Reference no: EM132957320

Accounting for equity investments in other entities depends crucially on the level of influence the investor holds on the investee. Already learned how to account for equity investments where the investors obtain control over the investees. After learned the case where the investors can exert 'significant influence' over the investees. In the former case, the investor is required to consolidate the investee's financial statements, while in the latter the investor shall apply the 'equity method' to account for the investment.

• Some commentators argue that having these very different treatments for similar investments is problematic as the distinction between control and significant influence is often unclear, which gives managers some flexbility to choose equity method to mask the underlying economic truth. However, many experts contend that different treatments are needed to reflect the extent to which the investee is integrated with the investor.

Compare consolidation accounting to the equity method, and contribute opinions to the debate.

Problem a) Provide a detailed comparison of consolidation accounting to the equity method. Identify their key similarities and differences;

Problem b) Explain how managers can privately benefit from choosing equity method over consolidation when the determination of control and significant influence is unclear;

Problem c) Conjecture several mechanisms or solutions that could be implemented to mitigate the potential manipulation; and

Problem d) Discuss whether it is more desirable to require uniform accounting treatment for equity investments regardless of the level of influence the investor holds on the investee.