Consolidating subsidiary under equity method
If Saks rose to per share, the 10 million shares would be worth 0 million ( per share x 10 million shares = 0 million).
The balance sheet would be adjusted to reflect million in unrealized gains, less a deferred tax allowance for the taxes that would be owed if the shares were sold.
The company would not be able to report its share of Saks' earnings, except for the dividends it received from the Saks stock.
The asset value of the investment would be reported at the lower of cost or market value on the balance sheet. If Federated purchased 10 million shares of Saks stock at per share for a total cost of million, it would record any dividends received from Saks on its income statement, and add million to the balance sheet under investments.
Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company.
The investor records such investments as an asset on its balance sheet.
If Federated owned 65% of Saks, it would report the entire 0 million in profit, and then include an entry labeled minority interest that deducted the million (35%) of the profits it didn't own.
Equity method in accounting is the process of treating investments in associate companies.
If Federated Department Stores, the owner of Macy's and Bloomingdale, purchased five percent of Saks Fifth Avenue, Inc., common sense tells us that Federated would be entitled to five percent of Saks' earnings.
For VIEs, a qualitative model is applied that focuses on the assessment of possession of controlling financial interest.
According to the model, control is considered to exist if an entity has power to direct activities of a VIE that most significantly impact the VIEs economic performance (power criterion) and receives benefits or suffers losses from the VIE (losses/benefits criterion).
In most cases, Federated would include a single-entry line on their income statement reporting their share of Saks' earnings.
For example, if Saks earned 0 million and Federated owned 30 percent, they would include a line on the income statement for million in income (30% of 0 million), even if these earnings were never paid out as dividends (meaning they never actually saw million).