Intercompany investment

Question 1

Three degrees of influence over investee (%) [Form]

Answer 1

• 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

Question 2

Five forms of intercompany investment

Answer 2

• investment in assets
• investment in associates
• joint venture
• business combination
• investment in SPEs and VIEs

Question 3

Financial reporting methods for investment in financial assets

Answer 3

• fair value through p/l (FVPL)
• fair value through other comprehensive income (FVOCI)
• amortized cost

Question 4

Financial reporting method for investment in associates

Answer 4

equity method

Question 5

Financial reporting method for investment in business combinations

Answer 5

acquisition method (consolidation)

Question 6

Financial reporting methods for joint ventures

Answer 6

• equity method*

* under rare circumstances both IFRS and GAAP allow acquisition method (consolidation)

Question 7

FVPL disambiguation

Answer 7

fair value through profit/loss

Question 8

FVOCI disambiguation

Answer 8

fair value through other comprehensive income

Question 9

What is the accounting method for the value paid in excess of book value of a investee?

Answer 9

• 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

Question 10

Four types of business combinations (of entity A and B)

Answer 10

• merger: A + B -> A
• acquisition: A + B -> {A + B}*
• consolidation: A + B -> C
• SPE or VIE: A -> A + C

Question 11

What is ‘bargain price’ acquisition?

Answer 11

acquisition for a price below fair value of net assets

Question 12

Are contingent assets/liabilities of a subsidiary recognized in a consolidated statement under IFRS and GAAP?

Answer 12

• IFRS: only contingent liabilities are recognized
• GAAP: both contingent assets and liabilities are recognized

Question 13

What accounting method is used for held-for-trading equity investments?

Answer 13

Fair value through P / L (FVPL)

Question 14

Can investment in equity be accounted for using amortized cost method?

Answer 14

no, only debt securities are suitible for amortized cost method

Question 15

what is reclassification policy under IFRS for amortized cost, FVOCI and FVPL methods?

Answer 15

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

Question 16

Significant influence over the investee may be evident from the following five conditions:

Answer 16

• presence on the board of the directors
• participation in policy-making process
• material transactions between parties
• interchange of managerial personnel
• technological dependency

Question 17

to which accounting method does the term ‘one-line consolidation’ refer to?

Answer 17

equity method

Question 18

what are the allowed accounting bases for investee’s PP&E under IFRS and GAAP?

Answer 18

• IFRS: historical cost or fair value
• GAAP: historical cost only

Question 19

Distinguish between equity income and change in book value of shareholdings

Answer 19

• 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)

Question 20

what are the three major issues addressed by acquisition method of accounting?

Answer 20

• the recognition and measurement of assets / liabilities of the combined entity
• recognition and subsequent accounting of goodwill
• recognition and measurement of non-controlling interest

Question 21

how goodwill is accounted for in a consolidated statement under GAAP and IFRS?

Answer 21

• IFRS allows full goodwill as well as partial goodwill methods
• GAAP requires partial goodwill method

Question 22

how value of assets and income from investment differ under FVOCI and FVPL methods?

Answer 22

• 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

Question 23

Bond amortization (equation) under amortized cost method:

Answer 23

• 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