Equity Method/Joint Ventures

Question 1

Equity Method

Answer 1

• 20-50% ownership
• exercises significant influence (investor over the investee)
• if ownership percentage is below 20%, but the “ability to exercise significant influence” exists, then the equity method should be used.

Question 2

Significant Influence

Answer 2

• Largest Shareholder

- Majority of board

Question 3

Equity method is not appropriate when:

Answer 3

• bankruptcy of sub
• investment in sub is temporary
• lawsuit or complaint is filed
• a “standstill agreement” is signed
• another small group has majority ownership and they operate the company without regard to the investor
• the investor cannot obtain the financial info necessary to apply the equity method
• the investor cannot obtain representation on the Board of Directors

Question 4

Equity method = Bank Account, use BASE account analysis

Answer 4

B - Beginning Balance
A - Add: Earnings
S - Subtract: Dividends (withdrawals)
E - Ending Balance

Question 5

Differences Between the Purchase Price and Book Value (NBV) of the Investee’s Net Assets

Answer 5

• Asset FV Differences: differences between the BV and FV of the net assets acquired.
• Goodwill: any remaining difference is goodwill.
• Amortize Asset FV difference (premium) over related asset life. (excess caused by land is not amortized)
• Goodwill Difference: not amortized and no impairment test

Question 6

Joint Venture Investments

Answer 6

accounted for using the equity method

Question 7

Change from Cost Method to Equity Method

Answer 7

• investment account and the RE account are adjusted retrospectively for the difference between the AFS classification/cost method to the equity method.
• add the cost of acquiring the additional interest
• adopt the equity method
• if the investment was previously accounted for as an AFS security, recognize in earnings the unrealized holding G/L from AOCI.