Equity Method and JV Flashcards
Equity method
external reporting only
when
generally 20% to 50%
BUT CRITICAL THAT PARENT EXERCISES SIGNIFICANT CONTROL:
1) largest shareholder
2) majority of board
if no evidence of significant control, ownership of 20% to 50% of the voting shares is deemed to represent significant influence
significant influence test: met by % common shares owned not preferred stock because that is usually the voting stock
not used even if owns 20% to 50% if
1) bankruptcy of sub
2) investment in sub is temp
3) lawsuit or complaint is filed
4) investor cannot obtain rep in bod
etc.
Step 1: record investment
like cost method record at FV of consideration surrendered + legal fees
dr investment in investee
cr cash
or
dr investment in investee
cr common stock (of parent if parent is issuing stock for this investment)
cr apic
Step 2: + earnings
dr investment in investee
cr. equity in earnings/ investee income
it is like a bank account; as the sub earns money you claim your share
earnings:
share of earnings available to common shareholders (NI-dividends) and preferred stock dividends
Step 3: dividends
dividends are not income but treated as bank withdrawals
dividends or withdrawals: decrease by the parent’s ownership % of cash dividends from investee; *stock dividends reduce unit cost of stock owned in investee and are memo entry only
dr. cash
cr. investment in investee
step 4: record the investor’s percentage of earnings as income
parent’s % of ownership of earnings of investee
same as step 2
pass key
bb + parent’s share of earnings (so like interest where it is income when earned and not when taken out) - parent’s share of dividends (like withdrawals, but not income) = eb
Problem
page f3-17
ONLY FOR EQUITY METHOD
Diff between purchase price and NBV of the investee’s net assets
Adjustment
Purchase price:
first cover parent’s % of nbv; excess cover parent’s % of fv; excess = goodwill
a) part of excess between fv and bv
amortized over the life of the asset (will tell you why you were willing to pay the premium= for what assets) if inventory, amortize over life of inventory which is usually a year
if more than one asset then allocate proportionally
amortization is like a bank’s service charge
expense and reduces basis:
dr equity in investment income
cr investment in investee
EXCEPTION: LAND= DO NOT AMORTIZE
Premium attributed to goodwill
not amortized and no impairment test
premium
purchase price - book value of asset acquired
total equity method investment including goodwill
annually tested for impairment; goodwill by itself is not
COST METHOD AND EQUITY METHOD
VALUED AT % OWNERSHIP vs acquisition which is at 100%: see saw at the cost of the investment
Unconsolidated investment over 50%
either due to lack of control due to a company being controlled by a bankruptcy trustee or a sub that is likely to be a temporary investment must use equity method when presenting the investment in the sub
Comparison of cost and equity methods
Cost and equity on page f3-19
cost and equity: report at FV***
JV accounting
usually under both GAAP and IFRS: JV accounted for using equity method
JV accounting
usually under both GAAP and IFRS: JV accounted for using equity method
Step by step acquisition- still not consolidating
from cost method to acquisition method:
1) record goodwill at the time of each transaction
2) important to record a change from the cost of afs to equity method:
a) equity methods should be used and the periods during which cost method or fair value method was used are retrospectively adjusted
b) the year end ownership % is used to make all the equity entries**
Income calc:
(old % * income before the ownership change) + (total ownership % * income after the ownership change)
KEY:
1) Apply equity method to prior period’s old %
2) do not apply the new % to the prior period
1) Add cost of acquiring additional interest in the investee to the carrying value of previously held investment
2) adopt equity method going forward
3) if investment was previously recognized as afs and there were unrealized gains or losses in OCI, release that in earnings
sticky note
IFRS: requires entities to apply equity method prospectively from time at which obtains significant influence. Retroactive adjustment is not req
Comprehensive
Cost method: don’t really care about the book value
1) Find ending value of investment under equity method
2) find ending value of investment under cost method
3) add gain or subtract loss from OCI
= adjustment to re
when you have cost method initially and wnat to find amortization expense you can just take purchase price - book value and amortize all of that premium because they only give you fv at end of the year and that doesnt help
*JE on 21
1) adjustment JE’s
2) additional investment JE
stock dividends
memorandum entry reducing the unit cost of all guard stock owned
equity method preferred stock
**problem
two types of revenue due:
% claim to pref cash div
% claim to ni after preferred div have been paid out
(so 100% ni - 100% div ) * % ownership only detemined by common stock %
preferred stock does not allow the investor to exercise control so the preferred stock investment is accounted for using the cost method and preferred stock dividends of our ownership % are recorded as dividend revenue on the income statement
