Chartered Financial Analyst (CFA) Practice Exam Level 2

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What ownership percentage necessitates the use of the acquisition/consolidation method?

  1. Less than 20%

  2. 20-50%

  3. More than 50%

  4. Exactly 50%

The correct answer is: More than 50%

The acquisition/consolidation method is applied when an investor gains control over another entity, which is typically indicated by owning more than 50% of that entity's voting shares. This level of ownership signifies that the investor can influence operational and financial policies significantly and therefore must consolidate the assets, liabilities, revenues, and expenses of the subsidiary with its own financial statements. When ownership exceeds 50%, the investor is deemed to have the power to direct the activities of the entity to generate returns, and this justifies the comprehensive approach of full consolidation. Under this method, all of the subsidiary’s financial information is incorporated into the parent company's financial results, allowing for a clearer picture of the business's overall financial health and performance in the financial statements. In contrast, for ownership percentages below 50%—whether it’s less than 20% or between 20% and 50%—the equity method or cost method is typically utilized. These methods reflect a more limited influence over the entity, where the parent does not have control and thus does not consolidate financial information in the same way.