FRA - Intercorporate investment Flashcards by Pass Pass

Assoiates

20-50%
Equity method
significant influence

representation on the BOD
Participation in the policy making process
material transactions b/w investor and investee
interchange of managerial personnel
technological dependency

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Financial Assets

<20%
fv through p/l
fv through OCI
Amotized cost
not significant

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Business combinations

> 50%
subsidiary
consolidation

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Joint ventures

shared control

Equity method

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FV through P/L

Hold for trading (debt/equity)

B/S: Fair value
I/S: Interest, dividend, REALIZED/UNREALIZED G/L
coupon pmt on par, get interest on starting balance

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FV through OCI

Designated at FVOCI

B/S: Fair value
Unrealized g/l in oci, move to i/s when realized

I/S: Interest, dividend, REALIZED G/L

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Amortized cost

Debt

B/S: Amortized cost
I/S: Interest, REALIZED G/L

Amortized premium = coupon on par - interest on bb. balance

carrying value of bond = bb balance- amortized premium

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Reclassification of financial assets

not permitted for equity

permitted for debt only if the business model has changed

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From Amortized cost fo FVPL

unrealized g/l moved to i/s

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FVPL to amortized

fair value at the reclassification date becomes the carrying amount

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Equity method

B/S carrying amount of investment in B/S

recognize cost at inception
one-line consolidation

(adj accumulated net profit of investee - accumulated dividends declared by the investee) * % of interest owned
- purchase price

I/S:
gain is recognized + current year’s net profit of investee
*% interest owned

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Good will (equity method)

Acquisition cost- fair value of net identifiable assets (bv of net identifiable asset + fv appreciation)

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Equity Income - Equity method

NI of investee
-Depr. adjustment
(fv of pp&e / useful life) - pre-acquisition depr)
=Equity income of investor

One-line consolidation - 
Equity Investment  = 
Purchase cost 
\+equity income
-dividend (not included in investment income)

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Impairment - Acquisition method

FV Option IFRS

IFRS -
One of more loss events with impact on future CF
if carry > recoverable
loss= carry value - fair value

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Impairment - FV Option GAAP

GAAP -
carrying value and is determined to be permanent
>fair value
impairment loss
= implied fv of reporrting unit’s goodwill - carrying amount

max reduction is amount of Goodwill

impairment loss recognized on I/S
carrying value on B/S reduced to fair value

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Equity method - transaction with associates

Upstream

profit recorded on associate’s I/S

the investor’s share of unrealized profit must be deferred by REDUCING the amount recorded under equity method

Equity method - transaction with associates

Downstream (sale down to assciated)

Profit recorded on investor’s I/S

the investor’s share of any unrealized profit must be deferrer by reducing the amount recorded under equity method

Equity Income from transaction - Equity method

NI of investee
-Depr. adjustment 
(fv of pp&amp;e / useful life)  - pre-acquisition depr)
- UNREALIZED profit *% ownership
=Equity income of investor

One-line consolidation - 
Equity Investment  = 
Purchase cost 
\+equity income --reflecting unrealized profit
-dividend

unrealized profit in transactions with associate (downstream)

profit realized by S = 
(selling price P - resold price  S) 
profit realized by P = 
(selling price - bv of good) / selling price --profit margin
* profit realized by S
* %ownership

upsteam is straight forward

Acquisition method

Minority interest recognized in both I/S and B/S (equity account)
= diff. in asset and equity account
No more investment account in B/S and I/S

+ goodwell in asset

Goodwell (acquisition)

= consideration + fv of minority interest - fv of net assets of target company

Full goodwill

US GAAP & IFRS
= consideration / % interest acquired - fv of net assets
=fv - fv of identifiable asset of subsidiary
Minority interest = consideration / % interest own

Partial goodwill

IFRS only

=consideration - fv of net asset * % of interest acquired

minority interest = % MI shares own & fv of net assets

Pooling-of-interest

target’s assets and liabilities are stated at historical book value in the consolidated financial statements
not allowed under IFRS

SPE

a legitimate financing mechanism to segregate certain activities and thereby reduce risk By transferring the variability in the risk of a project to a sponsor, a lender can provide a lower cost of financing to the company that creates the SPE. In return, the sponsor will RECEIVE pro-rata profits/RISK/RETURN or other residual interests in the project. under IFRS, SPE must be consolidated if the sponsoring entity controls SPE. impact b/s (same borrow directly or through SPE)

VIE

An entity that is financially controlled by one or more parties that do not hold a majority voting interest equity investors lack any of the following: ability to make decisions the obligation to absorb losses the right to receive returns ``` primary beneficiary (Absorb majority of losses) must consolidate it as subsidiary regardless of how much of an equity investment it has in the VIE. ``` impact b/s

The initial choice of classification into fair value through OCI is irrevocable and reclassification is not allowed for equity securities.

Book value of net asset

equity+ RE

As the financial effect of the contingent liabilities cannot be reasonably estimated, under U.S. GAAP they should not be included.

goodwill formula

purchase price -% * bv of net asset of sub - attributable to diff. b/w fv and bv of net identifiable asset = goodwill

investment income

includes dividends, interest, and realized gains

investments in a bond can be classified as amortized cost if it meets the two criteria;

business model test and cash flow characteristic test. But if the asset may be sold prior to collecting all the contractual cash flows, be measured using one of the two fair value methods.

investment income equity method

WAI’s share of Aurora’s net income for the year: 20% × $93 million = 18.6 Less amortization of the identifiable intangible: (20% × $60 million)/10 years (1.2) Less unrealized profit after tax on the unsold landing gear in WAI’s ending inventory. One half of the inventory is unsold, therefore one half of the $12 million profit should not be recognized: 0.5 × $12 million × 20% share

reinvestment payoff years

total debt = Current debt + Long term debt = 2,271 + 1,347 = € 3,618 Reinvestment = Capital expenditures + Expenditures on intangibles = 824 + 73 = € 897 Operating cash flow − reinvestment = 2,449 − 897 = €1,552/year Years to repay debt from operating cash flow = 3,618/1,552 = 2.3 years