FRA - Intercorporate investment Flashcards
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
Financial Assets
<20% fv through p/l fv through OCI Amotized cost not significant
Business combinations
> 50%
subsidiary
consolidation
Joint ventures
shared control
Equity method
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
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
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
Reclassification of financial assets
not permitted for equity
permitted for debt only if the business model has changed
From Amortized cost fo FVPL
unrealized g/l moved to i/s
FVPL to amortized
fair value at the reclassification date becomes the carrying amount
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
Good will (equity method)
Acquisition cost- fair value of net identifiable assets (bv of net identifiable asset + fv appreciation)
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)
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
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
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&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.
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.
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
