Long-Term Equity Investments: Definition, Accounting, and Measurement

Long-term equity investments include: the company's long-term equity investments in subsidiaries; the group's long-term equity investments in joint ventures and associates; and the group's long-term equity investments in investees that do not have control, joint control, or significant influence, and whose fair value cannot be reliably measured in an active market.

A subsidiary refers to an investee in which the company has control; a joint venture refers to an investee in which the group has joint control with other parties; and an associate refers to an investee in which the group has significant influence over its financial and operating decisions.

Investments in subsidiaries are presented in the company's financial statements at the amount determined under the cost method and adjusted under the equity method in the preparation of consolidated financial statements; investments in joint ventures and associates are accounted for using the equity method; and investments in investees that do not have control, joint control, or significant influence, and whose fair value cannot be reliably measured in an active market, are accounted for using the cost method.

Determination of investment cost

For long-term equity investments formed through business combinations: long-term equity investments acquired in a business combination under common control are initially measured at the proportionate share of the acquired net assets of the merged entity on the acquisition date; long-term equity investments acquired in a business combination under non-common control are initially measured at the acquisition cost.

For long-term equity investments acquired through means other than business combinations: long-term equity investments acquired for cash are initially measured at the actual purchase price paid; long-term equity investments acquired through the issuance of equity securities are initially measured at the fair value of the equity securities issued.

Subsequent measurement and recognition of income or loss

Long-term equity investments accounted for using the cost method are measured at the initial investment cost, and any cash dividends or profits declared by the investee are recognized as investment income in the current period.

Long-term equity investments accounted for using the equity method are initially measured at the investment cost if it exceeds the proportionate share of the investee's identifiable net assets fair value at the time of investment; any difference is recognized in the current period as income or loss and correspondingly adjusts the investment cost.

For long-term equity investments accounted for using the equity method, the group recognizes its share of the investee's net income or loss for the current period. If the investee incurs a net loss, the recognition is limited to the carrying amount of the long-term equity investment and other long-term equity interests that substantially constitute the group's net investment in the investee, unless the group has an obligation to bear additional losses and meets the recognition criteria for a probable liability under the applicable accounting standards. Any other changes in the investee's equity, apart from the net income or loss, are directly recorded in capital reserves based on the group's ownership interest.