What is Equity method basis difference?
In short
When an investor pays more for an equity-method investment than its share of the investee's book value, the excess is allocated to undervalued identifiable assets, with the rest treated as goodwill.
Key takeaways
- Excess allocated to depreciable assets is amortized, reducing the investor's share of investee income.
- Goodwill within the investment isn't amortized or separately tested for impairment.
- The whole investment is tested for other-than-temporary impairment.
Example
Paying $500,000 for 30% of net assets with a book value of $1,400,000 ($420,000 share), with equipment undervalued by $100,000: $30,000 goes to equipment and $50,000 to goodwill.
Where it's tested
FAR: Investments (Debt & Equity Securities) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
An investor owns 30% of an investee and applies the equity method. The investee reports net income of $200,000 and pays dividends of $50,000. What is the net increase in the investment account?