Reading 07 - Intercorporate Investments Flashcards
What are the 3 ways Intercorporate Investments can be categorised?
+ explain this in terms of influence and control
- investments in financial assets ( the investing firm has no significant control over the operations of the investee firm)
- investments with associates (investment firm has signficant influences, but not control)
- business combinations (when the investing firm has control over the operations of the investee firm)
What are the % of ownership under Financial Assets, Investments in Associates and Business Combinations of Intercorporate Investments?
- Financial Assets < 20%
- Investments in Associates > 20% & < 50%
- Business Combination > 50%
What are some ways an Investments in Associates can have significant influence in the investee firm?
- Board of Directors representation
- Involvement in policy making
- Material intercompany transactions
- Interchange of managerial personnel
- Dependence on technology
What is the accounting treatment for Investments in Financial Assets, Investment in Associates and Business Combinations?
- Investments in Financial Assets :
Held to maturity/Amortised cost,
Available for sale/FV through OCI,
FV through profit or loss - Investment in Associates:
Equity Method - Business Combinations:
Acquisition Method
How are held to maturity/held at amortised cost financial assets reported in:
* the balance sheet?
* the income statement?
- Balance sheet:
carried on the balance sheet at amortised cost - Income statement:
interest income
realised gain/loss
NOTE: changes in market value NOT recognised unless impaired
If a Financial Asset is classified as Held-to Maturity and its fair value changes, how is this handled in the financial statements?
Fair value changes are ignored.
How are fair value through OCI/available for sale financial assets reported in:
* the balance sheet?
* the income statement?
- Balance sheet:
carried on the balance sheet at fair value - Income statement:
interest income
dividend income
Gains/losses from changes in FV reported directly in equity
How are fair value through profit or loss/trading securities financial assets reported in:
* the balance sheet?
* the income statement?
- Balance sheet:
carried on the balance sheet at fair value - Income statement:
interest income
dividend income
realised gains/losses
unrealised gains/losses
Equity Method:
What effect does this method have on the balance sheet and income statement?
Specify the balance sheet line affected and how dividends are treated
The balance sheet investment account and income statement increase by the pro rata share of the investees earnings.
Dividends received decrease the investment account.
Under GAAP, what are the 3 ways business combinations are categorized?
- Merger -> (Company A + Company B = Company A)
- Acquisition -> Company A + Company B = (Company A + Company B)
- Consolidation -> Company A + Company B = Company C
What is the only allowable accounting method for Business Combinations?
The Acquisition Method
All of the assets, liabilities, revenues and expenses of the subsidiary are combined with the parent. Intercompany transactions are excluded.
Acquisition method:
How is goodwill impaired? How is goodwill amortised?
Goodwill is subject to annual impairments tests. It is not amortised.
Acquisition method:
What aspects are combined with the parent company? What aspects is excluded?
Combined - 4
Excluded - 1
Combined:
* assets of subsidiary
* liabilities of subsidiary
* revenue of subsidiary
* expenses of subsidiary
Excluded:
* intercompany transfers
Acquisition method:
When is minority interest accounted for? What financial statement is it found in?
If less than 100% of company is acquired, minority interest in the balance sheet accounts for the share not owned by the parent.
What % of control or influence triggers a joint venture? What method is used to account for JVs?
50% shared control.
Equity method
Equity, acquisition & proportionate consolidation:
How do all 3 methods affect net income?
All three methods report the same net income.
Acquisition method vs. equity method:
How are assets, liabilities, equity, revenues and expenses affected under acquisition method compared with the equity method?
Assets, liabilities, equity, revenues and expenses are higher under the acquisition method v.s. equity method.
IFRS vs. US GAAP:
Under which accounting standards is fair value accounting primarily applied to financial instruments held by venture capital organizations and mutual funds, and which standards allow for a broader range of entities?
IFRS primarily applies fair value accounting to financial instruments held by venture capital organizations, mutual funds, and similar entities.
