(A) the rights and interests law
Equity method is an accounting method suitable for long-term equity investment. According to this method, the investment enterprise should adjust the book value of the subject of "long-term equity investment" according to the proportion of its equity in the invested enterprise and the change of its net assets. When using this method, the investing enterprise should list the annual net profit and loss of the invested enterprise as its own investment profit and loss according to the proportion of investment rights and interests, and express it as the increase or decrease of investment. If dividends are received from the invested enterprise (excluding stock dividends, the same below), the investing enterprise shall write down the book value of the investment account.
When the investing enterprise has great influence on the invested enterprise and is controlled by the same company, the equity method should be adopted to account for the long-term equity investment. Significant impact belongs to the category of joint venture. Under a joint venture, the investing enterprise accounts for the long-term equity investment according to the equity method, but there is no need to prepare consolidated statements. * * * The same control belongs to the category of joint venture. A joint venture includes * * * jointly controlled operations, * * * jointly controlled assets and * * * jointly controlled entities. * * * Controlling business and * * * controlling assets did not lead to new accounting methods. Long-term investment in jointly controlled entities can adopt equity method or proportional merger method based on equity method. Control right belongs to the category of enterprise merger. According to the legal form, enterprise merger can be divided into absorption merger, creation merger and holding merger. The result of absorbing merger and creating merger is that only a single economic entity and legal entity remain, and the accounting methods used to deal with merger business belong to the traditional accounting field. Holding merger means that one company obtains the controlling right of another company through long-term investment, and the invested company becomes a subsidiary and the investment company becomes a parent company. The parent company and its subsidiaries are independent economic entities and legal entities. On the one hand, the parent company accounts for long-term equity investment and investment income in its books according to the equity method, on the other hand, it comprehensively consolidates the separate statements of the parent company and subsidiaries at the time of merger and at the end of each accounting period.
The equity law emphasizes the economic substantive relationship between the investing enterprise and the invested enterprise, that is, it forms an independent economic entity in accounting, which reduces the opportunity for the investing enterprise to tamper with profits by using the distribution policy. Using the equity method to confirm the investment income is more in line with the accrual principle, because it confirms the rights and interests that investors should enjoy according to whether the profits and losses of the invested enterprise occur, regardless of whether they receive dividends. However, there are obvious defects when dealing with cross-shareholding between companies according to the equity method. Hong Kong financial newspapers can't compare it to "trying to find the last reflection in a room full of mirrors". At the same time, under the equity method, the retained earnings of an investment enterprise include the profit share of the invested enterprise, so it is not appropriate to distribute dividends accordingly. Therefore, it is suggested that dividends should be appropriately restricted.
(B) the complex rights and interests law
Equity method is divided into simple equity method and complex equity method. The compound equity method treats the investment of the invested enterprise as a merger, also known as the single-line merger method. The compound equity method not only needs to amortize the difference between the fair value and book value of the investment at the time of purchase, but also needs to deduct the unrealized gains and losses formed by internal transactions.
The accounting treatment features of the compound equity method are as follows:
1. When purchasing shares, the long-term equity investment is reflected by the purchase cost;
2. At the end of the accounting period, the share that enjoys the net profit and loss of the investee (excluding unrealized profit and loss formed by internal transactions) is recognized as investment profit and loss, and the long-term equity value is adjusted accordingly;
3. When receiving dividends, the long-term equity investment account shall be written off;
4. Amortize the difference between the market value and book value of the investment at the time of purchase, and at the same time offset the long-term investment and investment income subjects.
Under the full equity method, the account balance of "long-term equity investment" = investment cost+share in the net profit and loss of the invested company after purchase-dividend-the difference between the amortized market value and book value of the investment at the time of purchase; Investment income = net profit and loss share of the invested company-dividend-the difference between the amortized market value and book value of the investment at the time of purchase.
(3) simple equity method
The simple equity method is a theoretical simplification of the complex equity method, which does not need to amortize the difference between the fair value and book value of the investment at the time of purchase, nor does it need to deduct the unrealized gains and losses formed by internal transactions. However, in practice, simple equity law appeared earlier. American equity is subject to APB 18. Before APB 18, it was a simple equity method, and after APB 18, it was a complex equity method.
