The **equity method** is an accounting technique used when an investor has significant influence over the financial and operating policies of another entity, but not control over those policies. Significant influence is generally considered to exist when the investor holds between 20% and 50% of the voting stock of the investee. Under the equity method, the investor accounts for its investment as an equity ownership in the investee.

Here are key features and steps involved in the equity method:

1. **Ownership Stake:**
– The investor typically acquires an ownership stake of 20% to 50% in the investee. This level of ownership implies a significant influence but falls short of control.

2. **Initial Investment Recognition:**
– The investor records the initial investment in the investee at cost. This includes the purchase price and any directly attributable costs.

3. **Equity Pick-Up:**
– Periodically, usually at the end of each reporting period, the investor recognizes its share of the investee’s net income or loss. This is referred to as the equity pick-up. The investor’s share of the investee’s net income is added to the carrying value of the investment.

4. **Dividend Income:**
– If the investee distributes dividends, the investor recognizes its share of those dividends as a reduction in the carrying value of the investment.

5. **Adjustments to Carrying Value:**
– The investor adjusts the carrying value of its investment for its share of the investee’s comprehensive income, changes in accounting policies, and other adjustments that affect equity.

6. **Equity Method Journal Entries:**
– The equity method involves making journal entries to reflect the investor’s share of the investee’s financial performance. The entries typically include adjustments for revenue, expenses, and other comprehensive income items.

7. **Reporting the Investment:**
– In the investor’s financial statements, the investment is reported as a single line item on the balance sheet. The carrying value of the investment is adjusted based on the investor’s share of the investee’s financial performance.

8. **Significant Influence Criteria:**
– The determination of significant influence involves evaluating various factors, including representation on the investee’s board of directors, participation in policy-making processes, and intercompany transactions.

9. **Financial Statement Presentation:**
– The investor’s financial statements will show its share of the investee’s financial performance, such as its share of net income or loss, as a separate line item. This is often presented below operating income.

10. **Disclosure Requirements:**
– Financial statements must disclose the nature of the investor’s relationship with the investee, the reason for using the equity method, and information about the investee’s operations and financial position.

The equity method is appropriate when the investor has the ability to influence the investee’s operating and financial policies significantly. It contrasts with the consolidation method, which is used when the investor has control over the investee. The equity method recognizes the economic substance of the investment by reflecting the investor’s share of the investee’s performance in its own financial statements.