Intercorporate Investments Flashcards
With significant influence, 20 - 50% ownership, use…
IFRS and GAAP: equity method
Use _______ as guide to determine influence/control over company
Percentage of ownership
With shared control, 50% ownership, use…
IFRS: equity method or proportionate consolidation
GAAP: equity method
With control , >50%, use…
IFRS and GAAP: acquisition method
With no significant influence (<20% ownership), trading securities, use…
GAAP and IFRS:
bs - fair market value
Is - interest, dividends, realized/unrealized gains and losses
With no significant influence (<20% ownership), available for sale securities, use…
GAAP:
Bs- fair market value, unrealized g/l in comprehensive income (sh equity)
Is - interest, dividends, realized g/l reported
IFRS:
Same but unrealized g/l on IS
With no significant influence (<20% ownership), held to maturity debt securities, use…
GAAP and IFRS:
Bs - historical cost
Is - interest and realized g/l reported
How to record equity method
Investment listed at cost on bs
Dividends increase cash, decrease investment
Pro rata share of investees net income increases asset account and listed on investor income statement
How to record acquisition method
Consolidate BS (A&L net of intercorporate transfers) No change to parent equity List minority interest in sh equity (unowned * net subsidiary equity)
Consolidate IS (R&E less minority shareholder portion of NI)
How to record proportionate consolidation
Proportional share of A&L on BS
Proportional share of R&E on IS
When is proportionate consolidation best used?
If a stronger link exists than is demonstrated by ownership share
Ex. Joint venture
What are four effects on BS & IS items resulting from accounting method choice?
- All report same NI
- Equity: equity method = prop consol < acquisition method (+min int)
- A&L: acquisition > proportionate > equity
- Sales: acquisition > proportionate > equity
Which method is most favourable?
Equity method; lower leverage, higher net profit margin, ROE, ROA
Proportionate is second, acquisition is least favourable
What is a special purpose entity (SPE)
Legal structure created to isolate certain assets and obligations of a sponsor, normally to obtain low cost financing
What is a variable interest entity? (VIE)
Contractual, ownership or other pecuniary interest in an entity that changes as a result of the fair value of the entity’s net assets that must be consolidated by primary beneficiary