Analysis of long-term equity investment cost method and the application of the equity method

Abstract: Enterprise ownership relationships formed investment equity investment, which is usually long-term equity investments held for long term business, so the choice of accounting methods is very important. This paper analyzes the long-term equity investment cost method and the equity method of accounting methods and scope, and the similarities and differences between the two are compared, and finally describes the conversion between the two situations.

Keywords: cost method Long-term equity investment income method applied

A long-term equity investment is initially recognized at cost

Long-term equity investments in companies confirm the initial investment cost, in addition to outside formed by the merger are recognized in the following ways.

① Long-term equity investment obtained through the issuance of equity securities, the initial investment cost is the fair value of securities.
② cash payment made, the initial investment cost for the actual payment of the purchase price, including direct expenses, taxes and other expenses.
③ investor's investment, in addition to the agreed price is not fair circumstances, the initial investment cost is the value of the contracts.
④ through the exchange of non-monetary assets acquired and debt restructuring, should be in accordance with the 'Enterprise Accounting Standards' relevant non-monetary assets exchange and debt restructuring provisions to determine.

(2) Long-term equity investment cost method of application

2.1 Definitions and Scope

Long-term equity investments are initially measured at cost, the profits or cash dividends received after the method of revenue recognition is the cost method.

In accordance with the relevant provisions of the long-term equity investments can be used when the following occurs Cost method: (a) business combinations, investment companies can be invested enterprise control. Manifests itself invested enterprises had been invested enterprises at 50% or more of the voting capital or through agreements have control over their business decisions. (2) Non-business combinations, investment enterprises invested enterprises do not have significant influence or joint control, in an active market and their fair value can not be reliably measured, it does not offer. Jointly controlled companies that have invested more than 20% of voting capital, investment companies and joint venture invested enterprises, with a veto. When the joint venture between the two companies, investment companies in the technology, business decisions and other aspects of the invested enterprise influential when it is materially affected.

2.2 Cost accounting methods and accounting procedures

① accounting method. When the long-term equity investments using the cost method should be in accordance with the initial investment cost, the additional cost is to be adjusted or recovered costs, additional investments for the cash dividends or profits are recognized as investment income. The amount of profit or cash dividends exceed the accumulated net profit allocated invested enterprises as the initial investment cost. Under this method to obtain investment passive investment income, can not be invested automatically influence.

② accounting procedures. Under the cost method Long-term equity investments, generally follow the following procedures: (1) initial or additional investment, generally in its book value as the initial investment cost. (2) investment enterprises invested enterprises shall be entitled to cash dividends or profits are recognized as investment income. After the year of investment profits or cash dividends, to the end of the year if the accumulated profits greater than or equal supremacy of the invested net cumulative end

Profit or loss, in accordance with the accounting system can be calculated according to the formula and the accounting treatment, on the contrary you should first calculate dividends receivable and cash dividends previously recognized as investment income, offset the initial cost of the amounts reversed.

2.3 Costing the theoretical basis and improvements

① theory. The theory is based on the cost method Long-term equity investments accounted for at cost, not with the increase or decrease in shareholders' equity adjusted book value remains unchanged, unless there are additional, withdrawn or reduced investment, both to reflect the cost of long-term equity investments accounted for. So whether corporate profit and loss, only upon receipt of cash dividends and profits only debit bank deposit, credit investment income, accounting method is relatively simple. Distribution of profit before distribution of profits invested enterprises do not have the right to two relatively independent enterprise. So the cost method is applicable to investment companies do not control the investee companies and it has no significant impact.

② cost improvements. In the use of the cost method of accounting, the cost can be offset through investments and reversal of ways to improve cost accounting method, the calculation is not re-cumulative calculation and allocation of net profit or loss before dividends, profit distributions based directly on the year and on annual net income, combined with the cost of investment in the amount of offset and reversal of accounting and cost calculation of changes in investment income, which not only saves time and energy, but also reduces the error rate to achieve a streamlined effect.

3 Long-term equity investments under the equity method of application

3.1 Definition of the equity method and scope of application

Investment to the initial investment cost, the investment holding period is under-invested enterprises have invested enterprise share of changes in equity adjusted book value of investments using the equity method is a method.

