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Equity Securities: Method. If 20-50% of The Stock Is Owned, The Investor Is Usually Able To Significantly

The accounting method used for an equity security investment depends on the level of control and influence the investing company has over the issuing company. If less than 20% is acquired with no influence, the cost method is used. Between 20-50% ownership allows for significant influence, using the equity method. Owning over 50% constitutes control, requiring use of consolidated financial statements. The level of influence determines the appropriate accounting treatment, rather than just percentage of ownership.

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65 views1 page

Equity Securities: Method. If 20-50% of The Stock Is Owned, The Investor Is Usually Able To Significantly

The accounting method used for an equity security investment depends on the level of control and influence the investing company has over the issuing company. If less than 20% is acquired with no influence, the cost method is used. Between 20-50% ownership allows for significant influence, using the equity method. Owning over 50% constitutes control, requiring use of consolidated financial statements. The level of influence determines the appropriate accounting treatment, rather than just percentage of ownership.

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Ella
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© © All Rights Reserved
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EQUITY SECURITIES

An equity security is an investment in stock issued by another company. The


accounting for an investment in an equity security is determined by the amount of
control of and influence over operating decisions the company purchasing the stock has
over the company issuing the stock. If less than 20% of the stock is acquired and no
significant influence or control exists, the investment is accounted for using the cost
method. If 20–50% of the stock is owned, the investor is usually able to significantly
influence the company it has invested in. Assuming the investor does not control the
number of positions on the Board of Directors or hold key officer positions, this
investment would be accounted for using the equity method. If the investor has 50% or
more of a company's stock, significant influence and control are deemed to exist and
the investor reports its results using consolidated financial statements. Although
percent of voting stock owned serves as a guideline, the amount of influence and
control is used to determine the accounting for equity securities.

Equity securities are financial assets that represent shares of a corporation. The most
prevalent type of equity security is the common stock. And the characteristic that most defines
an equity security, differentiating it from most other types of securities, is “ownership.”

If you own an equity security, your shares represent part ownership of the issuing company. In
other words, you have a claim on a percentage of the issuing company’s earnings and assets. If
you own 1% of the total shares, or security stocks, issued by a company, your part ownership of
the controlling company is equivalent to 1%.

Source: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-
ii/investments/accounting-for-equity-securities
https://tickertape.tdameritrade.com/investing/equity-securities-debt-securities-16959

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