Title: Equity Investments (significant Influence)
1Equity Investments (significant Influence)
- When a company can exert significant influence
over another, the equity securities it owns of
that company must be accounted for using the
Equity Method. Significant influence is usually
believed to result if the company owns in excess
of 20-25 of the outstanding shares of the other
company. - Under this method of accounting, we
- Record dividends as a return of investment
(credit investment account), rather than as
income - Report income (and increase investment account)
equal to percentage ownership in earnings of
investee company. - The investment account, thus, rises (falls) with
those events that increase (decrease) retained
earnings of investee company
2Here is an example from the annual report of
Coca-Cola
3Details relating to this investment are found it
the notes
4One point to remember investments accounted for
under the equity method are not marked-to-market
like passive investments discussed earlier. They
are reported at cost, adjusted for dividends and
the proportionate share of investee company
earnings.
There is an unrealized gain of 2.7 billion
relating to this investment. This will not be
reflected in Cokes income and stockholders
equity until the investment is sold.