What Is an Investee in Accounting and Finance?

An investee is the entity that receives an investment from an investor. This relationship forms the foundation of many financial activities, where capital is provided to an individual, company, or project with the expectation of a future return or some form of influence.

Understanding the Investee Concept

An investee is the business entity, person, or project that receives financial capital. This entity typically seeks funds for various purposes, such as growth, operational expenses, or the development of specific ventures. The investee uses the received capital to further its objectives, aiming to generate returns that can then benefit the investor.

The fundamental dynamic involves the investee receiving resources in exchange for an equity stake, debt instrument, or another agreed-upon financial interest. While the investee gains necessary funding, the investor anticipates either a share of future profits, interest payments, or an appreciation in the value of their investment. This reciprocal arrangement underpins many financial transactions, from startup funding to large corporate financing.

Different Forms of Investees

Investees can take on various forms, reflecting the diverse ways capital is deployed in the economy. This includes new businesses or small enterprises that seek seed capital or growth funding to expand their operations. Established corporations also act as investees when they issue stocks or bonds to raise capital from the public or private investors.

Beyond traditional companies, investees can include specific projects, such as real estate developments that require significant upfront capital. Investment funds themselves can be investees, where the fund receives capital from limited partners to then invest in other entities. Even individual ventures or specific initiatives within a larger organization can be considered investees.

Investment Levels and Financial Reporting

The level of an investor’s ownership or influence over an investee directly impacts how the investee’s financial performance is recognized on the investor’s financial statements. For passive investments, typically less than 20% ownership, the investor accounts for the investment using the fair value method, recognizing changes in value through net income. Dividends received from the investee are recorded as income.

When an investor holds significant influence, generally between 20% and 50% ownership, the equity method of accounting is applied. Under this method, the investor recognizes a proportionate share of the investee’s net income or loss directly on their income statement, adjusting the investment’s carrying value accordingly. Indicators of significant influence can extend beyond ownership percentage to include board representation or participation in policy-making.

If an investor obtains control over an investee, usually by owning more than 50% of its voting shares, the consolidation method is used. This approach integrates the investee’s entire financial statements with the investor’s, presenting them as a single economic entity. This level of control means the investee’s assets, liabilities, revenues, and expenses are combined with the investor’s, requiring specific accounting adjustments for any non-controlling interests.