The accounting features of the simple equity method are as follows:
1. When purchasing shares, the long-term equity investment is reflected by the purchase cost;
2. At the end of the accounting period, the share enjoying the net profit and loss of the investee (unrealized gains and losses of internal transactions need not be deducted) is recognized as investment profit and loss, and the long-term equity value is adjusted accordingly;
3. When receiving dividends, the long-term equity investment account shall be written off;
Under the simple equity method, the account balance of "long-term equity investment" = investment cost+share in the net profit and loss of the invested company after purchase-dividend; Investment income = net profit and loss share after being purchased by the invested company-dividend.
When the fair value of the investment is greater than the book value, the account balance and investment income of "long-term equity investment" under the compound equity method are less than those under the simple equity method. From this point of view, the compound equity method is more robust at this time.
Because the most fundamental difference between the complex equity method and the simple equity method is whether to amortize the difference between the fair value and book value of the investment at the time of purchase, and whether to deduct the gains and losses formed by internal transactions, the following two issues are mainly analyzed and expounded.
Two, the treatment of the difference between the fair value and book value of the investment at the time of purchase.
The reason why the compound equity method amortizes the difference between the fair value and the book value of the investment at the time of purchase is because when the fair value of the investment is greater than the book value, the difference indicates that the assets of the invested enterprise are undervalued or there is unrecorded goodwill. If these assets are depreciated or amortized, they have a certain benefit period, during which the assets will be consumed every year, so depreciation or amortization should be recorded. However, because the value of assets is underestimated or not recorded, the amortized expenses are low, the profits of the invested enterprises are inflated, and the investment income recognized by the invested enterprises is inflated every year. Therefore, when the fair market value of the investment at the time of purchase is greater than the book value, it is necessary to analyze what kind of assets cause this difference. If assets need to be depreciated or amortized, they should be amortized year by year according to the expected remaining economic life of the assets. On the one hand, debit (decrease) investment income, on the other hand, credit long-term investment. If the difference is caused by permanent assets (such as land) or current assets (such as short-term investment in inventory), the book value of investment income and long-term investment should be adjusted at one time when the assets are sold.
If the fair value of the investment at the time of purchase is less than the book value, it means that the assets of the invested enterprise are overvalued or the goodwill is negative, which makes the annual depreciation expense on the book overvalued and the profit artificially reduced. Therefore, according to the nature of assets, it should be amortized annually or resold at the time of sale to increase the investment income and the book value of long-term investments.
The compound equity method amortizes the difference between the fair value and book value of the investment at the time of purchase, so that the cost and expenses of the invested enterprise can be calculated according to the fair value of the consumed assets, thus correctly measuring the investment income of the invested enterprise, which is more in line with the accrual principle. Under the simple equity method, the current income matches the book value of assets, which is not completely in line with the accrual basis.
When the investing enterprise has control over the invested enterprise, the parent company shall prepare consolidated statements. Just as the complex equity method needs to amortize the difference between the fair value and book value of the investment at the time of purchase, it also needs to amortize the difference between the fair value and book value of the investment at the time of purchase when consolidating the statements. At this point, the offset entries of the complex equity method and the simple equity method are slightly different. The difference is that the simple equity method needs to be adjusted to the complex equity method in the merger working papers under the simple equity method. Therefore, no matter which equity method the parent company uses to calculate the long-term equity investment, the final consolidated statement is the same. However, under the compound equity method, if the unrealized gains and losses arising from internal transactions are not considered, the net income on the books of the parent company is equal to the net income on the consolidated statements of the enterprise group, and the net assets at the end of the period on the books of the parent company are equal to the net assets on the consolidated statements of the enterprise group, which has good verifiability; Under the simple equity method, the above equation is not valid, so it cannot be verified.
It is worth noting that there is no difference between the fair value and book value of the investment in these two cases. If other factors are not considered, the long-term equity investment and investment income handled by the complex equity method and the simple equity method are the same at this time. One is when the enterprise merger accounting adopts the equity set method, and the other is when the downward accounting is adopted.
