Question

A change in Accounting Method would be necessary because of which of the following circumstances?

a)An increase in ownership percentage from 25% to 40%
b) A decrease in ownership percentage from 25% to 15%
c) An increase in ownership percentage from 10% to 15%
d) A decrease in ownership percentage always triggers a change in accounting method.

Answer 1

b) A decrease in ownership percentage from 25% to 15%

Step-by-step explanation:

There is change in accounting method when the shareholding is 20% or more.

Under Consolidation there are two methods:

Equity method: This is used when the shareholding is 20% or more, and there is significant influence. Under this method all the assets and liabilities are accumulated in the consolidated balance sheet.

Proportional Consolidation method: This is generally used when the shareholding is merely shown as an investment, and the balances of assets and liabilities are not accumulated.

Thus, there is a change in method of accounting when the shareholding is more than 20%. This is in case b as change is from 25% to 15% and thus, it will change from equity method to proportional consolidation method.