The accountant of Cornett Chocolates Ltd., Maria Fraulein, has been advised by her auditors that the company’s investment in Concertina’s Milk Ltd. should be accounted for using the equity method of accounting. Cornett Chocolates holds only 20.2% of the voting shares currently issued by Concertina’s Milk. Since the investment was undertaken purely for cash flow reasons based on the potential dividend stream from the investment, Ms. Fraulein does not believe that Cornett Chocolates exerts significant influence over the investee.
Required
Discuss the factors that Ms. Fraulein should investigate in determining whether an investor associate relationship exists, and what avenues are available so that the equity method of accounting does not have to be applied.