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The investor's share of the investee's earnings or losses is generally presented as a single amount in the income statement. Limited exceptions to this presentation are permissible, as discussed in this section.
Example FSP 10-1 illustrates the presentation of equity in net earnings of an investee as a single amount in the income statement.
EXAMPLE FSP 10-1
Presentation of equity in net earnings of investee as a single amount
FSP Corp owns 40% of the common stock of Company A and has the ability to exercise significant influence over the operating and financial policies of this investee. FSP Corp accounts for Company A as an equity method investee. There are no intercompany transactions, consolidation-type adjustments required for investee capital changes (e.g., exercise of stock options issued by investee), or differences between investor cost and underlying equity in investee net assets. FSP Corp is taxed at 40%.
Additionally, note that any tax provision required by ASC 740, Income Taxes, relating to the temporary difference arising from the use of the equity method for book purposes and the cost method for tax purposes has been omitted to simplify the illustration.
During the year, FSP Corp has income before taxes of $160,000 and income taxes of $64,000. FSP Corp's portion of Company A's earnings is $39,000, net of tax.
How should FSP Corp present the equity in net earnings of Company A as a single amount in the financial statements?
Analysis
FSP Corp should present the equity in net earnings of Company A as a single amount as follows:
Income before income taxes and equity in net earnings of affiliate
$160,000
Income taxes
64,000
Income before equity in net earnings of affiliate
96,000
Equity in net earnings of affiliate
39,000
Net income
$135,000
View table

The presentation in Example FSP 10-1 is consistent with the presentation requirements of S-X 5-03. S-X 5-03 generally requires equity method earnings to be presented below the income tax line unless a different presentation is justified by the circumstances. The SEC staff has indicated that, in certain limited circumstances, it may be appropriate to include income from equity investments in operations because some reporting entities operate their business largely through equity investees, or the equity investee may be integral to the investor's operations. However, classification within revenue from contracts with customers is not allowed.
The income statement caption for the equity method earnings should be appropriately titled depending on its nature (e.g., "Equity in net earnings of Company A," or "Share of net earnings of equity method investee"). Additionally, the subtotal for income prior to equity in net earnings of affiliate (required for SEC registrants) should be appropriately titled, as illustrated in Example FSP 10-1.
If the equity method earnings are of such a nature that it is acceptable for them to be presented within operations, the amount must be net of taxes as recorded by the investee in determining its net income. To do otherwise would be tantamount to proportionate consolidation.
When the investee is a partnership, the investor/partner's share of the income of the partnership is taxable at the investor level, not at the partnership level. In such cases, a question may arise as to whether the equity earnings should be reported before or after the investor's income tax provision on its income statement. We would encourage the investor to report equity earnings after the income tax provision line on its income statement because any taxes due on its equity method investment in the partnership would be reported in its income tax provision.
Figure FSP 10-1 illustrates common methods an investor may use for income statement presentation of equity method earnings, which depend on the nature of the equity method investee and whether the investee is a taxable or non-taxable entity.
In practice, the presentation of equity in earnings in the income statement varies. Careful consideration should be given to how investor and investee activity related to an equity method investment is presented. Depending on the facts and circumstances, an alternative presentation may be acceptable when accompanied by appropriate disclosures in order to allow users of the financial statements to understand the activity presented.
Figure FSP 10-1
Methods of presenting earnings of equity method investees in the income statement
Presentation
Additional considerations
Earnings of non-taxable investees
In operating profit
The SEC staff has indicated that presenting equity method earnings from an investee within the operating income section of the investor's income statement is acceptable in very limited circumstances.
Before tax provision line item
For a non-taxable investee, there is no difference between gross or net of tax presentation as the investee is not taxed.
Below tax provision line item
The investor's income tax provision line would include any income tax levied against the investor for its share of the investee's results.
Earnings of taxable investees ("net of tax" presentation)
In operating profit
The SEC staff has indicated that presenting equity method earnings from an investee within the operating income section of the investor's income statement is acceptable in very limited circumstances.
Below tax provision line item
The investor's income tax provision line would include any income tax levied against the investor for its share of the investee's results.
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