to prepare and file its own accounts.

Such accounts must include the name, in the opinion of the directors, of the ultimate holding company.

Consolidated Financial Statements