| The use of the equity method has a long history.At present,the equity method is mainly used to solve the following two kinds of financial reporting issues:First,it is used as the measurement method of equity investment in the individual financial statements of the parent company;second,it is used as an incomplete consolidation method for joint ventures and associates in the consolidated financial statementsThe IFRS Equity Method Project advocates problem-oriented research on the application of the equity method.The general topics include:(1)The conceptual basis of the equity method,including whether the equity method is an incomplete consolidation method or a measurement method;What does "significant influence" mean and why it affects the nature of information required by users of financial statements,the relationship between the equity method and the concept of "control";(2)how to apply the equity method,including how the equity method reflects different ownership structures and changes information,such as a step-by-step acquisition;(3)The usefulness of the information provided by the equity method in the financial statements and whether it is equally applicable to all applicable equity methods;(4)Other methods(eg,whether cost or fair value can provide more useful information for decision-making in some or all of the cases,which provides important research ideas for the study of this paper.This paper considers that the above issues are not independent of each other.The concept of the equity method based on the concept of the consolidation method is totally different from that of the equity method based on the conceptual basis of the measurement method.This can explain,to a certain extent,the reasons for the current controversy over the concept,objectives,and survival of the equity law.Equity method research based on the conceptual basis of measurement methods needs to be established on the basis of clear definitions of long-term equity investment classification standards,"joint ventures and associates",and"significant influence" concepts,and then discuss the investment of firms in joint ventures and associates.It is then possible to discuss the measurement methods used by companies for the investment in joint ventures and associates to better provide investors with useful information for decision making.However,at present,there are many deficiencies in the definition of long-term equity investment classification standards,"joint ventures and associates," and "significant influence" in China's accounting standards,and there is no proper distinction between the different economic relationships between investors and investees.This paper attempts to study the usefulness and application basis of China's equity method in the consolidated financial statements based on the conceptual basis of the consolidation method.The equity method studied in this paper is used as an incomplete consolidation method to account for the equity in investees that do not have control(ie,joint ventures and associates).The main concerns of this paper are:(1)Whether the investment income information of joint ventures and associates accounted for using the equity method in the consolidated financial statements is useful for decision making;(2)At present,there are problems with the application basis of the equity method(the definition and presumption of"significant influence").Is there any synergy between joint venture and associates that are accounted for the current equity method?Will these issues affect the usefulness of the decision?(3)CAS41 requires the firms to disclose the information on the equity of the important joint ventures and associates in the notes to the financial statements.What is the implementation status and effect of the information?Is the regulatory pressure on fully disclosed standards helpful in resolving the current issues affecting the transparency of the accounting information in the equity method?This paper combines the current status of long-term equity investment business activities of listed companies in joint ventures and associates in China.The analysis results of transparency of accounting information in China's equity method accounting are as follows:(1)The large annual changes in the long-term equity investments of listed companies in joint ventures and associates is a factor that may affect the transparency of the investment income information of joint ventures and associates accounted in the equity method;(2)The basis for the application of the equity method is not clear and understandable.Holding an equity investment in an associated enterprise that does not follow the convention of significant influence but is accounted in the equity method,to a certain extent,increases the difficulty of understanding investment income and reduces the transparency.(3)Given that the current accounting standards do not pay enough attention to the nature of the equity method's accounting,it is difficult for investors to analyze the synergies between the reporting entity and the invested entity through investment returns.If the company uses the equity method to account for the joint ventures and associates that do not have an important relationship with each other,especially the joint ventures and associates in the financial industry,the difficulty in understanding investment income is increased to some extent,and the transparency of investment returns is reduced;(4)If companies that did not disclose the equity information of joint ventures and associates prior to the implementation of CAS41,they will be disclosed in the notes to the financial statements in accordance with the requirements of the accounting standards after 2014,which indicates that regulatory pressures on the information disclosure standards of joint ventures and associates have played a role;and Companies that have disclosed information on the equity of joint ventures and associates prior to 2014 are