Now, let's see how to actually model equity method investments.The concepts above are implemented in the following comprehensive example, where we assume a simplified P&L and balance sheet to focus on key takeaways, which are highlighted in yellow.Adjustments to the carrying value should also be made if it's clear that original cost is no longer a justifiable value.

Liquidating dividend from an investee video

Monetizing the investment after the DTL has grown large can trigger a large tax bill that (i) must be weighed against the benefits of monetization, and (ii) may limit the investor's strategic options with respect to the disposition of the stake.

PNC Financial faced this dilemma in evaluating monetization options for its sizeable investment in Black Rock.

When a company has passive interest, or is unable to exert significant influence over another, it is required to use the cost method of accounting.

This method requires the investor (company) to record the initial investment at cost on the balance sheet, and continue to carry that investment at cost until the shares of stock are partially or entirely sold.

The cost method also applies to passive investments in the equity securities of closely held companies that do not have actively traded stock, since these nonmarketable securities do not have a clearly determinable value until sold.

On January 1, Company A acquired 100,000 shares of Company XYZ's common stock for .00 per share.

The term cost method refers to an accounting approach used when an investor has passive interest in another company.

In practice, the cost method is used when an investor (company) does not have a controlling interest or is unable to exert significant influence over the investee, but has made a long-term investment in that company.

This accounting method requires companies to carry and report the investment at cost until disposed of, or when it's clear that historical cost is no longer justified.