Discuss what constitutes substantial influence first


Problem

You work for the CFO of Swiffer, a public corporation that invests in start-up and small to medium-sized exotic animal zoos throughout the United States. Because of your advanced degree in accounting, and your research expertise, all important accounting research issues are directed to you for resolution. The CFO, Maria Beltran, has asked you to research whether Swiffer has significant influence over two recent investments. If significant influence exists, the use of the equity method will be required. By the way, Swiffer is not an investment company in accordance with ASC 946.

The first investment is City Zoo. Swiffer holds a 20 percent interest in the common stock of City Zoo (CZ), a small-sized exotic animal zoo in Oklahoma that is a corporation capitalized by common stock outstanding. Swiffer has representation on CZ's board of directors, controlling two of the ten board seats, and participates in the policy-making process. Two large investors hold the remaining 80 percent interest in CZ. The first investor, Candle LLC has a 60 percent interest in the common stock of CZ and controls six of the ten board seats. The other investor, Simmons Services Inc. has a 20 percent interest in the common stock of CZ and controls two of the ten board seats.

The second investment is Able Rescue ("Able"). Swiffer made a strategic decision to diversify its investment portfolio and expand its investments to include wildlife rescues and sanctuaries. Because of this decision, Swiffer acquired a 17 percent interest in the common stock of Able, a wildlife rescue facility in Florida that is a corporation capitalized by the common stock outstanding. Swiffer has representation on Able's board of directors, controlling two of the twelve board seats, and participates in the policy-making process. Two large investors hold the remaining 83 percent interest in Able. The first investor, Bacon Group Inc. ("Bacon") has a 58 percent interest in the common stock of Able and controls seven of the twelve board seats, including the chairperson's seat. An executive from Bacon is the chief executive officer and serves as the chairperson on the board of directors. The other investor, Langford Living Trust has a 25 percent interest in the common stock of Able and controls three of the twelve board seats.

Task

You have been asked draft an Accounting Research Memo for Maria Beltran, CFO of Swiffer Maria is a CPA and is highly qualified for her position. Maria wants to have confirmation of the proper method of accounting used for each of these recent investments.

Be sure to discuss what constitutes "substantial influence" first. Then assess how each of these investments should be accounted for in the Swiffer financial statements.

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Corporate Finance: Discuss what constitutes substantial influence first
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