Equity investments represent an ownership interest (for example, common, preferred, or other capital stock) in an entity, and may be made in a variety of legal entities, such as corporations, limited liability partnerships, or limited liability corporations.
The accounting for an equity investment depends on the degree to which the investor can influence the investee. An investor that directly or indirectly holds a controlling financial interest in another entity is required to consolidate that entity pursuant to either the variable interest entity (VIE) or voting interest entity (VOE) consolidation model, as prescribed by ASC 810, Consolidation. This determination may require extensive analysis depending on the terms and nature of the investment. See CG 1.3 for further information regarding the application of the VIE and VOE consolidation models.
Once an investor has determined that it does not have a controlling financial interest, it should determine if the equity method of accounting applies, as prescribed by ASC 323, Investments – Equity Method and Joint Ventures. The equity method is used to account for investments in common stock or other eligible investments by recognizing the investor’s share of the economic resources underlying those investments. Investments within the scope of the equity method include investments in either common stock and/or in-substance common stock of corporate entities, as well as investments in entities such as partnerships, unincorporated joint ventures, and limited liability companies. The equity method is applied if these investments provide the investor with the ability to exercise significant influence over the investee. Additionally, the equity method must be applied to a limited partner’s interest unless the interest is so minor that the limited partner has virtually no influence over partnership’s operating and financial policies. See EM 1.2 and EM 1.3 for further discussion of these investments and EM 2 for further discussion of the concept of significant influence.
There are certain exclusions to applying the equity method of accounting, such as when an investor has elected to measure an investment at fair value or is applying the proportionate consolidation method allowed in limited circumstances. See EM 1.4 for further information regarding these exclusions.
An investment that, individually or in combination with other financial and nonfinancial interests, does not provide the investor with the ability to exercise significant influence should be accounted for under other accounting guidance (e.g., ASC 320, Investments – Debt Securities or ASC 321, Investments – Equity Securities).

1.1.1 Framework to determine if the equity method applies

The following framework illustrates the accounting for equity investments and should be read in conjunction with the referenced sections.
Figure EM 1-1
Framework to determine those investments that should be accounted for under the equity method of accounting
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