Homework answers / question archive / Accounting for equity investments in other entities depends crucially on the level of influence the investor holds on the investee

Accounting for equity investments in other entities depends crucially on the level of influence the investor holds on the investee

Business

Share With

Accounting for equity investments in other entities depends crucially on the level of influence the investor holds on the investee. we learned how to account for equity investments where the investors obtain control over the investees. after that we learned the case where the investors can exert 'significant influence' over the investees. In the former case, the investor is required to consolidate the investee's financial statements, while in the latter the investor shall apply the 'equity method' to account for the investment.

Some commentators argue that having these very different treatments for similar investments is problematic as the distinction between control and significant influence is often unclear, which gives managers some flexbility to choose equity method to mask the underlying economic truth. However, many experts contend that different treatments are needed to reflect the extent to which the investee is integrated with the investor.

Required

Compare consolidation accounting to the equity method, and contribute your opinions to the debate. Specifically, you are expected to:

• Discuss whether it is more desirable to require uniform accounting treatment for equity investments regardless of the level of influence the investor holds on the investee.