Three ownership thresholds, three methods
| Ownership | Influence Level | Method | What You See |
|---|---|---|---|
| < 20% | No significant influence | Fair value through net income (FVTNI, ASU 2016-01 — Trading/AFS/HTM now apply to DEBT securities only) | Fair value on balance sheet; unrealized swings hit net income (non-marketable stakes may use the cost-minus-impairment measurement alternative) |
| 20–50% | Significant influence | Equity method | Single line on income statement + balance sheet |
| > 50% | Control | Full consolidation | Every line item merged into parent’s statements |
Why equity-method income isn't cash received
Under the equity method, reported income is based on the investee’s net income, NOT on cash received. If the investee earns $100M and pays no dividends, the 30% owner records $30M in income but receives $0 in cash.
The equity-method income formula
Equity Method Income = Ownership % × Investee Net Income
Variable Interest Entities (VIEs) — control determined by economic interest, not voting rights. The primary beneficiary must consolidate regardless of ownership %. VIEs became notorious through Enron’s off-balance-sheet partnerships.
| Feature | Equity Method (49%) | Consolidation (51%) |
|---|---|---|
| Revenue | Not shown (single line) | All investee revenue merged |
| Debt | Invisible (footnote only) | Fully on balance sheet |
| Reported assets | Single investment line | All investee assets merged |
| Perception | Leaner, less leveraged | Larger, more leveraged |
Find equity-method income and the investee's debt
Find a company with equity method investments (energy, conglomerates, Japanese trading houses). Look for ‘Equity method income’ on the income statement and check the footnotes for the investee’s debt levels.
Non-cash income and off-balance-sheet JV debt
A conglomerate reports $80M in equity method income from a 40% JV that paid no dividends. The JV has $1.2B in debt. What’s concerning?
The consolidation cliff between 49% and 51%
How a 25% stake hides a partner's risk
Company A owns 25% of Company B. How is this investment reported, and why might the equity method understate economic exposure?
Check your understanding
Sit with the ideas.
A conglomerate owns 40% of a joint venture that reported $200M in net income but paid no dividends this year. The conglomerate's income statement shows $80M in 'equity method income.' Meanwhile, the JV's footnote disclosure reveals it has $1.2B in debt. What should concern you?
Why: