Intercorporate Investments Flashcards

0
Q

With significant influence, 20 - 50% ownership, use…

A

IFRS and GAAP: equity method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

Use _______ as guide to determine influence/control over company

A

Percentage of ownership

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

With shared control, 50% ownership, use…

A

IFRS: equity method or proportionate consolidation

GAAP: equity method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

With control , >50%, use…

A

IFRS and GAAP: acquisition method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

With no significant influence (<20% ownership), trading securities, use…

A

GAAP and IFRS:
bs - fair market value
Is - interest, dividends, realized/unrealized gains and losses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

With no significant influence (<20% ownership), available for sale securities, use…

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

With no significant influence (<20% ownership), held to maturity debt securities, use…

A

GAAP and IFRS:
Bs - historical cost
Is - interest and realized g/l reported

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How to record equity method

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How to record acquisition method

A
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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How to record proportionate consolidation

A

Proportional share of A&L on BS

Proportional share of R&E on IS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

When is proportionate consolidation best used?

A

If a stronger link exists than is demonstrated by ownership share

Ex. Joint venture

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are four effects on BS & IS items resulting from accounting method choice?

A
  1. All report same NI
  2. Equity: equity method = prop consol < acquisition method (+min int)
  3. A&L: acquisition > proportionate > equity
  4. Sales: acquisition > proportionate > equity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Which method is most favourable?

A

Equity method; lower leverage, higher net profit margin, ROE, ROA

Proportionate is second, acquisition is least favourable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a special purpose entity (SPE)

A

Legal structure created to isolate certain assets and obligations of a sponsor, normally to obtain low cost financing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is a variable interest entity? (VIE)

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Examples of common VIEs

A
At-risk equity investment 
Debt guarantee
Subordinated debt 
Lease residual guarantee
Participation rights 
Asset purchase option
16
Q

Conditions that identify a VIE

A
  • insufficient at-risk equity investment
  • s/h lack decision making rights
  • s/h do not absorb losses
  • s/h do not receive residual benefits