Eigenkapitalmethode

The Eigenkapitalmethode, often translated as the equity method, is an accounting standard used to account for investments in which the investor has significant influence over the investee. This method is typically applied when an investor holds between 20% and 50% of the voting stock of another company. Under the equity method, the investment is initially recorded at cost. Subsequently, the investor's share of the investee's net income or loss is recognized as investment income or loss, and the investment account is increased or decreased accordingly. Dividends received from the investee reduce the carrying amount of the investment. If the investee incurs a loss, the investor recognizes its share of the loss, but the investment account cannot be reduced below zero. The equity method aims to reflect the economic reality of the investment relationship, showing the investor's proportionate share of the investee's performance. This contrasts with the cost method, where the investment is generally not adjusted for the investee's earnings, or the consolidation method, where the financial statements of the investor and investee are combined. The choice of accounting method depends on the degree of influence the investor has over the investee.