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An investor should generally apply the equity method of accounting for investments in common stock or in-substance common stock of corporations when the investor does not control, but has the ability to exercise significant influence over the operating and financial policies of the investee.
The significant influence determination requires evaluation of the related facts and circumstances for each investment, and should be assessed on an ongoing basis. Therefore, an investor’s initial conclusion regarding significant influence may change. For example, an investee that files for bankruptcy or becomes subject to significant exchange restrictions or other government controls may cast doubt on an investor’s ability to exercise significant influence. This could result in a change in the investor’s conclusion regarding its ability to exercise significant influence.
In addition, the ability to exercise significant influence over an investee is different from the ability to control an investee. Multiple investors may have the ability to exercise significant influence over the operating and financial policies of an investee, even in instances when there is one investor with a controlling financial interest that consolidates the investee.
The voting percentage that is presumed to provide an investor with the required level of influence necessary to apply the equity method of accounting varies depending on the nature of the investee (e.g., corporation, partnership). Figure EM 2-1 summarizes voting percentages by type of investee. These are general guidelines and not bright lines (for example, the difference between a 20% voting interest in common stock and a 19.9% voting interest would not be considered substantive).
Figure EM 2-1
Voting percentages generally presumed to demonstrate significant influence
Investment in:
Investor does not own a controlling financial interest, but owns:
Discussed in:
Common stock
20% or more of the outstanding voting securities
In-substance common stock
20% or more of the outstanding voting securities
General partnership interest in a partnership
Any noncontrolling financial interest
Limited partnership or unincorporated joint venture
3-5% or more of a limited  partnership or other interest
Limited liability company or partnership that does not maintain specific ownership accounts for each investor (similar to a corporation)
20% or more of the outstanding voting securities
Limited liability company or partnership that maintains a specific ownership account for each investor (similar to a limited partnership)
3-5% or more of the outstanding voting securities

1Equity method accounting for interests in limited partnerships is generally appropriate unless the interest is so minor that the investor has virtually no influence (less than 3%). See EM 2.1.2.

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