Question

HOW DOES A COMPANY REALLY DECIDE WHICH INVESTMENT METHOD TO APPLY?

Pilgrim Products, Inc., buys a controlling interest in the common stock of Crestwood Corporation. Shortly after the acquisition, a meeting of Pilgrim's accounting department is convened to discuss the internal reporting procedures required by the ownership of this subsidiary. Each member of the staff has a definite opinion as to whether the equity method, initial value method, or partial equity method should be adopted. To resolve this issue, Pilgrim's chief financial officer outlines several of her concerns about the decision.

I already understand how each method works. I know the general advantages and disadvantages of all three. I realize, for example, that the equity method provides more detailed information whereas the initial value method is much easier to apply. What I need to know are the factors specific to our situation that should be considered in deciding which method to adopt. I must make a recommendation to the president on this matter, and he will want firm reasons for my favoring a particular approach. I don't want us to select a method and then find out in six months that the information is not adequate for our needs or that the cost of adapting our system to monitor Crestwood outweighs the benefits derived from the data.

What are the factors that Pilgrim's officials should evaluate when making this decision?

Answer 1