Question

I need to know what are all the circumstances the equity method is appropriate?

Answer 1

The equity method is one of the methods of valuation of investments in other entities.

Equity method is appropriate when the investment made by the investor in the investee fetches the ability to exert singnificant influence over the operating and financial policies of the investee. Significant influence is a question of fact and purely driven by the prevelant circumstances. However generally a total holding of 20% or more of voting power of the investee is deemed to give the investor the ability to exert significant influence.

The following situations may be considered as indicators of significant influence:

• representation in Board of directors
• Participation in operating and financial policies
• Existence of transactions with the investee which are material
• Key personnel swapping between the investor and investee