actually voluntarily providing supplementary explanations for improving the transparency of information on investment returns of joint ventures and associates.The empirical test content of this paper is laid out in the following way:(1)Using the data disclosed by listed companies in relation to associated transactions with associates and joint ventures to measure the concept of "important interrelationships";(2)Combining the investment income information of joint ventures and associates accounted in the equity method with the content of the equity information of joint ventures and associates disclosed in CAS41 to study the transparency of the accounting information of equity method accounting;(3)Through the test of value correlation and stock price synchronization,we obtained empirical evidence on the usefulness of the equity method as an incomplete consolidation method in the consolidated financial statements,and examined the three major issues that may affect the transparency of investment income of joint ventures and associates in the equity method of accounting.Issues(including annual changes in the long-term equity investment accounted in the equity method,compliance issues with significant influence presumptions,and differences in operating synergy effects),how disclosure of equity information in major joint ventures and associates affects value correlation and stock price synchronization;(4)Taking into account the essential differences between the equity approach objectives and the concept of "control"based on the conceptual basis of the merger approach,we conduct group tests based on the differences in the embedded background of the listed companies in China;(5)Using the differences in disclosure of equity information between major joint ventures and associates,we identified the motivation behind the three major issues affecting the transparency of investment income(including the annual changes of long-term equity investments in the equity method,the application of presumption of significant impact conventions,and differences in operating synergy effects).and CAS41's impact on the above issues.The main conclusions of this paper are as follows:(1)The application of the equity method as semi-consolidation is based on the premise that the income to the invested entity is not only to obtain the ownership gains(changes in dividends and equity prices),but also to build important business relationship that contribute to the company's production,sales,and technology research and development.The strong inter-relationship,through the sharing of ownership and management rights,further forms a synergistic effect on the business activities of the reporting entity.Most important,the strong inter-relationship is an open cooperative relationship.Each company maintains an independent business entity.Trading activity arrangements are driven by the company's own interests.The freedom and cooperative characteristics of the equity investment in the investees with the strong inter-relationship is essential different from that in the equity investment in subsidiaries.According to the logic of "control-joint control-significant influence",the order of decreasing power and the degree of influence are successively defined,which is to deviate from the goal of equity method accounting based on the concept of the consolidation.(2)Research conclusions about the usefulness of long-term equity investment accounted by equity method.First,the investment income of joint ventures and associates measured by the equity method is useful for decision-making,which is more significant in more independent firms.Second,the impact of the practical application of the equity method of accounting on the usefulness is concluded as follows:Significant changes in the annual changes of long-term equity investments do not reduce the usefulness of the decision-making of the investment incomes of the joint ventures and associates,While the application basis of the equity method and the financial diversification purposes will reduce the usefulness of the decision-making of the investment incomes of the joint ventures and associates,which is even more pronounced in more independent firms.Third,disclosures,particularly continuous disclosures,of the interests of joint ventures and associates can enhance the usefulness of the investment incomes of joint ventures and associates.(3)Research conclusions on the relationship between the accounting information accounted by the equity method and the price synchronization.First,the investment income of joint ventures and associates accounted by the equity method can reduce the price synchronization.Second,the impact of the practical application of the equity method of accounting on the price synchronization is concluded as follows:For the firms with large changes in the annual amounts of the long-term equity investments in joint ventures and associates,strengthen the reducing effect on the synchronization of stock prices;the financial diversification purposes which include more industry-level or market-level of information will enhance the stock price synchronization.Third,the firms that consistently disclose the information of the interests in joint ventures and associates have low price synchronization.(4)Research conclusions about the economic consequences of accounting information of long-term equity investment accounted by equity method.Under the pressure of CAS41 regulatory on the disclosure of information in joint ventures and associates,public firms reduce the long-term equity investments in joint ventures that held less than 20%of their shareholdings,which reduced the issue of the basis for the application of the equity method.