3.1 Overview

If an investor does not possess a controlling financial interest over an investee but has the ability to exercise significant influence over the investee’s operating and financial policies, the investor must account for such an investment under the equity method of accounting regardless of its intent, or lack thereof, to exercise such influence. In addition, in contrast to the consolidation guidance that states that only one investor can consolidate an investee, there can be multiple investors that have the ability to exercise significant influence over the operating and financial policies of an investee (even if another investor has a controlling financial interest in, and therefore consolidates, that investee).

As discussed in Chapter 2, the equity method of accounting is applicable only for investments in common stock of corporations; corporate joint ventures; and, to a certain extent, entities other than corporations, such as partnerships, LLCs, trusts, and other entities that maintain specific ownership accounts. The ability to exercise significant influence over an investee is mainly driven by an investor’s voting powers in that investee.

The presumed levels of ownership that give an investor the ability to exercise significant influence differ depending on the legal form of an investee (see Section 3.2). However, other factors may also indicate that an investor has the ability to exercise significant influence (see Section 3.3).

This chapter provides guidance to assist an investor in its evaluation of whether it has the ability to exercise significant influence over an investee.