Major Motors, Inc., a publically held company, recently agreed to sell its Major Automotive Parts (MAP) operations to National Guaranteed Repairs (NGR), another publicly held company. NGR paid cash plus common stock that, after issuance, would be equal to roughly 15% of NGR’s outstanding shares, which would in turn make Major Motors the largest shareholder by a considerable margin. The question resulting from this transaction is whether or not the equity method must be applied to Major Motors’ 15% interest in NGR. After reviewing the appropriate accounting literature, we have determined that the equity method is, in fact, appropriate for Major Motors’ interest in NGR under FASB ASC 323, Investments—Equity Method and Joint Ventures.

According to accounting literature, Major Motors meets the requirements for applying the equity method. If an investor holds significant influence in an investee, then using the equity method to account for the investment would be the most appropriate. FASB ASC 323-10-15-6 outlines the criteria for significant influence:

a. Representation on the board of directors
b. Participation in policy-making processes
c. Material intra-entity transactions
d. Interchange of managerial personnel
e. Technological dependency
f. Extent of ownership by an investor in relation to the concentration of other shareholdings. Major Motors satisfies three of the six criteria pertaining to significant influence above. Through the deal, Major Motors will hold 15% of NGR’s common shares. Although this is not the 20% minimum needed for the equity method as given in FASB ASC 323-10-15-8, Major Motors will become the single largest shareholder of NGR, thus gaining a substantial say over the company. Despite the clause stating that Major Motors must dispose of its shares after a three-year period, this is dependent upon NGR having the funds