8.1 & 8.2 Flashcards
Describe an investment in financial assets?
Where the investing firm has no control
Describe an investment in associates
Where the firm has significant influence, but not control
Describe a business combination
The investing firm has control over the operations of the investee firm
What is the ownership threshold for investments in associates?
Typically between 20% and 50% of the votes is considered a non-controlling interest
How is significant influence evidenced?
Seat on board
Involvement in policy making
Material intercompany transactions
Interchange of personnel
Dependence on technology
- Can you have significant ownership with <20% ownership? 2. Can you own between 20% and 50% and not have significant influence? How would you class these investments?
- Yes. An investment in associate
- Yes. An investment in financial assets
What is the threshold for business combinations?
Over 50%
What is a joint venture?
Control is shared by two or more investors
What accounting method is used for joint ventures?
Both IFRS and US GAAP require the equity method, although in rare cases both permit proportional consolidation
What is the accounting treatment for investments in financial assets?
Three options:
1. Amortised cost
2. Fair value through OCI
3. Fair value through P&L
What is the accounting treatment of investments in associates?
Equity method
.What is the accounting treatment for business combinations?
The acquisition method
What type of securities does amortised cost accounting apply to?
Only applies to debt securities where you must have the ability and intention to hold to maturity
What is the criteria test for amortised cost accounting?
Two criteria must be met:
1. Business model test: is the bond going to be held until maturity, firm will collect contractual cash flows?
2. Cash flow test: is it definitely debt e.g. the only payments should be coupon payments and principal repayment
What is amortised cost?
The original cost of the debt;
plus any discount OR;
minus any premium
….That has been amortised to date