The financial accounting term ownership interest is used to describe the degree to which one company has acquired common stock in another. Ownership interest generally falls into three categories: controlling, significant influence, and passive.
Ownership interest represents a long-term investment in the common stock of another company, and is categorized as such on the acquiring company’s balance sheet.
Unlike marketable securities, which are short term investments made in lieu of holding cash, an ownership interest in another company represents a long-term investment. The accounting treatment of these investments depends on the amount of outstanding stock held by the acquiring company (investor). Generally, ownership interest falls into three categories:
- Controlling Interest: occurs when the investor holds more than 50% of the voting stock issued by a company. In this situation, the investor is referred to as the parent company, and the investee company is referred to as the subsidiary. When a parent company has controlling interest in a subsidiary, consolidated financial statements are typically prepared using the equity method.
- Significant Influence: occurs when the investor holds between 20% and 50% of the voting stock issued by a company. FASB guidance provides some examples where an investor might own 20% or more voting shares but does not have significant influence over the investee. For example, the investee might oppose the investor’s acquisition of stock, representation on the board of directors is denied, or voting stock in the investee is held by only a few individuals. When a company has significant influence over another, that investment is normally accounted for using the equity method.
- Passive Interest: occurs when the investor holds less than 20% of the voting stock issued by a company. When a company has passive interest in another, that investment is normally accounted for using the cost method, or a lower of cost or market approach.