There are three possible ways to account for the investment by one company in the common stock of another, depending on the resulting degree of influence the investor has over the investee:
Cost or Market Method
Investor acquires < 20% of investee’s voting stock (insignificant influence).
Investor acquires 20% – 50% of investee’s voting stock (significant influence).
Investor acquires > 50% of investee’s voting stock (legal control).
These percentages are merely guidelines; there are other factors that must be considered in evaluating the degree of influence. For example, exceptions to these guidelines might arise when:
- A corporate investor owns < 20% of voting stock, but still has considerable influence over the investee through veto power or business contracts (equity method could apply).
- Corporate investors in joint ventures share control (equity method could apply).
- A corporate investor owns > 50% of voting stock, but the investee is in bankruptcy proceedings and the court has control (equity method could apply).