Intercorporate investment

Question 1

Assoiates

Answer 1

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

Question 2

Financial assets

Answer 2

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

Question 3

Business Combinations

Answer 3

> 50%
subsidiary
consolidation

Question 4

Joint Ventures

Answer 4

Shared Control

Question 5

Classification of Corporate Investments

Answer 5

<20%

Financial Assets - Passive

20-50%

Associates - Influence

> 50%

Business Combination - Control

Question 6

FV through P/lL
Hold for trading (debt/equity)

Answer 6

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

Question 7

Financial Assets Treatment - Amortized Cost

Answer 7

DEBT securities meeting the business model and cash flow characteristics tests

Interest income reported on Income Statement
Interest income = coupon + amortized discount (or minus amortized premium)
Carried on the BS at amortized cost
Changes in market value not recognized unless impaired

Question 8

FVPL

Answer 8

Financial Assets - debt and equity securities

interest and dividend income reported on income statement
Interest = coupon + amortized discount (or less premium)
Carried on BS at fair value
Unrealized gains / losses recognized on income statement

Question 9

FVOCI

Answer 9

Financial Assets - Debt and Equity Securities

interest and dividend income reported on income statement
interest = coupon +/- amortized discount (premium)
carried on balance sheet at fair value
unrealized gains / losses reported directly in equity
when sold, realized G/L is recognized on the income statement

Question 10

Treatment of Unrealized Gains / Losses - Intercorporate Investments

Answer 10

Debt Securities:

Fair value - amortized cost = cumulative unrealized gain

Equity Securities:

Fair value - purchase price = cumulative unrealized gain

Note: unrealized gain/ loss for a period = the change in cumulative unrealized gain from BGN to END of period on BS

Question 11

Reclassification of securities - Intercorporates

Answer 11

Equity Securities: NO RECLASSIFICATION - initial choice of FVPL / FVOCI is irrevocable
Debt Securities: ONLY if the business model has changed
Unrecognized gains/losses carried at amortized cost and reclassified as FVPL are recognized in the income statement
If reclassififed out of FVPL to amortized cost, it’s transferred at fair value on the transfer date, and that fair value becomes the carrying amount of the security

Question 12

Business Combination - Steps of Acquisition Method (control)

Answer 12

Balance Sheet

1. Eliminate investment account (purchase price) of parent and equity (only pre-acquisition sub R/E) accounts of subsidiary
2. Create minority interest (share of equity not owned)
3. Calculate goodwill
4. Combine 100% of the assets and liabilities of both firms (net of intercompany transactions)

Income Statement

1. Eliminate subsidiary earnings from parent (dividends)
2. Subtract minority share of earnings (share of earnings not owned)
3. Combine revenues and expenses (only post-acquisition results) of both firms (net of intercompany transactions)