Reply posts to two (2) classmates

Reply posts to two (2) classmates must be at least 100 words for each reply.

First classmate:

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I believe Highland Laboratories should account for its investment in Abraham, Inc. using the equity method as the second accountant states. According to the text, “generally accepted accounting principles (GAAP) prescribes that the equity method should be used to account for Equity Investments when the investor has the ability to exercise ‘significant influence’ over operating and financial policies of an investee.” (Hopkins & Halsey, Page 5) The criteria regarding if the investor has significant influence in the company is simple. Since Highland Laboratories has more than twenty percent of the shares, they have significant influence since not stated otherwise by the investee. Highland Laboratories does not help manage and operate the company in any way, but it seems to me that they could exercise that right if they desired. As long as the investee does not challenge the investor’s ability to participate and exercise significant influence, or make an agreement regarding the investor’s significant influence, Highland Laboratories has that right to exercise its influence. Since the investor, Highland Laboratories, can exercise significant influence over Abraham, Inc.’s company, Highland Laboratories should account for the investment using the equity method. I agree with the second accountant’s statement suggesting that we certainly have the ability to exercise significant influence whether the company uses it or not. This means that according to generally accepted accounting principles, Highland Laboratories must account for the investment using the equity method. Even though Highland Laboratories does not know anything about running a bakery and Abraham, Inc. will not expect them to participate in decision-making or operations regarding the company’s business, Highland Laboratories certainly has a vote in how to run the business if they desired. This does not mean that Highland Laboratories is required to participate in operations and decision-making of Abraham, Inc., but Highland Laboratories is definitely allowed to participate if they decide they want to become more involved. There are ways that Abraham, Inc. could possibly keep Highland Laboratories from participating, but it all depends on the circumstances.

Second Classmate:

From the information that is given, I would say that this case does not qualify for the equity method. Going off what the first account said, there seems to be a lack of significant influence. There seems to be no representation on the board, there does not seem to be a strong inter-company transactions or dependency on the investor. It is important to note that even though Highland owns one third of all the stocks available for Abraham, Inc, it does not guarantee to qualify for the equity method. “The investor might not have significant influence even though it owns more than 20 percent of the outstanding voting stock of the investee” (Hopkins and Halsey). This quote shows that the second accountant is wrong in his argument. The important factor in determining if an investment qualifies for the equity method is the. Significant influence that Highland has on Abraham, Inc. Even when the percentage of the stock owned is less than the magic number of 20 percent, if the investor has a significant influence it can still qualifies for the equity method. So, I have to agree with the first accountant that this investment should be used at fair value method. With this method, the investment is reported on the balance sheet at the current value. It is important that the investment is reported to the current fair value every statement date. Any gain that is reported at the statement date is recorded in the current income. Any dividends received are reported as income. When an investment reported at fair value, this means that the investor cannot apply significant influence on the investee, in this case Highland does not have significant influence on Abraham, Inc.

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