Significant Influence and the Equity Method
Understanding Significant Influence
The equity method is applied when an investor can exercise significant influence over an investee's operating and financial policies but does not control the entity. Significant influence is often presumed with ownership between 20% and 50%.
- Representation on the board of directors.
- Participation in policy decisions.
- Material intercompany transactions.
- Exchange of managerial personnel.
- Technological dependency.
Note
Ownership percentage alone does not determine significant influence.
Summary
The equity method reflects an ongoing investment relationship between the investor and investee.