Which accounting method is preferable when an investor has significant influence over a company?

The equity method is the appropriate accounting method when an investor has significant influence over another company, typically reflected by ownership of 20% to 50% of the company’s voting stock. Under this method, the investor recognizes their share of the investee’s profits or losses in their own financial statements, which provides a more accurate picture of the investor’s financial position. This method aligns the investor’s performance with that of the investee and allows for recognition of both earnings and losses, promoting transparency.

In contrast, the cost method is used when the investor lacks significant influence, typically involving investments where the investor owns less than 20%. Since the cost method does not adjust for the investee's operational performance, it does not reflect any changes in the value of the investment based on the financial performance of the investee.

Consolidation is employed when an investor has control over the investee, generally through ownership of more than 50%. This method requires the investor to combine the financial statements of both entities, which is unnecessary when only significant influence exists.

The fair value method applies to certain investments but is more relevant for instruments that are actively traded or for which fair value can be readily determined. This method inadequately captures the nuances of significant influence situations and