Under the holding merger, there are two kinds of accounting treatment for enterprise merger: purchase method and combination of rights and interests method. According to the purchase method, the investment cost calculated by the parent company should be the fair value on the purchase date, so there is a difference between the investment cost and the share in the book equity of the subsidiary, and the difference consists of asset appreciation and goodwill. Both the compound equity method and the consolidated statement need to amortize this difference. The equity joint venture method does not recognize any goodwill when purchasing an enterprise. It records the combined assets and liabilities according to the existing book amount, and the investment cost is equal to the share in the book equity of the invested company, and there is no difference to be amortized.
Generally speaking, the separate financial statements of subsidiaries shall report assets, liabilities, income and expenses according to the book value before merger. However, in some cases, the value of net assets allocated to subsidiaries in consolidated statements should be "pushed down" to separate financial statements prepared by subsidiaries, which measure net assets at fair value. This is "pushing accounting". SEC requires that when the subsidiaries are almost entirely owned by the parent company (usually 97%) and there is no large amount of bonds or preferred shares issued to the outside world, the financial statements submitted to the SEC should adopt push-down accounting. If push-down accounting is not adopted in the purchase merger, the investment cost shall be allocated to the identifiable net assets and goodwill of the subsidiary in the working paper of the consolidated statement, and the consolidated statement reflects the allocation of investment cost. When subsidiaries adopt push-down accounting in financial statements, the merger procedure is greatly simplified. Similarly, for the compound equity method, the separate statement of the subsidiary has been adjusted according to the fair value, which is consistent with the investment cost, and there is no amortization of the difference, which simplifies the processing procedure. It can be seen that if unrealized gains and losses are not considered, the operation and results of the compound equity method and the simple equity method under pushdown accounting are consistent.
For the equity method, the specific accounting standard "investment" applies to joint-stock companies, and the industry accounting system applies to other enterprises. In view of the idea of accounting reform in China is to unify the accounting systems of various industries according to the accounting system of joint stock limited companies, this paper only analyzes the equity method stipulated in the specific accounting standard "investment". According to the "investment" criterion, the difference between the investment cost and the share of the owner's equity of the invested unit is regarded as the difference of equity investment, which is amortized evenly according to a certain period and included in the profit and loss. Some people think that compared with the above-mentioned theory of annual amortization according to the nature of assets, China's equity law does not allocate the difference between goodwill and assets, but lists it in the form of total amount in the "equity investment difference" and amortizes it annually. The base and duration of amortization are different from the theory, so it is not a complex equity method in a complete sense. In fact, the treatment of amortization in China's equity law is a simplification of theoretical treatment, and it can still reflect the idea of adjusting the profit calculated by the invested enterprise according to the book value to the profit measured by the fair value. In this sense, it is still a complex equity. The reason why China doesn't allocate this difference specifically is because China lacks a standardized and unified national asset appraisal system at present. In the case of high asset appraisal cost (even if the appraisal system is perfect in practice, many appraisers and accountants' estimates of asset value and service life can't be completely consistent with the theory), a method suitable for the national conditions is adopted. With the development of market economy and the improvement of accountants' quality, the treatment of long-term equity investment in China will develop towards a more standardized and complicated equity law.
So far, there is no clear regulation on the accounting treatment of merger with holding company in China. However, from the current operation practice, most of them adopt the purchase method, and a few adopt the joint venture method. As the purchase method and the joint venture method have a direct impact on investment accounting, it is suggested that the investment cost and the net assets of subsidiaries be
Three. Treatment of unrealized gains and losses arising from internal transactions
According to the compound rights law, because the investing enterprise has great influence and even control over the invested enterprise, the two enterprises should be regarded as a single economic entity. If there is sales between enterprises, for example, the investment enterprise sells the goods to the invested enterprise, but the invested enterprise has not yet sold the goods to a third party. Although the investment enterprise is listed as sales income, in fact, because the investment enterprise and the invested enterprise are the same economic entity, the sales are equivalent to turning from the left hand to the right hand and have not yet been sold. Therefore, the sales profit of the investment enterprise has not been realized and cannot be confirmed, so it should be adjusted and written off at the end of the period. The same is true if the invested enterprise sells to the invested enterprise. This is the unrealized gains and losses formed by internal transactions. Sales between enterprises can be divided into two types: direct sales and reverse sales. Direct selling refers to the sales of invested enterprises to invested enterprises, while reverse selling refers to the sales of invested enterprises to invested enterprises. For the convenience of discussion, it is assumed that unrealized gains and losses are borne by the seller, and vice versa. In the case of reverse sales, it is well understood that the inflated profits of the invested enterprise due to unrealized gains and losses should be deducted, debited to "investment income" and credited to "long-term investment". Direct selling can be regarded as an investment enterprise using its influence or control ability to distribute its own profits through internal transactions and recover its capital in advance, so it is also necessary to reduce investment accounts and investment income.
