If you own less than 20% and have significant influence, which accounting treatment may be used?

• A. Equity method
• B. Trading securities
• C. Consolidation
• D. Held-to-Maturity treatment

Answer: (A)

Significant influence with less than full ownership calls for the equity method. This method recognizes your ongoing influence on the investee’s decisions and your share of its profits or losses, rather than treating the investment as a simple asset or as a separate entity to be consolidated.

Under the equity method, you record the investment at cost initially. Each period, you adjust the carrying amount for your share of the investee’s net income (increasing the investment) and for your share of its net losses (decreasing the investment). The income on your own financial statements reflects your share of the investee’s earnings, not dividend income. Dividends you receive reduce the carrying amount of the investment rather than being recorded as income. This approach better mirrors the economic relationship when you can influence policy and participate in profits.

Trading securities would be handled at fair value with unrealized gains and losses through net income, which isn’t appropriate for an investee you have influence over. Consolidation is used when you control the investee (typically ownership of more than half). Held-to-maturity applies to debt securities intended to be held to maturity, not equity investments with influence.