Module I· Consolidation & Equity MethodBasic
Question
What is the equity method, and when is it used?
Answer
Equity method
The investor records the investment as one line on the balance sheet and recognizes its share of the investee's profit or loss in one line below operating profit.
When used
Usually for associates where the investor has significant influence, often presumed at 20-50% ownership, or for joint ventures.
Mechanics
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Investment carrying value increases by share of net income
Investment carrying value decreases by dividends received
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Valuation implication
Equity-method EBITDA is not included in consolidated EBITDA. For sum-of-the-parts or leverage analysis, use look-through metrics if the associate is material.