FRA: intercorporate investments Flashcards
Categories of intercorporate investments
1) Less than 20% + lack of influence -> financial investment (HtM, AFS, Trading)
2) 20% - 50% + influence -> equity investment (GAAP allows for fair value accounting, IFRS - only for specialized financial companies)
3) 50%+ -> acquisition
Treatment of unrealized gains and losses
IFRS - FX-related gains and losses are recognized in PnL
GAAP - everything is recognized in OCI
Bond life-cycle in BL and PnL
As price of bond at purchase is lower than its price at maturity, it will be amortization back by (YTM - coupon)*Volume
Reclassification of security treatment
IFRS: only HtM AFS allowed
GAAP: everything allowed
Rules of impairment of financial assets
IFRS: reversal of impairments allowed only for FI securities
GAAP: reversal of impairments are not allowed
Specifics of IFRS 9
1) Amortized costs (only FI) - securities are held to collect contractual csh flows, which are principal or interest on principal
2) Fair value through OCI (FI or equity)
3) Fair value through PnL (equity only)
Equity method
1) Investment is reflected on purchase cost on BS
2) All future net gains / losses by associates change the investment value on BS
3) Dividends received reduce investment value
4) Goodwill is difference between purchase price and net assets less the difference between fair value and book value of assets (this will depreciate)
Treatment of intercorporate trades
Investor should reduce its unconfirmed (not sold to third party) income by % of share in the invest
Acquisition method
1) 100% of investee’s assets and liabilities are added to investor’s balance sheet
2) Minority interest is added as uncontrolled share * investors equity
3) Minority interest is subtracted from investor’s PnL as share of net income not owned by investor
4) Net income is the same with equity and acquisition method
Goodwill
Full (GAAP and IFRS): Fair value of company - fair value of its identifiable assets (excluding Goodwill on investee’s BS)
Partial (IFRS only): Purchase price - purchased proportion of fair value of acquired assets
Impairment of goodwill
1) IFRS: carrying value of investee - fair value of invested
2) GAAP:
- test for impairments based on value of investee
- loss as carrying value of goodwill - its fair value
Proportional consolidation
1) Allowed under both IFRS and GAAP, but rarely
2) Only purchased amount of assets and liabilities reported, so no minority interest is created
Treatment of SPE
Sponsor should consolidate SPE if
1) IFRS - it controls it
2) FASB - SPE’s equity si not enough to absorb risks and formal equity investors does not have controlling rights
