Reading 19 - Intercorporate Investments

Question 1

What are the 3 ways Intercorporate Investments can be categorized?

Answer 1

1. investments in financial assets ( the investing firm has no significant control over the operations of the investee firm)
2. investments with associates (investment firm has signficant influences, but not control)
3. business combinations (when the investing firm has control over the operations of the investee firm)

Question 2

What are the % of ownership under Financial Assets, Investments in Associates and Business Combinations of Intercorporate Investments

Answer 2

• Financial Assets < 20%
• Investments in Associates > 20% & < 50%
• Business Combination > 50%

Question 3

What are some ways an Investments in Associates can have significant influence in the investee firm?

Answer 3

1. Board of Directors representation
2. Involvement in policy making
3. Material intercompany transactions
4. Interchange of managerial personnel
5. Dependence on technology

Question 4

What is the accounting treatment for Investments in Financial Assets, Investment in Associates and Business Combinations?

Answer 4

• Investments in Financial Assets : Held to maturity, available for sale, fair value through profit of loss
• Investment in Associates: Equity Method
• Business Combinations: Acquisition Method

Question 5

How is the reporting of Financial Assets done?

Answer 5

• Acquisition of financial assets is recorded at cost
• Any dividend or interest income is recognized in the investor’s income statement

Question 6

If Financial Asset is classified as Held-to Maturity and its fair value changes, how is this handled in the financial statements?

Answer 6

Fair value changes are ignored.

Question 7

If Financial Assets are classified as Held-for-Trading and its fair value changes, how is this handled in the financial statements?

Answer 7

Both realized and unrealized gains/losses are recognized in the income statement along with any dividend or interest income.

Question 8

If a Financial Asset is classified as Available-for-sale and its fair value changes, how is this handled in the financial statements?

Answer 8

Only realized gains or losses, and dividend and interest income are recognized in the income statement

Unrealized g/l are reported as a seperate component of stockholder’s equity (in other comprehensive income)

Question 9

Under GAAP, what are the 3 ways business combinations are categorized?

Answer 9

1. Merger -> (Company A + Company B = Company A)
2. Acquisition -> Company A + Company B = (Company A + Company B)
3. Consolidation -> Company A + Company B = Company C

Question 10

What is the only allowable accounting method for Business Combinations?

Answer 10

The Acquisition Method

All of the assets, liabilities, revenues and expenses of the subsidiary are combined with the parent. Intercompany transactions are excluded.

Question 11

Under GAAP, how is goodwill determined?

Answer 11

The Goodwill

is the amount by which the fair value of the subsidiary is greater than the fair value of the acquired company’s identifiable assets

Question 12

What is Partial Goodwill and how is it calculated?

Answer 12

Is the excess of the purchase price over the fair value of the acquiring company’s proportion of the acquired company’s identifiable assets

**Allowed under IFRS but not GAAP**

Question 13

Are ROA and ROE higher or lower for the full goodwill method than under the partial goodwill method?

And why?

Answer 13

Lower

b/c the full goodwill method results in higher total assets and higher total equity

Question 14

Are Net Profit Margin, ROA and ROE higher under the Equity Method or Acquisition Method?

Answer 14

All higher under the Equity Method

Question 15

What are the 3 classifications under IFRS 9 (New Standards)?

Answer 15

1. Amortized Cost (for debt securities only)
2. Fair Value Through Profit or Loss (FVPL) - for debt & equity
3. Fair Value Through OCI (FVOCI) - for equities only

Question 16

Are you able to reclassify an asset under IFRS 9 (New Standards)?

Answer 16

Equities:

No, the initial designation is irrevocable

Debt:

Yes, but only if the business model has changed.

Question 17

What are the kinds of loss events are necessary under IFRS for a debt security to be considered impaired?

Answer 17

1. Default of payments of principal or interest
2. Likely bankruptcy or reorganization

***A credit downgrade or lack of a liquid market are not reasons to be considered impaired***

Question 18

What are the 2 criterias for using **Amortized Cost Accounting **for debt securities under IRFS 9?

Answer 18

1. _Business Model Test _ - Debt securities are being held to collect contractual cash flows
2. Cash Flow Characteristic Test - The contractual cash flows are either principal , or interest on principal, only

Question 19

How do you calculate goodwill?

****Research this formula further*********

Answer 19

Purchase Price

Less : Pro-rate book value of net assets

Less : Excess allocated to equipment

= Goodwill

Question 20

What is an **upstream transaction **?

Answer 20

Transactions flowing from the parent to the subsidiary

Question 21

What is a **downstream transaction **?

Answer 21

transactions from the subsidiary to the parent

Question 22

What happens using the **acquisition method ** when the parent owns less than 100% of the subsidiary?

Answer 22

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 BALANCED SHEET

Question 23

What is a VIE?

Answer 23

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***

Question 24

What are the characterstics that would classify an SPE as a VIE?

Answer 24

Only one of the 2 is neccessary to be a VIE

1. At-risk equity that is insufficient to finance the entity’s activities without additional financial support
2. 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