When indirect horizontal holdings exist, it is appropriate to apply the equity method of accounting, even when one company has less than a 20% investment in the common stock of another company.

Question

Quizplus · Accepted Answer

The equity method of accounting is appropriate when one company has significant influence over another company, even if the investment is less than 20%. Significant influence is typically assumed to exist when an investor owns between 20% and 50% of the voting stock of another company. However, in some cases, an investor may have significant influence even with an investment of less than 20%. This can occur when the investor has the ability to control the operating and financial policies of the other company, even without a majority ownership stake.

When Indirect Horizontal Holdings Exist, It Is Appropriate to Apply