Intercompany investment Flashcards
Three degrees of influence over investee (%) [Form]
- no significant influence: < 20% [Financial Assets]
- significant influence: 20% > 50% [Associates]*
- control: > 50% [Business Combinations]
- shared control: NA [Joint Ventures]
* significant influence may be gained through other channels rather than stock holdings
Five forms of intercompany investment
- investment in assets
- investment in associates
- joint venture
- business combination
- investment in SPEs and VIEs
Financial reporting methods for investment in financial assets
- fair value through p/l (FVPL)
- fair value through other comprehensive income (FVOCI)
- amortized cost
Financial reporting method for investment in associates
equity method
Financial reporting method for investment in business combinations
acquisition method (consolidation)
Financial reporting methods for joint ventures
- equity method*
* under rare circumstances both IFRS and GAAP allow acquisition method (consolidation)
FVPL disambiguation
fair value through profit/loss
FVOCI disambiguation
fair value through other comprehensive income
What is the accounting method for the value paid in excess of book value of a investee?
- fair value of investee’s assets are calculated. it is also accounted as investor’s costs
- if some of the excessive value cannot be attributed to an identifiable asset, then it is considered a goodwill
Four types of business combinations (of entity A and B)
- merger: A + B -> A
- acquisition: A + B -> {A + B}*
- consolidation: A + B -> C
- SPE or VIE: A -> A + C
What is ‘bargain price’ acquisition?
acquisition for a price below fair value of net assets
Are contingent assets/liabilities of a subsidiary recognized in a consolidated statement under IFRS and GAAP?
- IFRS: only contingent liabilities are recognized
- GAAP: both contingent assets and liabilities are recognized
What accounting method is used for held-for-trading equity investments?
Fair value through P / L (FVPL)
Can investment in equity be accounted for using amortized cost method?
no, only debt securities are suitible for amortized cost method
what is reclassification policy under IFRS for amortized cost, FVOCI and FVPL methods?
FVOCI and FVPL are irrevocable. In rare circumstances a company can switch from amortized cost method to FVOCI or FVPL if the underlying business model of an asset has changed
Significant influence over the investee may be evident from the following five conditions:
- presence on the board of the directors
- participation in policy-making process
- material transactions between parties
- interchange of managerial personnel
- technological dependency
to which accounting method does the term ‘one-line consolidation’ refer to?
equity method
what are the allowed accounting bases for investee’s PP&E under IFRS and GAAP?
- IFRS: historical cost or fair value
- GAAP: historical cost only
Distinguish between equity income and change in book value of shareholdings
- equity income is an entry in investor’s income statement; it is the share of investee’s net income minus amortization of surplus values
- book value of shareholdings is an entry in investor’s balance sheet; it is equal to equity income minus dividends paid by investee to investor (i.e. share of total divideds paid)
what are the three major issues addressed by acquisition method of accounting?
- the recognition and measurement of assets / liabilities of the combined entity
- recognition and subsequent accounting of goodwill
- recognition and measurement of non-controlling interest
how goodwill is accounted for in a consolidated statement under GAAP and IFRS?
- IFRS allows full goodwill as well as partial goodwill methods
- GAAP requires partial goodwill method
how value of assets and income from investment differ under FVOCI and FVPL methods?
- value of assets is the same under both methods
- under FVOCI realized gains / losses are accounted as income from investment along with dividends received, thus affecting net income; unrealized gains are reflected in other comprehensive income;
- under FVPL unrealized gains / losses are reflected in the income statement along with dividends received and have a direct impact on net income
Bond amortization (equation) under amortized cost method:
- amortization = (issue price - fair value) / term
- if there are coupon payments:
- interest income = effective yield at the purchase date * book value at the start of a period
- amortization = interest income - coupon
