Consolidated financial reporting is appropriate when one entity has a controlling financial interest in another entity. The usual condition for a controlling financial interest is ownership of a majority voting interest. But in some circumstances, control does not rest with the majority owner-especially when minority owners are contractually provided with approval or veto rights that can restrict the actions of the majority owner. In these cases, the majority owner employs the equity method rather than consolidation.
Address the following by searching the FASB ASC Topic 810 on consolidation.
1. What are protective minority rights?
2. What are substantive participating minority rights?
3. What minority rights overcome the presumption that all majority-owned investees should be consolidated?
4. Zee Company buys 60 percent of the voting stock of Bee Company with the remaining 40 percent minority interest held by Bee's former owners, who negotiated the following minority rights:
• Any new debt above $1,000,000 must be approved by the 40 percent minority shareholders.
• Any dividends or other cash distributions to owners in excess of customary historical amounts must be approved by the 40 percent minority shareholders.
According to the FASB ASC, what are the issues in determining whether Zee should consolidate Bee or report its investment in Bee under the equity method?