(5)The test of motivation for the practical application of the equity method has the following conclusion:The issue of large changes in the annual amounts of long-term equity investments in joint ventures and associates is not a deliberate choice made by the firm's management;While the issues of the application basis of the equity method and financial diversification purposes are deliberate choices made by the firm's management,especially in those firm with a higher motivation for earnings management and firms with poorer information environment.On the basis of the main contents and conclusions mentioned above,this paper puts forward the following suggestions on the usefulness of the equity method and how to improve the existing practical application of the equity method:(1)About the usefulness of the equity method.The investment income of the joint ventures and associates accounted by the equity method in the consolidated statements is value relevance.The equity method is applicable in the consolidated financial statements.Relatively speaking,the more independent firms have more strategic significance in building strategic alliances and seeking integration.The long-term equity investments in joint ventures and associates measured by equity method,which can be reflected its rights and interests in joint ventures and associates play a role similar to that of parent and subsidiaries in consolidated financial statements.(2)About the application basis of the equity method.Although the definition and judgment of "significant influence" depart from the equity method target based on the concept of incomplete merger method,it is not only "non-black and white"" acceptance "or "repeal".The understanding of the applicability of the equity method can consider changing the thinking:the problem of accounting information transparency that affects the accounting of equity method increases the difficulty of understanding investment income information accounted in the equity method,but management has the opportunity to manage information by improving and improving supplementary information disclosure.The environment,which in turn releases signals to the market.The specific recommendations are as follows:First,I suggest the accounting standards makers focus on continuing to strengthen,refine and standardize the disclosure of interests in joint ventures and associates:disclosure of the basic information of all the joint ventures and associates,including the name,place,business and the proportion of voting rights;especially concerning the explanation of significance.Second,in order to make the equity method accounting closer to its essence(the method of single-line consolidation,as an alternative to the consolidated financial statements),consideration should be given as to whether the degree of influence or the classification between integration effect and simply benefit-sharing should be considered as applicable basis.After all,the criterion of "significance" is too subjective and the judgment of "integration effect " is relatively objective.It is suggested that accounting standards makers should adopt the method of presenting accounting information and disclosing information disclosure at present.Specifically,it can be solved from the following two aspects:In accounting information presentation,the investment income of joint ventures and associates should be divided into two parts in the consolidated financial statements-with and without integration effect.In the disclosure of information note,the public firms should be required to disclose the explanatory statement on the integration effect.The main improvements and innovations in this article are reflected in the following points:(1)The current equity method research mainly considers the equity method as a measurement method and compares the equity method with the historical cost method and fair value method,and discusses which measurement method can better provide investors with useful information for decision making.Equity method research based on the concept basis of measurement methods needs to be established on the basis of clear definitions of the long-term equity investment classification criteria,the definitions of joint ventures and associates and significant influence.However,at present,there are many deficiencies in the definition of long-term equity investment classification standards,joint ventures and associates and significant influence in China's accounting standards,and there is no proper distinction between the different economic relationships between investors and investees.This paper attempts to study the usefulness and application basis of China's equity method in the consolidated financial statements based on the conceptual basis of the consolidation,broadening the research method of the equity method,which is conducive to a clearer and more comprehensive understanding of the equity method.(2)Based on the analysis of the practical application of the equity method in public firms in our country,this paper draws lessons from the research ideas of Nichols et al.(2017)and Guay et al.(2016),constructs the measurement variable so that the theoretical controversy of the equity method can be transformed into the empirical test.Compared with the concept-oriented normative research,this paper belongs to the problem-orientated empirical test.The knowledge about the relevance,truthfulness and understandability of the investment incomes provided useful empirical evidence for accounting standard makers for reference.(3)Based on the complexity issues that may affect the comprehensibility of financial statement information and the supplemental information disclosure,this article combines the practical application of equity method with the supplementary explanation information of joint ventures and associates.The paper on the pricing efficiency and economic consequence test provides a new perspective for the study of accounting information of long-term equity investment,which is calculated by the equity method.It also provides a brand new way of thinking for dealing with the complexity of the equity method. |
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