ABC Ltd. has a 15% holding in the shares of XYZ Ltd. In addition, ABC has, through one of its subsidiaries, a currently exercisable option to buy 15% more shares in XYZ. Although the exercise price is in the money, ABC does not have the intention and the financial ability to exercise this option. How should this investment be classified?
A joint arrangement
A subsidiary
An investment
An associate
This investment should be classified as an investment. According to ASC 323-10-25, an investment in a nonpublicly traded company is considered an investment if the investor does not have the ability to exercise significant influence. In this case, although ABC Ltd. has the option to acquire additional shares, their lack of intention and financial ability to exercise the option means they do not have significant influence over XYZ Ltd. Therefore, the investment would be accounted for using the equity method, as described in ASC 323-10-25-25, but does not meet the criteria to be considered an associate. Hence, the appropriate classification is an investment.