what is the equity method 
the equity method is an accounting technique used by a company to record the profits earned through its investment in another company with the equity method of accounting the investor company reports the revenue earned by the other company on its income statement this amount is proportional to the percentage of its equity investment in the other company paige mclaughlin investopediaunderstanding the equity methodthe equity method is the standard technique used when one company the investor has a significant influence over another company the investee when a company holds approximately 20 or more of a company s stock it is considered to have significant influence 1significant influence means that the investor company can impact the value of the investee company which in turn benefits the investor as a result the change in value of that investment must be reported on the investor s income statement companies with less than 20 interest in another company may also hold significant influence in which case they also need to use the equity method significant influence is defined as an ability to exert power over another company this power includes representation on the board of directors involvement in policy development and the interchanging of managerial personnel 2owning 20 or more of the shares in a company doesn t automatically mean that the investor exerts significant influence operating agreements ongoing litigation or the presence of other majority stockholders may indicate that the investor doesn t exert significant influence and that the equity method accounting is inappropriate 3recording revenue and asset changes under the equity methodthe equity method acknowledges the substantive economic relationship between two entities the investor records their share of the investee s earnings as revenue from investment on the income statement for example if a firm owns 25 of a company with a 1 million net income the firm reports earnings from its investment of 250 000 under the equity method 