What are the relevant circumstances that justify differential accounting for intercorporate equity investments?

Question

What will be an ideal response?

Answer 1

ANSWER:
The relevant circumstances that justify differential accounting for intercorporate equity investments depend on the level of influence held by the investor. Standard-setting bodies have focused on a single quantitative criterion, percentage of voting stock owned, as the basis for evaluating the level of influence. Three levels of control have been defined along with three distinctly different reporting methods for each level. SFAS No. 94 requires all majority-owned companies to be consolidated except when control is only temporary or if the majority owner does not have effective control. For less-than-majority-owned companies, the appropriate reporting is either the equity method or the fair value method. The relevant circumstance is whether the investor can exercise significant influence over operating and financial policies. Effective control leads to consolidated reporting; a lesser level of control can also exist in which there is significant influence but not effective control. FASB Interpretation No. 35 established that the relevant circumstance is the ability to exercise significant influence with a 20 percent ownership level used as a guideline, but not a hard and fast rule. If there is no significant influence, then the fair value method of accounting is required under SFAS No. 115.