FInancial Reporting & Analysis 1: Investments In Associates And Joint Ventures(EQUITY METHOD OF ACCOUTING) Flashcards
Under both IFRS and GAAP, how do we account for Investments in Associates and Joint Ventures?
Under both IFRS and GAAP, we use the Equity Method of Accounting
Under the Equity Method for both IFRS and GAAP, how do we initially recognize an investment?
Under the Equity Method of accounting, we initially recognize the investment on the balance sheet. It falls under non-current assets.
Under the equity method of accounting, how does the investor recognize earning from the investee?
Under the equity method of accounting, the investors proportionate share of the investee’s earnings will increase the carrying value of the investment within non-current assets. Losses and dividends decrease the carrying amount.
When we’re looking at how earnings are reflected on the investors balance sheet under the equity method, what is the impact of dividends?
Under the equity method of accounting, dividends will decrease the carrying value of the investment.
For an investors proportionate share of earnings under the equity method, how are they reported?
The proportionate share of earnings will be reported on the income statement as a single line item.
When an investor is recognizing their proportionate share of earnings on the income statement, how do dividends impact the amount reported?
Dividends have no impact on the amount of income reported on the income statement. Dividends detract from the carrying value on the balance sheet, but do not count against income.
When using the equity method, what happens if the investment falls to $0?
The use of the equity method will be discontinued until the investment becomes profitable.
When we are calculating the amount of goodwill that we will report on an investment, using the equity method, what effect does PP&E have on the amount?
When we are using the equity method to account for good will, we take out the proportionate amount of value from PP&E.
Under the equity method, what all do we need to look at when we see that the purchase price of the investment is over the reported book value?
We need to look at what line items are reporting above book value. This will typically come from PP&E, Land, Inventory, Current Assets.
We look for costs that can be amortized. PPE and typically be amortized. We also look for any other identifiable amounts that are over book value. ANything that is not identifiable will be considered “good will”.
When we are paying above book value for an investment, under the equity method, what are we thinking when we see that PPE is over book value?
When PPE is above book value, we need to remember that we can capitalize this then expense it (amortize it). We will get to take our proportionate share of amortization out of our share of proportionate income.
Under the equity method when we see that inventory is above book value, how do we approach this?
We expense it. With PPE, we amortize the excess amount. But with inventory, we just immediately expense it.
When considering an investment that we paid over book value for, what do we call the amount that can be specifically attributed to line items like PPE, Land, etc.?
This is considered good will. We monitor Good Will for impairment periodically.
When calculating earnings from an investment in associate under the equity method, what is the impact of the proportionate share of amortization of PPE on our earnings? What do we call the earnings?
The earnings are called our equity income.
Our proportionate share of amortization from PPE will reduce the amount of reported earnings.
Using the equity method, when we need to record the value of our investment on the balance sheet, how do we come to the valuation?
The value of our investment starts with our initial purchase price. We then add our proportionate share of net income.
From that total, we subtract amortization as well as dividends. Remember, dividends reduce our carrying amount but HAVE NO IMPACT on our reported income on the income statement.
When considering amortization and depreciation, what is the difference between PPE and Land?
PPE can be amortized, and this amount reduces our income and our carrying amount. Land can not be amortized! So we check it for impairment regularly, like good will.
