Intercorporate Investments

Question 1

What are the 4 different categories of intercorporate investments

Answer 1

• Investment in financial assets
• Investments in associate
• Joint venture
• Business combination

Question 2

When is something categorized as Investment in financial assets

Answer 2

Less than 20% ownership in equity

No significant influence or control

Question 3

When is something categorized as Investments in associate

Answer 3

20-50% of equity ownership

Significant influence but no control

Question 4

When is something classified as Joint venture

Answer 4

When 2 or more entities share control of a company.

Question 5

When is something classified as Business control

Answer 5

More than 50% equity ownership

Question 6

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

Answer 6

Fair value through profit or loss

Fair value through IOC

Question 7

What is the equity method?

Answer 7

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

Question 8

How are investments initially recorded?

Answer 8

Initially recorded at cost of acquired shares.

Question 9

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

Answer 9

In income statement

Question 10

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

Answer 10

Only in balance sheet

Question 11

What is fair value method?

Answer 11

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.

Question 12

Who can use fair value method under IFRS and GAAP?

Answer 12

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

GAAP: All entities

Question 13

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

Answer 13

In net income

Question 14

Where is interest/dividends reported in fair value method?

Answer 14

In net income

Question 15

How is impairment tested in Fair value method

Answer 15

For both IFRS and GAAP

If impaired, write down to recoverable amount

Question 16

When is acquisition method used?

Answer 16

In business combination

When we go from influence to control

Used for IFRS and GAAP

Question 17

Formula for calculation of impairment of loss

Answer 17

Carrying value - Recoverable amount of units

Question 18

How should equity investment be categorized on the financial statement?

Answer 18

Fair value through profit and loss

Question 18

Test for impairment of GW under GAAP

Answer 18

CV of unit > FV of unit

Question 18

Formula for recognized goodwill

Answer 18

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

Question 18

Measurement of implied goodwill under GAAP

Answer 18

FV of unit - Net assets

Question 19

Measurement of Impairment of loss under GAAP

Answer 19

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

Question 20

Test for impairment of GW under IFRS

Answer 20

CV > Recoverable amount

Question 21

Measurement of Impairment of loss under IFRS

Answer 21

Recoverable amount - Carrying value

Question 22

Formula for excess purchase price

Answer 22

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

Question 23

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

Answer 23

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

Question 24

How do we recognize contingent liabilities under IFRS

Answer 24

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

Question 25

How is Partial Goodwill measured?

Answer 25

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

Question 26

Formula for Partial Goodwill

Answer 26

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

Question 27

Formula for full goodwill

Answer 27

[ (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

Question 28

Formula for Full Goodwill recognized under GAAP

Answer 28

FV of entity - Fv of net identifible assets

Question 29

Formula for excess purchase

Answer 29

Purcahse price - (% own x BV of assets)

Question 30

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

Answer 30

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

1 step appraoch - Identification = Measurement

Question 31

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

Answer 31

GAAP allocates Goodwill to all reporting segments

2 step approach: Identification then measurement

Question 32

How is the carrying amount of the investment recognized?

Answer 32

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

Question 33

What causes acturial losses?

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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

(Investment in Financial Assets)

Answer 35

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

Question 36

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

Answer 36

Should recognize a contingent liability if

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

Question 37

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

Answer 37

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

Question 38

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

Answer 38

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

Question 39

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

Answer 39

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.

Question 40

When is Proportionate consolidation used?

Answer 40

For Joint Venture

Question 41

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

Answer 41

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.

Question 42

What is Pooling of interests method?

Answer 42

Pooling of interests is a method of accounting where the assets, liabilities, and reserves of two combining business entities are summed and then recorded at their historical values.

Question 43

How do we calculate “effective interest rate method”

Answer 43

The effective interest method where the amortization is calculated as the difference between the amount received and the interest income.

Received - Interest income

Received = (Par value x Coupon rate)
Interest income = (Initial fair value x Effective interets rate)

(Par value x Coupon rate) - (Initial fair value x Effective interets rate)

Question 44

Explain Upstream payment

Answer 44

Investee sells goods to the investors who then later sells it to the market.

The investee has recognized all of the profit in the income statement.

However, for profit that is unconfirmed (goods have not been used or sold by the investor), the investor must eliminate its proportionate share of the profit from the equity income of the investee.
E.g. Suppose that investor owns 30% of investee. During the year, investee sold goods to investor and recognized $15,000 of profit from sale.

At year end, half of the goods purchased from investee remained in investor’s inventory. Now all of the profit is included in investee’s net income.
Investor must reduce its equity income of investee by investor’s proportionate share of the unconfirmed profit.

Since half of the goods remain, half of the profit is unconfirmed. Thus, investor must reduce its equity income by $2250 ($15,000 total profit x 50% unconfirmed x 30% ownership interest).
Once the inventory is sold by investor $2250 of equity income will be recognized.

Question 45

Explain downstream

Answer 45

Investor sells to investee who then sell it to the market

The investor has recognized all of the profit in its income statement.

Like the upstream sale, the investor must eliminate the proportionate share of the profit that is unconfirmed.

E.g. Investor owns 30% of investee. During the year, investor sold $40,000 of goods to
investee for $50,000. Investee sold 90% of the goods by year end. In this case, investor’s profit is $10,000 ($50,000 sales - $40,000 COGS).

Investee has sold 90% of the goods, thus, 10% of the profit remains in investee’s inventory.

Investor must reduce its equity income by the proportionate share of the unconfirmed profit by $300 ($10,000 profit x 10% unconfirmed x 30% ownership interest).

Once investee sells the remaining inventory, investor can recognize $300 of profit.