Tuesday, 24 January 2012

Corporate Investments (Basic) Categories

Investments in marketable debt and equity securities can be categorized as follows:
1) Investments in financial assets in which the investor has no significant influence or control over the operations of the investee (less than 20% ownership interest).
2) Investments in associates in which the investor can exert significant influence but not control over the investee (between 20% - 50% ownership interest).
3) Business combinations, i.e. investments in subsidiaries, in which the investor has both over the investee. Greater than 50% ownership interest).

NOTE: Ownership percentage is only a guideline. The category of investment is rather based on the investor’s ability to influence or control the investee.

It is possible that investor has significant influence over the investee with < 20% ownership interest. Or the investor has 20-50% ownership but does not have any influence on the investee.

Preferred Accounting Methods: 
• When a company owns a non-influential and noncontrolling interest in another company the investment must be carried at Cost.
• When a company owns an influential but noncontrolling interest in another company, commonly 20-50%, it must account for it under the Equity Method.
• When a company's interest in another exceeds 50% it is considered to have controlling interest and must consolidate the financial statements using the Acquisition Method.

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