The Equity method has two main meanings:

Financial system

Equity method designates a form of the Discounted cash-flow method in the financial system (there also called net method) for assessment of company value. It is the opposite of the Entity method.

How often in the financial system the payments of the enterprise, simplifying said, become divided in payments by and at own capital funds givers (i.e. shareholders and/or by and at outside capital giver (bank As with each assessment of company value one tries to determine the value of an enterprise from the view of the own capital funds givers (i.e. shareholders As with each Discounted cash-flow method one makes by the fact that one determines the present value of future expected cash-flow (i.e. in and disbursements in and from the enterprise) by its discounting. When interest rate for the discounting thereby, mostly and simplifying said, the best interest becomes consulted, those the own capital funds givers about the regarded period with bank, at other companies or sonstwo with same risk obtain could (i.e. the best market interest rate).

With the Equity method, as Unterform of the Discounted cash-flow method, of future cash-flow only the payments are considered to the own capital funds givers (i.e. dividends The interest rate for the discounting must be adapted accordingly: the so-called risk-adapted demand for net yield is consulted, which mostly on the basis the Capital ate Pricing Models one computes. It means risk-adapted that the risk that the payment does not take place, is already considered. Demand for net yield is called, simplifying said, that interest rate (net yield), which the own capital funds givers (and not the outside capital givers) of the regarded enterprise demand, since they could invest otherwise into other enterprises (i.e. the best market interest rate for own capital funds givers).

Accounting

In accounting it is one of the methods, by which an enterprise X can register its participation in another enterprise Y in the end-of-year procedure of the X and/or must.

It is in Germany in "§"§ 311ff. HGB, into the IAS in the IAS 28 and into the US-GAAP in APB 18 regulated.

It consists of the fact that the participation in Y in the height of "“proportionate own capital funds"” is proven by X in Y. The result of the following calculation is thus proven concretely:

original initial costs of the participation

intermediate proportionate profit/loss of Y

in the meantime received dividends from Y

intermediate proportionate change of the quiet reserves of y

- intermediate writing-off of the goodwill with X (e.g. after IFRS 3)

intermediate change of the own capital funds portion of Y, which did not change the profit or loss of X

The method is used predominantly in the company conclusion of the X (consolidation) and above all, if the enterprise Y is a so-called associated Unternehemen (English associate), i.e. an enterprise, which is neither a subsidiary company, still another joint undertaking of X, in which however X nevertheless a so-called relevant influence has.

Alternative methods from the same problem area, frequently which can be found, are:

• Initial cost method, i.e. simply beginning of the participation to their initial costs
• Ratio consolidation

Literature

Coenenberg, Adolf: End-of-year procedure and end-of-year procedure analysis, current edition, publishing house modern trend industry

Related links

• http://finanzportal.wiwi.uni-sb.de/fund/Inhalt.htm

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