Equity Method Investments: Coca-Cola's Strategic Growth Partners

Coca-Cola, one of the world's most recognisable brands, utilises the equity method of accounting for its investments. This method is employed when Coca-Cola has significant influence over another company, generally indicated by owning 20% to 50% of the other company's voting stock. The equity method is an accounting technique that offers a clearer picture of the financial health and influence of a company over other entities, which is crucial for stakeholders to understand the impact of investments.

The equity method is applied when an investor has the ability to exert significant influence over the operating and financing decisions of the investee. This influence is reflected in Coca-Cola's ability to impact the financial and operational policies of its equity method investees, which have included Coca-Cola European Partners, Monster, AC Bebidas, Coca-Cola FEMSA, Coca-Cola HBC, and Coca-Cola Bottlers Japan Holdings.

By using the equity method, Coca-Cola recognises its proportionate share of the net income or loss of its equity method investees, which impacts the equity income (loss) in its consolidated statement of income and the carrying value of its investments. This method provides a more accurate representation of Coca-Cola's financial position and influence, allowing stakeholders to make informed decisions.

Coca-Cola's equity method investments include holdings in Coca-Cola European Partners, Monster, and Coca-Cola FEMSA

Coca-Cola European Partners was formed in 2015 through the merger of Coca-Cola Enterprises, Coca-Cola Iberian Partners, and Coca-Cola Erfrischungsgetränke AG. Coca-Cola Enterprises was previously the anchor bottler for Western Europe and most of North America. As of 2019, Coca-Cola owned approximately 19% of Coca-Cola European Partners' outstanding shares.

Monster, the beverage company, is another significant investment for Coca-Cola, with the company owning around 19% of its shares as of 2019. Coca-Cola's relationship with Monster has led to a reduction in purchases of Monster products in North America due to refranchising activities.

Coca-Cola FEMSA is the anchor bottler for Latin America, and Coca-Cola owned about 28% of its shares as of 2019.

Through these equity method investments, Coca-Cola gains influence over the operating and financial policies of these companies. The company's consolidated net income includes its proportionate share of the net income or loss of these equity method investees. This means that Coca-Cola's income increases when the investees' income increases and vice versa.

The equity method is used when an investor has significant influence over an investee

The equity method is used in accounting when an investor has significant influence over an investee but does not exercise full control over it. This is different from the consolidation method, where the investor exerts full control over the investee, which is then referred to as a "subsidiary". In the equity method, the investee is referred to as an "associate" or "affiliate".

The equity method is used when an investor owns between 20% to 50% of the investee's shares or voting rights. If the investor owns less than 20% but still has significant influence over operations, the equity method must still be used. Significant influence is defined as the ability to exert power over another company, including representation on the board of directors, involvement in policy development, and the interchanging of managerial personnel.

When using the equity method, the investor reports its proportionate share of the investee's equity as an investment (at cost). Profit and loss from the investee increase or decrease the investment account by an amount proportionate to the investor's shares in the investee. This is known as the "equity pick-up". Dividends paid out by the investee are deducted from the account. The equity method acknowledges the substantive economic relationship between the investor and the investee, and ensures proper reporting on the business situations for both parties.

The Coca-Cola Company provides an example of the use of the equity method. In their 2008 financial statements, the company states that they "use the equity method to account for our investments for which we have the ability to exercise significant influence over operating and financial policies". The Coca-Cola Company holds a 35% ownership stake in Coca-Cola Enterprises, which allows them to influence operating and financing decisions. As a result, they use the equity method to account for this investment.

Coca-Cola's net income includes its proportionate share of equity income or loss from these investments

Coca-Cola's net income includes its proportionate share of equity income or loss from its equity method investments. This means that when Coca-Cola records its proportionate share of net income, it increases equity income in its consolidated statement of income and its carrying value in that investment. Conversely, when Coca-Cola records its proportionate share of a net loss, it decreases equity income in its consolidated statement of income and its carrying value in that investment.

The proportionate share of the net income or loss of Coca-Cola's equity method investments includes significant operating and non-operating items recorded by these investments. These items can have a significant impact on the amount of equity income or loss in Coca-Cola's consolidated statement of income and its carrying value in those investments.

Coca-Cola's equity method investments include, but are not limited to, its ownership interests in the following companies:

• Coca-Cola European Partners plc ("CCEP")
• Monster Beverage Corporation
• AC Bebidas
• Coca-Cola FEMSA
• Coca-Cola HBC AG ("Coca-Cola Hellenic")
• Coca-Cola Bottlers Japan Holdings Inc. ("CCBJHI")

As of December 31, 2019, Coca-Cola owned approximately 19% of CCEP, 19% of Monster Beverage Corporation, 20% of AC Bebidas, 28% of Coca-Cola FEMSA, 23% of Coca-Cola Hellenic, and 19% of CCBJHI.

Coca-Cola's investments in its equity method investments in the aggregate exceeded its proportionate share of the net assets of these equity method investments by $8,679 million as of December 31, 2019. This difference is not amortized.

Equity method investments impact Coca-Cola's financial results and accounting processes

Secondly, Coca-Cola's equity method investments include its ownership interests in various companies, such as Coca-Cola European Partners plc, Monster, AC Bebidas, Coca-Cola FEMSA, Coca-Cola HBC AG, and Coca-Cola Bottlers Japan Holdings Inc. As of December 31, 2019, the company owned approximately 19-28% of these companies' outstanding shares. The investments in these equity method investees exceeded Coca-Cola's proportionate share of the net assets by $8,679 million as of that date. This difference is not amortized.

The financial information of these equity method investees includes net operating revenues, consolidated net income, net income attributable to common shareowners, and company equity income or loss. Coca-Cola's net sales to these investees were $14,832 million, $14,799 million, and $14,144 million in 2019, 2018, and 2017, respectively. The company also made payments, primarily for marketing, to these investees and purchased beverage products from them.

Additionally, Coca-Cola's equity method investments impact the company's net receivables and dividends. As of December 31, 2019 and 2018, total net receivables due from equity method investees were $1,707 million and $1,564 million, respectively. The company received dividends of $628 million, $551 million, and $443 million in 2019, 2018, and 2017, respectively. The consolidated reinvested earnings representing undistributed earnings of investments accounted for under the equity method were $4,983 million as of December 31, 2019.

The equity method is applied when Coca-Cola has the ability to exert significant influence over the operating and financing decisions of another company. This typically occurs when the company owns between 20% and 50% of the voting stock of the investee. The equity method reflects Coca-Cola's ability to impact the financial and operational policies of the investee without having total control. It provides a clearer picture of the company's financial health and its influence over other entities, which is crucial for stakeholders to understand the impact of investments on Coca-Cola's financial position and performance.

The equity method is applied to investments in the 20-50% ownership range, where influence is significant but not total

The equity method is an accounting technique used to record the profits earned by a company through its investment in another company. It is used when the investor company holds significant influence over the company it is investing in, but does not exercise full control. This generally means owning around 20% or more of the company's stock, although it can also depend on other factors such as board representation and the ability to influence policy development.

When using the equity method, the investor's share of the investee's net income or loss is recorded as an increase or decrease in the value of the investment. This is known as the "equity pick-up". Dividend payouts from the investee are also deducted from the investment account, as they represent a return on investment and reduce the value of the investor's shares.

The equity method is a standard technique used to reflect the substantive economic relationship between two entities. It provides a more complete and accurate picture of the economic interest that one company (the investor) has in another (the investee).

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