Study On The Improvement Of The Equity Method Of The Long-term Equity Investment

With the development of our country's economy and the improvement of financial and capital market, investment has become an indispensable economic activity. Besides the production and operation, more and more companies not only choose upstream or downstream enterprises to invest, but also choose to invest other industries to develop the business, to present diversified products. The enterprises need to recognize, measure and report the transactions. The Ministry of Finance set out Accounting Standard for Business Enterprise No. 2 ——Long-term Equity Investment newly revised in 2014, which provides theoretical guidance for it. According to the regulation, a long-term equity investment in an associate or a joint venture shall be accounted for using the equity method. Where an investor is able to exercise control over an investee, the long-term equity investment shall accounted for using the cost method. However there are still some problems. The transform between equity method and cost method due to the additional or disposal investment has different principal. From the cost method to equity method, it should adjust the investment as if the equity method had been applied from the date of the first acquisition. While from the equity method to the cost method, it should not adjust the investment. What's more, there is no definite explanation for the adjustment. We can't judge whether the adjustment is an accounting entry. There are different ideas for it. This article will take it as a point to explore the intrinsic quality of the equity method and bring forward some suggestions.As is known to all, the equity method is not only one of the measurement method of the long-term equity investment in our country, but also used in the adjustment of consolidated financial statements. However, there is no explanation for it. In the background of the international convergence, this article combed the part of the equity method of accounting standards abroad, and points out the differences on the use of the equity method between Chinese accounting standards and the accounting standards abroad, which lays the foundation for the next. Then, it states that the equity method accounting has certain theoretical defects and there are some problems during the practice. The theoretical defects of the equity method accounting does not conform to the requirements of the measurement attributes; under the equity method, the result of the identified assets and profit and loss does not conform to the relevant definition; the equity method lack of reality. What's more, there exists selectivity for whether use the equity method in practice or not, and it is easier for the surplus management. Under the cross-shareholdings phenomenon, it cannot confirm investment profit and loss objectively. The reason of the theoretical defects is the lack of recognizing the essence of the equity method. And the reason of the practical problems is related to the train of the equity method and the transparency of information disclosure. Based on it, the article confirms clearly that the equity method is a means of merging processing, rather than the daily accounting method, and then it suggested that the abolition of the equity method in the individual financial statements and go on using the equity method in the consolidated financial statements. At the same time, it also puts forward to increase the disclosure, strengthen audit, and perfect the supervision mechanism to further standardize the equity method applied in practice.