Appendix D - Appendix D. After reading the material in this chapter, you should be able to: Explain why companies invest in other companies, account for investments in equity securities when the investor has insignificant influence, account for investments in equity securities when the investor has significant influence, account for investments in equity securities when the investor has controlling influence, account for investments in debt securities. | Investments Appendix D 1 Learning Objectives Explain why companies invest in other companies Account for investments in equity securities when the investor has insignificant influence Account for investments in equity securities when the investor has significant influence Account for investments in equity securities when the investor has controlling influence Account for investments in debt securities App D-2 Learning Objective 1 Explain why companies invest in other companies App D-3 Part A Equity Investments App D-4 Equity investments are the “flip side” of issuing stock. One company issues stock, and another company invests by purchasing that stock. Here, we discuss how do companies that purchase stock, account for their investment. The way we account for equity investments is determined by the degree of influence an investor has over the company in which it invests. A guideline for determining the degree of influence is the percentage of stock held by the investor. 4 Illustration —Accounting for Equity Investments App D-5 This illustration summarizes the reporting methods for equity investments. When one company (investor) purchases more than 50% of the voting stock of another company (investee), the investor has controlling influence. Companies account for their controlling investments using the consolidation method. When ownership is below 50% of the voting shares, the investor still might be able to exercise significant influence over the investee. This would be the case if the investor owns a large percentage of the outstanding shares relative to other shareholders. When significant influence exists, we account for the investment using the equity method. In the most common investment scenario, a corporate investor has insignificant influence, often indicated by ownership of less than 20% of the voting shares. In this case, we use the fair value method. 5 Learning Objective 2 Account for investments in equity securities when the investor has insignificant | Investments Appendix D 1 Learning Objectives Explain why companies invest in other companies Account for investments in equity securities when the investor has insignificant influence Account for investments in equity securities when the investor has significant influence Account for investments in equity securities when the investor has controlling influence Account for investments in debt securities App D-2 Learning Objective 1 Explain why companies invest in other companies App D-3 Part A Equity Investments App D-4 Equity investments are the “flip side” of issuing stock. One company issues stock, and another company invests by purchasing that stock. Here, we discuss how do companies that purchase stock, account for their investment. The way we account for equity investments is determined by the degree of influence an investor has over the company in which it invests. A guideline for determining the degree of influence is the percentage of stock held by the investor. 4 Illustration
