The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee. An investment of 20% or more of the voting stock of an investee should lead to the
presumption (absent evidence to the contrary) that an investor has the ability to exercise significant influence over an investor. The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee. Required: Identify events or circumstances that suggest that an investor has significant influence over an investee.
Ability of an investor to exercise significant influence over an investee may be indicated in the following ways:
1 . Investor representation of the board of directors of the investee.
2 . Investor participation in policy making processes.
3 . Material intercompany transactions between the investor and investee companies.
4 . Interchange of investor and investee managerial personnel.
5 . Technological dependency of one entity on the other.
6 . The extent of investor ownership in relation to the concentration of other shareholdings.
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