Equity method
In one sentenceA way of measuring an investment in an associate: it is recorded at cost, then increased by the investor's share of its profits and reduced by its share of losses and by dividends received.
Simply put
The idea is that the investment follows the associate's results: if it makes a profit your share grows, and if it pays you cash you have received part of the investment itself, so it falls.
Your share of profit appears in the income statement as a single line, and dividends are not recorded as income but reduce the investment balance.
Worked example
A company bought 25% of an associate for 1,000,000 SAR; the associate made a profit of 400,000 SAR and distributed 40,000 SAR to all owners.
Company's share of profit: 400,000 × 25%100,000 SAR
Its share of dividends: 40,000 × 25%10,000 SAR
Investment balance: 1,000,000 + 100,000 − 10,0001,090,000 SAR
Formula: Cost + share of profit − share of loss − dividends received
Don't confuse it with
Consolidated financial statementsConsolidation combines all of a subsidiary's assets and liabilities line by line, while the equity method shows the investment as a single figure.