Final answer:
The equity method is used when a company has significant influence but not control over another, accounting for its share of profits or losses in the investment, while the acquisition method is used when a company has control over another, leading to full consolidation of financial statements.
Step-by-step explanation:
The differences between the equity method and the acquisition method in preparing group financial statements lie in the level of control or influence and how the investment is accounted for.
Under the equity method, applied when a company has significant influence over another (usually 20-50% ownership), the investment is initially recorded at cost and subsequently adjusted to recognize the investor's share of the investee's profits or losses, which are reflected in the investor's income statement. Dividends received from the investee reduce the carrying amount of the investment. The acquisition method, on the other hand, is used when one company takes control of another (more than 50% ownership).
Here, the acquirer must consolidate the financial statements of the acquiree, which involves recognizing and measuring at fair value all identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree. Goodwill or a gain from a bargain purchase is also recognized.