According to managing director Anil Ambani, whenever a company holds more than 20 per cent stake in another company, then the accounts have to be consolidated according to the US GAAP.

The equity method of consolidation permits the investor to incorporate pro-rata share of the investee's (RPL) operating results into its earnings. The investor is required to include only net income as a separate line item in its income. The impact on bottomline is the same irrespective of equity or full consolidation method being employed. Simply stated, the original cost of the investment is increased by the investor's share of the investee's earnings and decreased by itsshare of investee's losses and dividends received.

For example, if company A (investor) acquires 40 per cent equity of company B at Rs 10 each for a consideration of Rs one lakh. Consider, that at the beginining of the year, the free reserves of company B is Rs 10,000, net profit is Rs 20,000, while dividend outgo is Rs 5,000 and the net worth of the company B is Rs 2.75 lakh. (capital + free reserves + profit for year- dividends). Now, under the equity accounting system, in the balance sheet of company A, the balance reported in the investment account would be Rs 1.06 lakh (Rs 1,00,000 + 0.40 * 20,000 - 0.40 *5000).

This is up from the initial investment of Rs one lakh made at the start of the financial year. Had it not been for the equity method of consolidation the dividend income would have been reflected in the books of company A in the head other income. Going by the example stated this would be only Rs 2000 (0.40 * 5000), while the investments would at cost at Rs one lakh.

This amount of Rs 1.06lakh represents 40 per cent of the net worth of the company B. Though the presentation will not be different, the amount will be as seen from the above example. In the above mentioned example defered taxes have been ignored for the sake of simplicity.