MODULE 4

Approaches to Investment Accounting
Types of Investments: Dependence on Ownership Share

Types of investments include: 20% to 50% (as an asset), greater than 50% (as a subsidiary), and less than 20% (as an investment position).

LEARNING OBJECTIVES

Distinguish between a 20% to 50%, greater than 50% and less than 20% investment

KEY TAKEAWAYS

Key Points

A share is a single unit of ownership in a corporation, mutual fund, or any other organization.
Equity method in accounting is the process of treating equity investments, usually 20% to 50%, in associate companies. The investor keeps such equities as an asset.
The ownership of more than 50% of voting stock creates a subsidiary. Its financial statements consolidate into the parent’s financial statements.
The ownership of less than 20% creates an investment position carried at historic book or fair market value (if available for sale or held for trading) in the investor’s balance sheet.
Key Terms

face value: The amount or value listed on a bill, note, stamp, etc.; the stated value or amount.
fair market value: The price at which the buyer and seller are willing to do business.
prima facie: at first sight; on the face of it
A share is a single unit of ownership in a corporation, mutual fund, or any other organization. A joint stock company divides its capital into issuing shares, which are offered for sale to raise capital. A share is thus an indivisible unit of capital, expressing the proprietary relationship between the company and the shareholder. The denominated value of a share is its face value, as calculated by dividing the total capital of a company by the total number of shares.

Shares are valued according to various principles in different markets, but a basic premise is that a share is worth the price at which a transaction would be likely to occur were the shares to be sold. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time. An actual sale transaction of shares between buyer and seller is usually considered to provide the best prima facie market indicator as to the “true value” of shares at that particular time.

20% to 50%

Equity method in accounting is the process of treating equity investments, usually 20% to 50%, in associate companies. The investor keeps such equities as an asset. The investor’s proportional share of the associate company’s net income increases the investment (and a net loss decreases the investment), and proportional payment of dividends decreases it. In the investor’s income statement, the proportional share of the investee’s net income or net loss is reported as a single-line item.