§ 01
| Ownership | Influence Level | Method | What You See |
|---|---|---|---|
| < 20% | No significant influence | Financial instrument (Trading/AFS/HTM) | Fair value or cost on balance sheet |
| 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 |
§ 02
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.
§ 03
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.
§ 04
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?
§ 05
§ 06
Company A owns 25% of Company B. How is this investment reported, and why might the equity method understate economic exposure?
Five questions · AI feedback
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: