Conceptually, the equity method treats the investee company as if it were condensed into one balance sheet item and one income statement item and then merged into the investor company at the proportion owned by the investor. The equity method is sometimes called “one-line consolidation” because it results in the same effect on the investor’s earnings and retained earnings as would result from consolidating the financial statements of the investor and investee companies. It does so without combining both companies’ financial statements. ILLUSTRATION In its simplest form, the equity method requires that the investment account represent the investor’s proportionate share of the book value of the investee.
