Identifying Special Settings for the Equity Method

When using the Equity Method, the system calculates goodwill the same way as in the Purchase method during thefirst consolidation .

Specified in the Consolidation of Investments (C/I) equity method, this differential amount offsets against an investment item. All postings occur in the direct investor unit. 

During subsequent consolidation of consolidation units that are included using the equity method, an update of the equity in earnings of affiliates items can be triggered by any of the following events:

• Recording of annual net income  
• Distribution of dividends  
• Payment of bonuses  
• Occurrence of currency translation differences, etc. 

These scopes must be defined first. This is described in the figure below.  

When using the equity method, no postings are done for the investee unit in the balance sheet or the profit and loss statement. Instead, the activity adjusts the investment book values of the direct investor units. The amount of the investment adjustment corresponds to the respective investor unit's share in the equity holdings adjustments of the investee unit.  

The equity holdings adjustment data reported by the investee unit in subsequent consolidation triggers an adjustment to the investment book value of the direct investor units according to each of their direct shares.

The offsetting entry of the adjustment is posted to the offsetting item. We define this separately in the equity method posting items for each scope of reported data.   

The item type of the offsetting item determines whether the scope of reported data affects net income:   

• If the offsetting item is a P&L statement item, it affects net income.   
• If the scope does not affect net income, the system generally selects the reported item as the offsetting item. 

The selection objects in the figure below are delivered to define the reported financial data for the equity holding adjustments. 

In this step, you specify the selections for the reported financial data concerning the equity holdings adjustments to the consolidation units.

Equity holdings adjustments are necessary for processing activities of consolidation units consolidated with the equity method.  

You can distinguish them by the different scopes of reported data that you set for the equity method. If you require a new scope of data, in addition to those already defined, you can define it in the Specify Scope of Reported Data for Equity Method step. 

To update the equity in earnings of affiliates (investment book value) when using the equity method of consolidation, the system requires data on the investment item and its offsetting item.

If the updates cause the investment book value to become negative, the system also requires settings for the posting entry and offsetting entry for the negative value.

You do not specify the items for (positive) investment and offsetting entry directly.   

Instead, specify an item role in master data for each item to use in posting the equity method. The system determines the corresponding item for the item role.

You specify these items for each scope of data for the equity method. This allows you to differentiate the updates of the investment book value depending on what causes it.