Tiger Corporation owns 45% of Rabbit Ltd. Tiger Corporation also owns 15% of Beaver Ltd. Explain,...

Tiger Corporation owns 45% of Rabbit Ltd.

Tiger Corporation also owns 15% of Beaver Ltd.

Explain, if the ownerships of Tiger Corporation in Rabbit Ltd and Beaver Ltd are sufficient to conclude on how the investments should be reported by Tiger Corporation

Solutions

Expert Solution

Equity methods to be recorded either as per

FVTNI - If % holding is less than 20%
Equity method - if % holding >= 20% upto 50% and significant influence exists.

But only % holding cannot decide the method to be followed to report the investment it is also required to consider whether the investor is able to apply significant influence through its holdings over another corporation.

There are various cases where influence can exist even if ownership is less than 20% -

Investor has representation on the board of directors of the investee company
Investor is a major customer/supplie of investee company
Investee has technological/transactional dependency on investor
Investor has definite intentions to increase the stake in the investee to more than or equal to 20%
owns atleast 20% of voting stock of the investee

Cases where ownership is 20%-50% but no significant influence -

Lawsuit/complaint filed against investor challenging ability to exercise significant influence
Investment in the investee is temporary
Bankruptcy of investee etc

So, we can conclude that just ownership % cannot decide how the investments should be reported.

For further clarification please comment. Please upvote!

ekkarill92 answered 1 year ago

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