If an investor holds 10% of a company but has significant influence, which accounting treatment might be used?

• A. Equity Method may be used
• B. Consolidation is required
• C. Full fair value through profit or loss is used
• D. No recognition of the investment is recorded

Answer: (A)

When an investor has significant influence but not control, the investment is accounted for using the equity method. This approach recognizes that the investor participates in the investee’s policy decisions and shares in its economic outcomes, without treating the relationship as a single entity.

Under the equity method, you initially record the investment at cost. thereafter, you adjust the carrying amount for the investor’s share of the investee’s net income or loss each period, and you reduce the investment for any dividends received. This method also reflects any amortization or impairment related to differences between the cost of the investment and the investor’s share of the net assets.

Consolidation is reserved for situations of control, where the investor effectively controls the investee and would present the combine as a single economic entity. Full fair value through profit or loss is typically used for investments where there is no significant influence, or when an entity elects FVPL for certain financial assets. Not recognizing the investment would ignore an economic interest the investor actually holds.

So, the suitable treatment when there is significant influence but no control is the equity method.