11.04 Investments in Equity Securities: The Equity Method

Question 1

When does an investor use the equity method of accounting?

Answer 1

When the investor has significant influence over the operating and financing activities of the investee, the investor uses the equity method accounting. The entity can also elect to use the FV method instead.

Question 2

What are the factors to consider regarding an investor’s significant influence over an investee?

Answer 2

(PERMIT) Participation in policy-making processes; Extent of ownership in relation to the concentration of other shareholders; Representation on the board of directors; Material intra-entity transactions; Interchange of managerial personnel; Technological dependency.