Financial Analysis #18 - Intercorporate Investments Flashcards
intercorporate investment categories
LOS 18.a
- classification of intercorporate ownership is based on degree of influence or control
- % ownership is a guide; strict determinant is degree of control
< 20% 20% to 50%>50%
ownership ownership ownership
“passive”“influence”**“control”
investment in investment in Business
Financial AssetsAssociatesCombinations
“shared control” = Joint Venture
Evidence of level of ownership interest in an intercoporate investment can be determined by which 5 criteria?
LOS 18.a
- board of directors representation
- involvement in policy making
- material intercompany transactions
- interchange of managerial personnel
- dependence on technology
Investment in Financial Assets: classifications
LOS 18.a
Investment in financial assets:
- held-to-maturity
- held for trading (GAAP);
fair value through profit or loss (IFRS) - available-for-sale
- designated at fair value
Reporting of Financial Assets: Held-to-maturity
LOS 18.a,b
Held-to-maturity - debt securities where the company has the intent and ability to hold to maturity.
- interest income reported on IS
- Interest Income = coupon +/- amort disc (prem)
- Initially reported at:
- cost including transactions costs (GAAP)
- fair value including transactions costs (IFRS)
- Carried on the BS at amort cost (not at fair value!)
- Changes in mkt value NOT recognized unless impaired
- Reclassification or sale prior to maturity may lead to disallowance of held-to-maturity classification “tainting the portfolio”
Reporting of Financial Assets:
Held for trading (GAAP)
Fair value through P&L (IFRS)
LOS 18.a,b
Held for trading / Fair value thru P&L - debt and equity securities acquired for the purpose of selling in the near future (less than 90 days).
- Interest and dividend income reported on IS
- Interest = coupon +/- amort disc (prem)
- Carried on the BS at fair value (aka market value)
- Unrealized gain/loss recognized on IS.
Designated at fair value - firms have the option to report any financial asset/liability at fair value.
Reporting of Financial Assets: Available for sale
LOS 18.a,b
Available for sale - debt and equity securities that are neither held-to-maturity nor trading securities
- Interest and dividend income reported on IS
- Interest = coupon +/- amort disc (prem)
- Carried on the BS at fair value (aka market value)
- Unrealized gain/loss (net of tax) recognized directly in Equity (OCI) *see IFRS exception below
- When sold, realized gain/loss removed from OCI and recognized on IS
*Exception for debt securities under IFRS - only securities G/L recognized in OCI; F/X portion of G/L recognized in IS
Summary of Financial Assets Accounting
LOS 18.a,b
Balance Sheet Income Statement
Fair Value thru P&L Fair Value (A) Dividends
(held for trading) Interest
Realized G/L
Unrealized G/L
Available for Sale Fair Value (A) Dividends
Unrealized G/L (E) Interest
Realized G/L
Held to Maturity Amortized costs Interest
Realized G/L
How is Unrealized G/L computed?
LOS 18.b
Debt Securities:
Cum unrealized G/L = Fair Value - amortized cost
Equity Securities:
Cum unrealized G/L = Fair Value - purchase price
d(cum unrealized G/L) = difference in unreal G/L over one period
Reclassification Rules for Financial Assets (under IFRS and GAAP)
LOS 18.a
From To Unreal’d G/L
Held for trade* Any IS (to extent not realized)
HTM Held for trade* IS
HTM Avail for sale OCI
Avail for sale HTM Amortize out of OCI
Avail for sale Held for trade* Transfer out of OCI
* Prohibitied under IFRS – all transfers at fair value on transfer date
IFRS 9 (New Standard)
LOS 18.a
Applicable from 1/1/2018–early adoption allowed)
- Amortized cost (debt securities only)
Conditions:
- business model test (how the asset is managed)
- cash flow characteristic test (are the payments solely interest and principal)
Business model: must be to collect contractual cash flows
Account trestment: same as for held-to-maturity
Investment in Associates
LOS 18.a
20-50% ownership; includes joint ventures
Significant influencial ownership
Accounting treatment: Equity method
BS: reported at cost + %earnings - %dividends
IS: %earnings
d(BS investmnt) = %share in co. * (earnings - dividends)
= %share in co. * (earnings - dividends)
= %share in co. * d(retained earnings)
NOTE: dividends received are considered a return OF capital
Investment in Associates (treatment of transactions with associates) need a card here
LOS 18.a
Business Combinations (need more here)
LOS 18.a
>50% ownership
Controlling position
Acquisition method
(describe here)
Compare Equity method and Aquisition methods (need to add this)
LOS 18.a
Described and compare partial and full goodwill method (need to add)
LOS 18.b
