FAR - The Adjusted Cost Method and the Equity Method Flashcards
Investments in the stock of other entities - which accounting method do you use to record influence 1) 0-20%, 20%-50%, more than 50%? and answer each influence’ definitions.
1) 0-20% Adjusted cost method (no significant influence, used when fair value is not available, requires election)
2) 20% to 50% - Equity method (ability to exercise significant influence, investor does not have a controlling financial interest)
3) more than 50% - Consolidation (investor has a controlling financial interest, may result from equity ownership or other factors, such as representation on the BoD making the investor the primary beneficiary of a variable interest entity (VIE))
What do we call these people? 1) 0-50% influence, 2) more than 50%
1) Investor - Investee
2) Acquirer - Acquiree
What is role of Board of Directors?
In charge of the general operation of the entity (hiring management, declaring dividends)
What are the factors to determine the degree of influence?
- Significant intercompany trans, or technological dependency
- Officers of the investor serving as officers of board members of investee
- The investor is a major customer or supplier of the investee
- The investor owns at least 20% of the voting stock of the investee provided:
a) no other investor holds a larger voting stock, or
b) a small group of investors own a majority of the equity and exercises total control - the investor has definite plans to acquire additional stock in the future to bring their interest up to at least 20%
Equity Method - Answer the JE (Acquisition, Earnings, Dividend, Deprec/Impairment of excess)
- 1/1/x1 acquire 30% for $1000
- FV of investee $3000, BV is $2500 - difference is PPE of FV is $500 higher (10year deprec), income $120, dividend $40, 10% of GW impairment
1. Acquisition DR Investment $1000 CR Cash $1000 2. Earnings DR Investment $36 ($120 income*30%) CR Equity in earnings $36 (I/S) 3. Dividend DR Cash $12 ($40*30%) CR Investment $12 4. Deprec/Impairment DR Equity in earnings $25($10 GW & $15 PPE) CR Investment $25
Investment Acct balance $999 ($1000 + 36 - 12 - 25)
Adjusted Cost Method - Answer the JE (Acquisition, Earnings, Dividend, Deprec/Impairment of excess)
- 1/1/x1 acquire 30% for $1000
- FV of investee $3000, BV is $2500 - difference is PPE of FV is $500 higher (10year deprec), income $120, dividend $40, 10% of GW impairment
1. Acquisition DR: Investment $1000 CR: Cash $1000 2. Earnings No entry 3. Dividend DR: Cash $12 CR: Dividend Income $12 (I/S) 4. Deprec/Impairment No Entry
Investment Acct Balance $1000
Adjusted cost method - what happened to JE if dividend paid is liquidating dividend (no income but dividends paid)?
DR: Cash
CR: Investment in B/S (instead of dividend income in I/S)
Fair value option for equity method investment - how to record it?
Initial purchase - record the investment at cost
When value goes up or down - adjust it as gain/loss in I/S
Under IFRS - what is considered to be significant influence (equity method) and control (consolidation)?
- significant influence - power to participate in the decisions of the investee
- control - power to direct activities of investee
* **ownership 20%-50% doesn’t apply in IFRS
Under IFRS - what are the methods to record equity?
- Amortized cost - HFM
- FVTOCI (Fair value through other comprehensive income) - AFS
- FVTPL (fair value through profit and losses)