About the Equity Method of Accounting

In Eagle's investment accounting solutions, you can use the equity method of accounting to account for investments in partnerships, joint ventures, limited liability companies, and substantial investments in common stock.

The equity method is a method of accounting used when the investor has significant influence but does not have control of the investee. For statutory basis, a version of the equity method is available even for a minority interest.

You use the equity method of accounting to account for investments in subsidiary, controlled, and affiliated entities. An affiliate includes a parent or subsidiary and may also include partnerships, joint ventures, and limited liability companies. Investments in partnerships, joint ventures, and limited liability companies are included on the Statutory Schedule BA for Other Invested Assets. Schedule BA investments include other long-term invested assets that are not includable in any of the other invested asset schedules for NAIC regulatory reporting.

In Eagle Accounting, the equity method of accounting allows you to:

Record your proportional share of income or loss from estimated or actual financial statements for your investment. Therefore if the total profit or loss from your investment in a partnership was $100,000 and you have an ownership interest of 10%, you can report your proportional share of income of $10,000.
Record both return of capital and/or income distributions.
Record your proportional share of changes in capital or other comprehensive income. For example, if the partnership has unrealized gains/losses reflected on their financial statement in capital or other comprehensive income representing changes in market value for underlying investments within the partnership, you can recognize your proportionate share of these unrealized gains and losses.
Account for investment if the financial statements for your investment are reported in foreign dollars.

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About Solutions that Use the Equity Method of Accounting

You can use the equity method of accounting with Eagle's core accounting and statutory accounting. That is, you can use it with Eagle's investment accounting solution and with Eagle's insurance solution.

About Accounting Bases and the Equity Method of Accounting

You can apply the equity method of accounting to any accounting basis, including STAT, GAAP, or IFRS.

When you use a STAT accounting basis with the equity method of accounting, the system allows you to elect Equity Method (EMA) or STAR accounting method. The Equity Method supports unique accounting requirements for the statutory accounting basis. The STAR accounting method follows core accounting treatment rather than the equity method of accounting. Under the statutory basis, your proportionate share of income is recorded as unrealized gains and losses through capital. The system recognizes income when the income is distributed.

When you use a GAAP, IFRS, or other accounting bases than STAT with the equity method of accounting, the system allows you to support regulatory requirements for equity method of accounting that are different than those used in the statutory methodology. You can record your proportionate share of income as an increase to undistributed income and an increase to your cost of investment.

When you use the equity method, Eagle's accounting solution allows you to account for investments for Schedule BA investments under the equity method of accounting from both a U.S GAAP and Statutory perspective. The equity method has unique accounting entries by accounting basis, along with unique ledger accounts for separate identification of investment activity for Schedule BA investments from both an asset and income perspective.

About the Pro-Rata Lot Selection Method

After you set up entity, security, and ledger information for the equity method, you use specialized transactions to manage investments in the common stock and Joint Venture/Limited Liability/Partnership securities in which you are investing. You use special transactions to switch existing positions into or out of the equity method, to open and close new positions, along with other maintenance transactions.

The Pro-Rata lot selection method used for equity method transactions allows the system to process EMA close transactions and close appropriate quantity on the eligible open lots. It distributes the close amount across all open lots with non-zero quantity using a pro-rata method based on the ratio of current lot quantity over the total position quantity. The system uses the Pro-Rata method rather using than the lot selection method defined for the accounting basis when the position uses the EMA accounting method.

About Commitments

When you create positions for securities that represent a partnership, joint venture, or limited liability corporation, Eagle Accounting can track the Commitment amount for the position. The commitment is the total amount, in base currency, committed by the investor in the partnership, joint venture, or limited liability corporation. The system only tracks the commitment for the STAT basis, if one exists.

The system stores the Commitment value at the position level. You can update that amount when you enter acquisition transactions and when you enter cost adjustment transactions. The system allocates the commitment proportionally to open lots. It does not relieve the commitment during sale transactions.

About Encumbrances

Eagle Accounting allows you to track the value of encumbrance, in base dollars, booked during an acquisition when you use the equity method of accounting. The system stores this value for all accounting bases, but uses it for reporting on bases that use the Equity Method (EMA) accounting method. You can store this value on transactions for conversions and acquisitions. The systems does not store it at the position level and does not create ledger entries for the encumbrance amount.

About Shares Outstanding for Positions

When you create a security for use with the equity method of accounting, you can define a Shares Outstanding value for the security, as you can for any equity. Eagle Accounting can also track the Shares Outstanding value at the position level. You can use equity method of accounting transactions for acquisitions, conversions, and cost adjustments to update this value at the position level.

About Market Value Overrides

You can manually define the market value for a position that uses the equity method of accounting at any point by using an income adjustment transaction. The system uses this value to override the market value that Eagle Accounting calculates for market value in core accounting reports. The system uses this override market value for the position and backs it into the unrealized gain/loss amount.