Ch01: Inter-corporate Investments Flashcards
Types of investments
Trading Held-to-maturity Available-for-sale Equity Securities (no significant influence) Equity Method (significant influence) Hedges Mergers, Acquisitions, Consolidations Controlling Interest, Variable Interest
Trading Investments
an investment in a debt or equity security with no significant influence; held for the short-term; reported at fair-value
Unrealized gains and losses appear on the IS; on the BS at Fv
If buy: Investment is debit, cash is credit IS: nothing SCF: (-) CFI - investing cash is spent on trading investment BS: (-) CCE, (+) ST-investments
If sell: Investment is credit, cash is debit IS: nothing SCF: (+) CFI - Cash increases under "sale ST-investment" BS: (+) CCE, (-) ST-investments
Available-For-Sale (AFS) investment
Recorded at fair value on the BS; unrealized gains and losses appear in AOCI.
Unrealized Gain on investment:
IS: + NI via investee
SCF: + NI via investee; - CapEx, - D (via investee)
BS: Assets: CCE = (Change NI + change CapEx + change D); + CapEx asset
Equity = (Change NI - change D + change AOCI via OCI)
Realized Gain:
IS: (+) income gain
SCF: (-) income gain from CFO (the gain is reclassified out of CFO); (+) income gain, (+) LT sale under CFI
BS: (+) CCE, (-) Fair-value of LT or ST investment (credit Asset); (+) NI gain under RtE (credit Equity)
Held-To-Maturity (HTM) investment
this card is incomplete
Recorded at amortized cost on the BS. Gains and losses are recorded only if the security is sold before maturity.
Investment is made; Record investment:
Debit HTM asset (+), credit cash CapEx (-)
Amortize discounted bond
Cash (debit) = (r) x (Par)
HTM amortized (debit) = [Interest Income (credit) - Cash (debit)]
Interest Income (credit) = (YTM / m) x (Price_T0)
Price_T = (Price_T0) + (HTM amortized_T0)
Equity Investments (no significant influence)
Recorded at fair value; equity investment in an asset that doesn’t include significant influence. The value of the asset to the investor is dictated via the change to the asset’s NI
If buy: Investment is debit, cash is credit IS: nothing SCF: (-) CFI - investing cash is spent on trading investment BS: (-) CCE, (+) ST-investments
If sell: Investment is credit, cash is debit IS: nothing SCF: (+) CFI - Cash increases under "sale ST-investment" BS: (+) CCE, (-) ST-investments
Equity Method (Significant influence) ASC 323
The equity method is used when a firm exerts significant influence over the investee:
- owns 20% - 50% of an asset’s voting stock; but influence can exist with a lower ownership threshold or won’t exist even with over 20% ownership
- representation on the investee’s board
- significant transactions exist between investor and investee
The firm’s NI changes in proportion to the % of ownership it has in the asset
An equity stake is taken with an NI change and D payout from the asset:
IS: + NI = (% of equity in asset) x (asset’s NI)
SCF: + NI, CFI = (-) Lt Investment, (-) D
BS: Assets: CCE = (+ NI - D), Lt Assets = (- +) Lt
Investment = (Cash-paid) + (ENI - D)
Equity: RtE = (+ NI - D)
The asset’s value to the investor is dictated via the change the asset’s RtE balance
Unrealized gains are recorded under OCI
Unrealized losses: if the carrying value = 0, do not apply equity method
Joint Venture Equity Method (Significant influence)
An entity formed by a group that jointly manages and controls a project or transaction; the equity method is used
Mergers, Consolidations, Asset Acquisitions
Controlling Investment
The investor acquires the assets and liabilities of the investee at fair value.
A cash acquisition is made. The acquiring firm’s statements reflect:
(-) cash investment (credit); (+) assets acquired (debit), (-) liabilities against cash used for acquisition(debit) then (+) liabilities acquired on buying firm’s BS
IS: nothing
SCF: (-) CapEx, (+) Debt, liabilities
BS: (-) CCE, (+) Asset lines via investment, (+) Goodwill
(+) Debt, liabilities
Stock Acquisitions
Controlling Investment
Investor (parent) gains control via investing in investee’s (subsidiary) voting stock. The firms continue to operate as separate entities with consolidated financials reported
Investor makes CapEx in investee’s voting stock; impact on its FIN statements:
IS: nothing
SCF: (-) CFI CapEx (credit cash)
BS: (-) CCE, (+) Asset investment (Debit the asset)
Change to controlling interest
equity method to controlling
A controlling investment is made with cash on a prior equity method investment. The investee has a fair-value gain (reported under investor’s NI); the CapEx and new fair-value (historical cost + gain) is subtracted from cash and added back on the BS:
IS: + NI (gain)
SCF: + NI, - CFI (CapEx, new fair-value)
BS: Assets; (-) CCE, (+) Capex, new fair-value
Equity; (+) RtE (from gain in NI)
Variable Interest Entities, VIE
Controlling Investment
similar to control via stock acquisition, yet VIE is via legal relationships (not stock ownership)
If the investee cannot finance its activities without additional support from its investor or affiliates, it’s a VIE
Marketable Securities
trading securities
AFS
HTM
Net Identifiable Assets, NIdA
The identifiable assets paid for by the acquisition price but not recognized on the investee’s books
Acquisition Price - Goodwill
Equity in Net Income, (ENI)
ASC 323
Note the % stake in the investee
Start with investor’s share of investee’s reported NI
Adjust for any of investee’s NIdA
Adjust for periodical depreciation and amortization of NIdA
Adjust for unconfirmed profits
Unconfirmed Gross Profits, UcGP
Intersale_h - Imputed COGS
If goods that were sold between two entities haven’t been sold to customers, the gross margin on the inter-company sales must be removed from the investee’s NI
