when the investor has a significant influence over the operating and financial results of the investee this can directly affect the value of the investor s investment the investor records their initial investment in the second company s stock as an asset at historical cost under the equity method the investment s value is periodically adjusted to reflect the changes in value due to the investor s share in the company s income or losses adjustments are also made when dividends are paid out to shareholders 
using the equity method a company reports the carrying value of its investment independent of any fair value change in the market with a significant influence over another company s operating and financial policies the investor is basing their investment value on changes in the value of that company s net assets from operating and financial activities and the resulting performances including earnings and losses for example when the investee company reports a net loss the investor company records its share of the loss as loss on investment on the income statement which also decreases the carrying value of the investment on the balance sheet 