How to Record the Initial Recognition of an Equity Method Investment and Allocate the Purchase Price to Underlying Assets

💡 Accountant's Note

Equity method investments are initially recorded at cost. At acquisition, the investor must allocate the purchase price to the underlying net assets of the investee (proportionate share of identifiable assets and liabilities at fair value) — the excess is 'goodwill within the equity method investment' (not separately recognized on the balance sheet). This is the 'cost-minus-underlying-equity' difference. The underlying asset differences must be tracked to properly compute equity method income: if the investor paid more for PP&E than the investee's book value, the investor's equity income is reduced for the excess amortization attributable to its ownership percentage. Goodwill within the equity method investment is NOT separately amortized or impairment tested — the entire investment is tested for impairment as a single unit.