4. XYZ Company buys 60 percent of the voting stock of ABC Company with the remai

Question

4. XYZ Company buys 60 percent of the voting stock of ABC Company with the remaining 40 percent noncontrolling interest held by ABC's former owners, who negotiated the following noncontrolling rights: a. Any new debt above $1,000,000 must be approved by the 40 percent noncontrolling shareholders. b. Any dividends or other cash distributions to owners in excess of customary historical amounts must be approved by the 40 percent noncontrolling shareholders. According to the FASB ASC, what are the criteria in determining whether XYZ should consolidate ABC or report its investment in ABC under the equity method? Provide a recommendation and justification on what XYZ should do in each of the two situations described above.

Explanation / Answer

The Equity method is used to gain the ability to influence the decision making process of the management. The Equity method influence the operating and financial policies of the investee.

As the ABC former owners holds 40% of the share holding, they will have the right to vote in the decision making process of the company and thus, the non-controlling rights are acceptable and they will have right to vote on the major aspects of the company.

The requirement is only the ability to excercise the significant influence is important rather than the actual influence.

Participation in the policy making process.

Material intra-entity transactions

Technology dependence.

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