According to relevant regulations, the occurrence of long-term equity investment, if the investment firm on the invested enterprise has joint control or significant influence, you can use the equity method, namely investment in joint ventures or associates.

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3.2 equity method accounting methods and advantages

① accounting method. Long-term equity investment is less than the initial investment cost of investment in the fair value of the identifiable net assets acquired, the difference shall be included in profit or loss, debit 'long-term equity investment,' credit 'operating income.' While adjusting the cost of long-term equity investments. Conversely not adjust the initial investment cost.

② advantages. Using the equity method of long-term equity investments meet the theoretical requirements of accrual is feasible and meaningful. It does not consider whether the dividends received, but according to the investment actually occurred to determine whether there is profit or equity investment enterprises. Equity method investment companies and real economic relations were invested enterprises also reduced emphasis on the use of adjusted profit allocation behavior.

3.3 Problems

Analysis using the equity method of accounting methods will find in the initial measurement of the equity method when the following questions: a. If a listed company to market the fair value of the net assets evaluation, the difference should not be repeated enjoy recognized as goodwill or assets do not meet the conditions value, and should be used as operating expenses. b. If itemized assessment of the investee assets recognized at fair value, the difference is not necessarily transferable benefits, but also possible negative goodwill or accounted for liabilities. In the subsequent measurement process may also occur invested enterprises recognized investment

Earnings and cash flow discrepancies or changes in equity other problems.

4 Cost Method and Equity Method Comparison

4.1 Costing and equity method of contact

① stock dividends treated equally. Distribute stock dividends invested enterprises, investment companies regardless of the cost method or the equity method of accounting treatment is not done, just specify the number of shares in the ex-dividend date change.

② impairment of assets in the same way. If the phenomenon of long-term equity investment is impaired, the accounting book value determined according to the provisions after provision for impairment. Subsidiaries, joint ventures and the investor does not have control or significant influence, the fair value of the investment can not be reliably measured by the corresponding accounting standards to determine the recoverable funds, provision for impairment. Whichever method is used, after determining impairment can no longer be reversed.

③ between the two can be transformed. Invested enterprises had invested enterprise's equity ratio was determined using the cost method or the income method of accounting, production and business activities in the ordinary course, when ownership changes, the long-term equity investment accounting method may also occur conversion.

4.2 Costing and the difference between the equity method

① Definition and scope of accounting nowhere

From the foregoing analysis, the cost to get the options of cost and equity method to the initial investment cost will be invested enterprise and investment enterprise's economic activity as a whole, there is a fundamental difference between the two definitions, when conducting accounting Scope also significantly different.

② initial investment to determine the different

When the cost method in the use of long-term equity investment when the actual cash amount paid as initial costs incurred direct expenses, taxes are also included in the investment cost. Using the equity method, if the birth cost over the fair value of the identifiable net assets, the difference is the cost of long-term equity investment. Otherwise the difference is seen as current income, and long-term equity investment cost to make adjustments.

5 Long-term equity investment cost method and the equity method of conversion

5.1 equity method to the cost method changes

If in the course of business, when additional shares of the investee units do not have to buy an additional investment, or investment in the transfer investment units will result in the invested equity capital in proportion to reduce, if this ratio is below 20% It was not invested enterprises have a significant impact. Or because of some other reason to make between the two is no longer have control, joint control or significant influence, the equity method is no longer applicable and should be converted to the cost method. The carrying value of the investment as an investment cost has been included in the book value of profits and cash dividends as an investment cost recovery.

5.2 cost method to the equity method of transformation

Additional investment if the investment firm and its equity capital being invested enterprises the proportion will continue to increase, when this ratio is too high to more than 20% after the invested enterprises will increase the influence of the matter on the cost method not reflect the results of operations of the investee impact of the investment units should be converted to the equity method. At this time the initial investment cost is retroactively adjusted book value of long-term equity investment and additional investment costs.

In short, the long-term equity investment enterprises in reasonable under the circumstances to choose accounting methods to achieve the best effect, and under the operating conditions change in a timely manner and method of accounting adjustments.

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