Ownership percentage

Definition

Ownership percentage refers to the proportion of equity interest an investor holds in an investee company, usually expressed as a percentage. This figure is crucial in determining the level of influence or control an investor has over the investee, especially when applying the equity method of accounting. A higher ownership percentage typically means a greater say in the investee's operations and financial decisions, which can affect how earnings are reported and recognized in the investor's financial statements.

5 Must Know Facts For Your Next Test

1. An ownership percentage of 20% to 50% generally allows an investor to use the equity method for accounting their investment.
2. Ownership percentage is calculated based on the number of shares owned relative to the total outstanding shares of the investee.
3. An ownership percentage of less than 20% typically indicates that the investor does not have significant influence and must use the cost method for accounting.
4. Changes in ownership percentage can impact how an investor recognizes income, either through equity method adjustments or as dividend income.
5. Investors must regularly assess their ownership percentage, as changes due to stock issuance, buybacks, or sales can affect their accounting treatment.

Review Questions

• How does ownership percentage impact the accounting treatment of an investment using the equity method?
  • Ownership percentage directly influences whether an investor uses the equity method for accounting. If an investor holds between 20% and 50% of an investee's shares, they can apply the equity method, reflecting their share of the investee’s profits or losses on their financial statements. This means that changes in the investee's performance directly impact the investor's reported earnings, highlighting the importance of understanding ownership stakes.
• Discuss how significant influence is determined through ownership percentage and its implications for financial reporting.
  • Significant influence is typically presumed when an investor owns between 20% and 50% of another company's voting stock. This level of ownership allows the investor to participate in key financial and operational decisions without having complete control. As a result, financial reporting under the equity method requires that any share of profit or loss from the investee be recognized in the investor’s financial statements, demonstrating how ownership percentage affects not just control but also financial outcomes.
• Evaluate the effects on financial statements when an investor's ownership percentage changes from 15% to 30%. How would this affect their accounting approach?
  • When an investor's ownership percentage increases from 15% to 30%, they transition from using the cost method to applying the equity method for accounting. This change means they will now recognize their share of the investee's profits or losses in their income statement rather than only recording dividends received. This shift significantly affects reported earnings and reflects a deeper financial relationship with the investee, emphasizing how even slight changes in ownership percentages can lead to substantial differences in financial reporting.

Related terms

Equity Method: An accounting technique used to record investments in associated companies where the investor has significant influence, typically indicated by owning 20% to 50% of the investee's voting stock.

Significant Influence:

The ability of an investor to participate in financial and operating policy decisions of an investee without having control or joint control, often assumed with ownership percentages between 20% and 50%.

Consolidation: The process of combining the financial statements of a parent company with its subsidiaries to present them as a single entity, typically required when ownership exceeds 50%.