According to APB 18, the United States stipulates that when using the equity method, "like the joint venture of subsidiaries or the merger of invested companies, the unrealized inter-company profits and losses of investors should be written off." The treatment of unrealized inter-company internal profits and losses depends on whether the transactions between investors are regarded as "normal" transactions. "Normal" transactions refer to transactions negotiated between independent buyers and independent sellers. When an investor controls the investee through majority voting rights and conducts abnormal transactions with the investee, the inter-company gains and losses obtained from the transaction shall not be recognized as the investor's gains until it is realized through transactions with a third party. When the "normal" transactions between investors and investors can be confirmed, only the proportion of unrealized gains and losses will be written off.
The proportion of elimination in the equity of Taiwan Province Province is determined by the distinction between direct selling and reselling. Determine the proportion of unrealized gains and losses according to whether the investment company has control over the invested company. If it has control, it will be completely eliminated. If not, it will be eliminated according to the proportion of investment share at the end of the period. In the case of reverse sales, regardless of whether the investment company has control over the invested company, the shareholding ratio of the investment company will be eliminated according to the trading day. When offsetting, direct selling can debit "unrealized sales profit (or unrealized asset disposal profit)" and credit "deferred credit-profit between affiliated enterprises", the former as a deduction of sales gross profit or asset disposal profit, and the latter as a liability; You can also debit "investment profit and loss" and credit "long-term investment". Reverse sales debit "investment profit and loss" and credit "long-term investment".
It can be seen that the deduction ratio in the United States depends on "normal" transactions and abnormal transactions, while the deduction ratio in Taiwan Province Province depends on direct sales and reverse sales and whether it has control rights. But their starting point is that substance is more important than form and they operate steadily. China's equity law does not stipulate the deduction of unrealized gains and losses formed by internal transactions. From this perspective, China's equity is not a compound equity in the full sense. Because unrealized gains and losses are not deducted, the investment account and investment income calculated by China's equity method are larger than those calculated by Taiwan Province Province's equity method, so China's equity method is not as stable as that of the United States and Taiwan Province Province. In the case of preparing consolidated statements, the unrealized gains and losses formed by internal transactions are offset, so whether the equity method deducts unrealized gains and losses has no substantive impact on the consolidated statements. However, in the separate statements of investment enterprises, the investment income confirmed without deducting unrealized gains and losses will distort the performance of enterprises, thus giving enterprises the opportunity to whitewash profits by using related party transactions, and ultimately harming the interests of investors, creditors, governments and other related parties.
Four. general survey
The compound equity method treats the investment of investment enterprises as a merger, also known as the single-line merger method, which needs to amortize the difference between the market value and the book value of the investment at the time of purchase and deduct the unrealized gains and losses formed by internal transactions. The simple equity method does not need to amortize the difference or deduct unrealized gains and losses.
Under the compound equity method, the costs and expenses calculated according to the fair value of the consumed assets match the current income of the invested enterprise, which fully conforms to the accrual basis. The simple equity method matches the current income of the invested enterprise, and the cost calculated according to the book value of the consumed assets does not fully conform to the accrual basis.
The complex equity method emphasizes science and rationality, while the simple equity method emphasizes simplicity and operability.
The consolidated statements prepared by the complex equity method and the simple equity method are the same, but the separate and consolidated statements of the parent company under the complex equity method are more verifiable.
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