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What is significant influence in relation to investments in equity securities?

Significant influence occurs when an investor has the power to participate in the operating and financial policy decisions of an entity. The rule of thumb is that if a company owns between 20% and 50%, then they have significant influence. However, a company can own less than 20% and still have significant influence if any of the following examples are true:

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  • What is the difference between the fair value method and the equity method?

    The main difference relates to the amount of ownership the company has in another entity. If the company owns less than 20% of the outstanding shares for the company they invested in, then the fair value method (i.e., cost method) is used. If the company owns between 20% to 50% of the outstanding shares, then the equity method is used. There are exceptions where a company can own less than 20% but have significant influence. In this case, the equity method will be used. The company can also own greater than 20% but not have significant influence. In This case, the fair value method can be elected. Anything over 50% requires consolidation.