Accounting for Intercorporate Equity Investments

This technical note provides an overview of accounting for investments in equity securities. It discusses passive investments and fair value accounting, investments resulting in significant influence and the equity method of accounting, and investments resulting in control and consolidation accounting. It provides examples of each of the three possible accounting approaches and walks through the appropriate accounting for each.<p>Excerpt</p><p>Accounting for Intercorporate Equity Investments</p><p>Managers invest in other companies&apos; securities for a variety of reasons. First, a company may have cash it would like to invest in the stocks or bonds of another company simply to generate a return. Second, a company may invest in another company so that it can influence that company&apos;s policies and performance. Third, a company may invest in another company to obtain control of that company.</p><p>The method used to account for investment in other corporations depends on the degree of influence or control the investing company has over the investee company due to the investment. From a financial reporting perspective, these diverse reasons result in three broad investment categories: (1) passive investments, (2) investments that result in significant influence, and (3) investments that result in control.</p><p>Passive Investments</p><p>Passive investments are investments in securities of another company simply for the purpose of earning a rate of return. They can include investments in debt and equity securities. Although there are exceptions, investments in equity securities (e.g., stocks) are considered passive investments if the investing company owns less than 20% of the outstanding voting shares of the investee. Note that since preferred stock is typically nonvoting stock, it is usually considered a passive investment.</p><p>Investments Resulting in Significant Influence</p><p>. . .</p>