Intercorporate Investments Flashcards

1
Q

What are the 4 different categories of intercorporate investments

A
  • Investment in financial assets
  • Investments in associate
  • Joint venture
  • Business combination
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2
Q

When is something categorized as Investment in financial assets

A

Less than 20% ownership in equity

No significant influence or control

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3
Q

When is something categorized as Investments in associate

A

20-50% of equity ownership

Significant influence but no control

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4
Q

When is something classified as Joint venture

A

When 2 or more entities share control of a company.

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5
Q

When is something classified as Business control

A

More than 50% equity ownership

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6
Q

How are investment in financial assets classified if they’re to be sold?

A

Fair value through profit or loss

Fair value through IOC

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7
Q

What is the equity method?

A

The equity method requires the investing company to record the investee’s profits or losses in proportion to the percentage of ownership.

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8
Q

How are investments initially recorded?

A

Initially recorded at cost of acquired shares.

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9
Q

Where should Increase in proportion of earnings be recording in the equity method

A

In income statement

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10
Q

Where should Increase in proportion of dividends be recording in the equity method

A

Only in balance sheet

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11
Q

What is fair value method?

A

The estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price.

Individuals and businesses may compare current market value, growth potential, and replacement cost to determine the fair value of an asset.

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12
Q

Who can use fair value method under IFRS and GAAP?

A

IFRS: Strictly Venture capital, Mutual funds, are restricted to only use FV

GAAP: All entities

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13
Q

Where is unrealized gains/loss reported in fair value method?

A

In net income

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14
Q

Where is interest/dividends reported in fair value method?

A

In net income

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15
Q

How is impairment tested in Fair value method

A

For both IFRS and GAAP

If impaired, write down to recoverable amount

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16
Q

When is acquisition method used?

A

In business combination

When we go from influence to control

Used for IFRS and GAAP

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17
Q

Formula for calculation of impairment of loss

A

Carrying value - Recoverable amount of units

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18
Q

How should equity investment be categorized on the financial statement?

A

Fair value through profit and loss

18
Q

Test for impairment of GW under GAAP

A

CV of unit > FV of unit

18
Q

Formula for recognized goodwill

A

Fair Value of consideration (Shares issued x MV of shares) - (%ownership x FV of net assets of acquired company)

18
Q

Measurement of implied goodwill under GAAP

A

FV of unit - Net assets

19
Q

Measurement of Impairment of loss under GAAP

A
  1. FV of unit - Net assets = Implied goodwill
  2. Current Goodwill - Implied goodwill = Impair loss
20
Q

Test for impairment of GW under IFRS

A

CV > Recoverable amount

21
Q

Measurement of Impairment of loss under IFRS

A

Recoverable amount - Carrying value

22
Q

Formula for excess purchase price

A

Purchase price - (% acquired x BV of net assets)

23
Q

If a parent company has purchased 80% of a subsidiary shares, how will it affect the BS of the parent company?

A

Under acquisition method, the parent company will absorb 100% of the subsidiary asset and liabilities measured under fair value method.

24
Q

How do we recognize contingent liabilities under IFRS

A

On the acquisition date, the acquirer must recognize any contingent liability in the acquisition if.

  1. It is a present obligation that arises from past events.
  2. It can be measured reliably
25
Q

How is Partial Goodwill measured?

A

Fair Value of acquisition minus acquirer share of FV of net assets

26
Q

Formula for Partial Goodwill

A

(Shares outstanding x share price) - (FV of net asset x % ownership)

27
Q

Formula for full goodwill

A

[ (Shares outstanding x share price) / % ownership ] - (FV of net asset x % ownership)

  1. (Shares outstanding x share price) = Purchase price
  2. Purchase price / % ownership = Full value
  3. Full value - FV of net asset = Full Goodwill
28
Q

Formula for Full Goodwill recognized under GAAP

A

FV of entity - Fv of net identifible assets

29
Q

Formula for excess purchase

A

Purcahse price - (% own x BV of assets)

30
Q

How does IFRS allocate goodwill and how many steps does it have?

A

IFRS allocates Goodwill to cash generating units that is expected to benefit from synergies.

1 step appraoch - Identification = Measurement

31
Q

How does GAAP allocate goodwill and how many steps does it have?

A

GAAP allocates Goodwill to all reporting segments

2 step approach: Identification then measurement

32
Q

How is the carrying amount of the investment recognized?

A

It is recognize the investors proportionate share of the investee’s earnings or losses, and these earnings or losses are reported on income statement.

Dividends or interests recived from the investee are trated as a return of capital, and thus reduces the carrying amount of the investment and are not reported on Profit or loss

33
Q

What causes acturial losses?

A
  • Wage inflation - (increase in wages)
  • lower discount rate
  • Longer tenure
34
Q

Under IFRS 9, how is FVPL, FVOCI, and Amortized cost carrying value reprted ?

A

FVPL and FVOC: at market value
Amortized cost: Historical cost

35
Q

If an asset can be sold, in which category should it be classified under

(Investment in Financial Assets)

A

Either Fair Value through profit and Loss (FVPL)
or
Fair Value through Other Comprehensive Income (FVOCI)

36
Q

If the acquirer is an IFRS company, on the date of acquisition, how should the company recognize any contingent liability.

A

Should recognize a contingent liability if

  1. Its a present obligation that arises from past events.
  2. It can be reliably measured.
37
Q

How is FVPL, FVOCI, and amortized cost measuered at the end of the year Under IFRS 9,

A

Under IFRS 9, FVPL and FVOCI securities are carried at market value, whereas amortized cost securities are carried at historical cost.

38
Q

Using the equity method.
Do we add the revenue of the company we have purchased to our revenue?

A

No. Revenue is not added. Net income is though.

39
Q

Does the choice of Equity method or proportionate consolidation affect shareholders equity?

A

The choice of equity method or proportionate consolidation does not affect reported shareholders’ equity.

Regardless of which method. It will be 0 on our statements.

40
Q

When is Proportionate consolidation used?

A

For Joint Venture

41
Q

How is the asset recorded if a entity has controll over a company?

A

When a company is deemed to have control of another entity, it records all of the other entity’s assets on its own consolidated balance sheet.