Equity Investments (significant Influence)

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Equity 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

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Here is an example from the annual report of
Coca-Cola
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Details relating to this investment are found it
the notes
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One 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.