Advanced Accounting 10th Edition by Thomas Schaefer, Joe Ben Hoyle, Timothy Doupnik

Exercise 24

IS THIS REALLY ONLY SIGNIFICANT INFLUENCE
The Coca-Cola Company accounts for its ownership of Coca-Cola Enterprises, Inc.(CCE), by the equity method as described in this chapter.In 2008, Coca-Cola held approximately 35 percent of CCE outstanding stock.According to the financial statements of CCE, the products of The Coca-Cola Company account for approximately 93 percent of total CCE revenues.Moreover, three CCE directors are executive officers of The Coca-Cola Company.CCE conducts its business primarily under agreements with The Coca-Cola Company.These agreements give the company the exclusive right to market, distribute, and produce beverage products of The Coca-Cola Company in authorized containers in specified territories.These agreements provide The Coca-Cola Company with the ability, in its sole discretion, to establish prices, terms of payment, and other terms and conditions for the purchase of concentrates and syrups from The Coca-Cola Company.
If Coca-Cola acquires approximately 16 percent more of CCE, it will hold a majority of the stock so that consolidation becomes a requirement.However, given the size of the present ownership and the dependence that CCE has on Coca-Cola for products and marketing, does Coca-Cola truly have no more than "the ability to exercise significant influence over the operating and financial policies" of CCE Does the equity method fairly represent the relationship that exists Or does Coca-Cola actually control CCE despite the level of ownership, and should consolidation be required Should the FASB reexamine the boundary between the application of the equity method and consolidation Should the rules be rewritten so that Coca-Cola must consolidate CCE rather than use the equity method If so, at what level of ownership would the equity method no longer be appropriate