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equity method: help me understand the statements below.
Consolidated statement of profit or loss
The basic principle of equity accounting is that the investing company (P Co) should take account of its share of the earnings of the associate, A Co, whether or not A Co distributes the earnings as dividends.P Co achieves this by adding to consolidated profit the group’s share of A Co’s profit after taxConsolidated statement of financial position
A figure for investment in associates is shown in the consolidated statement of financial position which must be stated at cost at the time of the acquisition of the associate. This amount will increase (or decrease) each year by the amount of the group’s share of the associated company’s increase (ordecrease) in post-acquisition retained reserves.Are they saying only profits after tax are considered during consolidation? and does this only apply to associates and investments or it applies to all kinds of investments? what are they saying?
What is written only applies to associates (and, of course, associates are only relevant if we are preparing consolidated statements – we only prepare consolidated statements if we also have subsidiaries.)
For associates we only bring in the after-tax profits (but that only applies to associates).
For other investments (i.e. not subsidiaries and not associates) we don’t bring in the profits at all. (We would bring in any dividend income but that would be recorded anyway in the holding companies statements)
All of this is explained in my free lectures.
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