Intercompany Transactions Under the Equity Method
Unrealized Profits
Profits from transactions between the investor and investee may be unrealized if the related asset remains within the combined relationship. The investor generally eliminates its proportionate share of unrealized profits until the asset is sold externally.
- Inventory transactions.
- Property and equipment sales.
- Partial elimination based on ownership percentage.
Note
The elimination is generally limited to the investor's ownership interest.
Summary
The equity method avoids recognizing profits that have not yet been realized outside the investment relationship.