The effect of using the equity method on the performance of the investor
Journal Title: Acta Economica - Year 2014, Vol 12, Issue 20
Abstract
There is a general agreement that the increase in investment in the real sector is one of the key prerequisites for economic recovery of countries affected by the crisis. In countries which have finished the transition process, this need arises even more strongly. Investors can invest in the establishment of new companies, the recapitalization of existing ones and establishment of companies that will be under the joint management. Financial reporting on investments varies depending on the amount of equity investments in companies. Significant impact for investors provides the share in the capital of more than 20 % and less than 50 % and equity participation in the joint venture provides a participation in the joint management. To determine the value of such share, the equity method is applied . It is very different from the consolidation that is used for the share which is the basis of control in how to determine the value of the share and the amount and timing of recognition of share revenue. The equity method, whose application is mandatory offers investors two important information: what is the amount of net assets of the associate or joint venture relating to share and how high is the share of investors in profit. The entire amount of earnings is almost never allocated to owners, part of the earnings is retained. Income from the participation in this method is almost always higher than the inflow of cash in dividends received, using the equity method may adversely affect the liquidity of the company investors.
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- EP ID EP43786
- DOI https://doi.org/10.7251/ACE1420059S
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