Significant influence Flashcards
How is an investment with significant influence measured?
the equity method ASPE: can choose between equity or cost method
Define significant influence
where the entity is able to participate in and influence financial and operating policy decisions of an associate, but is not able to control the decisions without the help of others General guideline: 20-50% ownership
Factors contributing to sig infl:
- representation on the BoD
- participation in policy making processes, including decisions about dividends or other distirbutions
- material transactions between the investor and the associate
- interchange of managerial personnel
- provision of essential technical information
Equity method
Initial measurement
Initially measured at cost
Equity method
Subsequent measurement
Y/E
share of investee’s net income
- DR Investment in Small
- CR Equity income
dividends
- decrease to investment account
- DR Cash (if paid)
- CR Investment in small
Acquisition differential: what is it?
the entity will likely have paid an amount higher than the book value of the associate’s net assets
= purchase price - book value of net assets
Goodwill equation
Purchase price
-BV of the assoicate’s net assets x ownership %
=Acquisition differential
+/- FV differentials x ownership %
= Goodwill (or negative goodwill)
FV differentials tip…
set up assets as positive numbers, liabilities as negative numbers
Calculate the FV differential = BV - FV
Equity income calculation
Associate’s net income
x ownership %
= share of associate’s income
+/- Current period amortization of FV differentials, net of tax (x 1-tax rate)
+ realized intercompany profits/gains (or - losses) from prior year, net of tax
- unrealized intercompany profits/gains (or - losses) in current year, net of tax
= equity income
Intercompany transactions.
Unrealized profit must be eliminated
= sales in ending inventory x gross profit % x investor % ownership x (1-tax rate)
