Question

In: Accounting

In 200 words or more, discuss some of the issues that affect equity investments. In particular,...

In 200 words or more, discuss some of the issues that affect equity investments. In particular, discuss how “investor control” is a concept relating to the accounting for investments.

Solutions

Expert Solution

The equity method treats the investee company as if it were condensed into one balance sheet item and one income statement item and then merged into the investor company at the proportion owned by the investor. The equity method is sometimes called “one-line consolidation” because it results in the same effect on the investor’s earnings and retained earnings as would result from consolidating the financial statements of the investor and investee companies. It does so without combining both companies’ financial statements.

The equity investor also has possible inputs with regarding decisions of investments, as well as management of investments. There are also different types of control, and the significant influence that the investor may have, depends solely on the total amount they have at stake in the company. There are also different levels of equity investment, passive-generally under 20% ownership, influential- generally 20-50% ownership, and controlling-generally over 50% ownership. The roles that each position holds also has different influences with regards to how a company will conduct certain operations. In certain instances where the presence of a controlling investor is known, there may often be more detailed information that will often be requested to be supplied. A controlling investment often requires that subsidiary income statement account be combined with those of the parent company.


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