Start Consolidating subsidiary under equity method

Consolidating subsidiary under equity method

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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.

These choices permitted the use of one of three methods to measure these investments: the cost method, the equity method, or as available for sale financial assets in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

As part of its improvements process in preparation for the adoption of IFRS in Europe and other countries from 2005, the IASB amended and renamed these standards and consolidated the requirements for the measurement of investments in separate financial statements within IAS 27 Consolidated and Separate Financial Statements.

How would Federated report their share of Saks' earnings on their income statement?

It depends on the percentage of the company's voting stock Federated owned.

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Prior to 2005, IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries, IAS 28 Accounting for Investments in Associates, and IAS 31 Financial Reporting of Interests in Joint Ventures contained requirements for the measurement of investments in subsidiaries, joint ventures and associates in the separate financial statements of the investor.

In doing so, the IASB removed the option to use the equity method of accounting in measuring investments in subsidiaries, joint ventures and associates in the separate financial statements of the investor.