US GAAP allows for fair value accounting for a broader range of entities and financial instruments.
IFRS vs. US GAAP:
Under which accounting standards is partial and full good will permitted, and which standards only allow for full good will?
IFRS: Partial and full goodwill permitted
US GAAP: Full goodwill only
Under GAAP, how is goodwill determined?
The Goodwill
is the amount by which the fair value of the subsidiary is greater than the fair value of the acquired company’s net identifiable assets
What is partial goodwill, how is it calculated and what accounting standards allow it?
Is the excess of the purchase price over the fair value of the acquiring company’s proportion of the acquired company’s identifiable assets.
It involves measuring the goodwill attributable only to the controlling interest acquired by the parent company, rather than the entire goodwill of the acquired entity.
**Allowed under IFRS but not GAAP**
IFRS vs. US GAAP:
How does the goodwill impairment process differ under IFRS vs. US GAAP?
IFRS:
* 1 STEP - recoverable amount v.s. carrying value
US GAAP:
* 2 STEP - identify if impairment, then measure the amount to be impaired.
IFRS vs. US GAAP:
Under the acquisition method, how are contingent assets recognised?
IFRS:Contingent assets are not recognised
US GAAP: Recognised, recorded at FV.
IFRS vs. US GAAP:
How are prior service costs reported in financial statements?
IFRS:Recognised as an expense in the I/S
US GAAP: Reported in OCI, amortised in I/S
IFRS vs. US GAAP:
How are actuarial gains/losses reported in financial statements?
IFRS:Remeasurements in OCI, not amortised
US GAAP: OCI, amortised with corridor approach
IFRS vs. US GAAP:
How are dividend/interest income and interest expenses cash flows classified in financial statements?
IFRS:Operating or financial cash flows
US GAAP: Operating cash flow
Are ROA and ROE higher or lower for the full goodwill method than under the partial goodwill method?
And why?
Lower
b/c the full goodwill method results in higher total assets and higher total equity
Are Net Profit Margin, ROA and ROE higher under the Equity Method or Acquisition Method?
All higher under the Equity Method
Are you able to reclassify an asset under IFRS 9 (New Standards)?
Equities:
No, the initial designation is irrevocable
Debt:
Yes, but only if the business model has changed.
What are the kinds of loss events are necessary under IFRS for a debt security to be considered impaired?
- Default of payments of principal or interest
- Likely bankruptcy or reorganization
***A credit downgrade or lack of a liquid market are not reasons to be considered impaired***
What are the 2 criterias for using **Amortized Cost Accounting **for debt securities under IRFS 9?
- _Business Model Test _ - Debt securities are being held to collect contractual cash flows
- Cash Flow Characteristic Test - The contractual cash flows are either principal , or interest on principal, only
How do you calculate goodwill?
****Research this formula further*********
Purchase Price
Less : Pro-rata book value of net assets
Less : Excess allocated to PP&E
= Goodwill
What is an **upstream transaction **?
Transactions flowing from the parent to the subsidiary
What is a **downstream transaction **?
transactions from the subsidiary to the parent
What happens using the **acquisition method ** when the parent owns less than 100% of the subsidiary?
It is necessary to create a noncontrolling (minority) interest account for the proportionate share of the subsidiary’s net assts that are not owned by the parent
**UPDATE CARD TO REFLECT WHERE THE MINORITY ASSET GOES ON BALANCE SHEET
What is a VIE?
Variable Interest Entity
Is a term used by FASB to describe a Special Purpose Entity (SPE)
****If the SPE is considered a VIE, it must be consolidated by the primary beneficiary***
What are the characterstics that would classify an SPE as a VIE?
Only one of the 2 is neccessary to be a VIE
- At-risk equity that is insufficient to finance the entity’s activities without additional financial support
- Equity investors that lack any one of the following:
- Decision making rights
- The obligation to absorb expected losses
- The right to receive expected residual returns
