Week 1 Flashcards
Define Non-Strategic (Passive) Investments
Include those investments held to increase the value of excess cash by earning a return on that investment until the cash is needed.
Define Strategic Investments
Include an investment in the shares of another company, either in an ongoing working relationship or in an ownership position
The level of influence can range from significant influence to control.
Describe Investments in Associates
- a significant influence in the investee is present
- the investor accounts for its investment using the equity method
- governed by IAS 28 Investments in Associates and Joint Ventures
Describe Investments in Subsidiaries
- control of the investee by the investor is evident
- either cost or equity method can be used
- reports it’s investments by preparing consolidated financial statements
- governed by IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements
Why is the Equity Method sometimes referred to as a “one-line consolidation”
Because it essentially collapses income earned from the investment into one line item in the statement of comprehensive income and similarly reports the investor’s ownership interest in the individual assets and liabilities of the associate in one line on the statement of financial position.
How does Paragraph 3 of IAS 28 define an Associate?
An entity over which the investor has significant influence.
How does IAS 28 define Significant Influence?
The power to participate in the financial and operating policy decisions, but not control or jointly control those policies.
An investor has some ability to affect the associate’s performance and the return on its investment.
How are investments in associate’s initially recognized under the equity method?
At cost
Define cost
The amount of cash or cash equivalents paid or the fair value of the other consideration given up to acquire an asset at the time of its acquisition.
What is the investor’s share of the Acquisition Differential (AD)?
When does this pro rating occur?
The difference between the price paid for an investment and the carrying (or book value) of the identifiable net assets (INA) acquired x the percentage ownership purchased
Occurs when there is significant influence and the equity method is used.
What is the Carrying Value of an entity’s INA?
The difference between the carrying value of an entity’s assets (including all recorded intangibles,except goodwill) and the carrying value of its liabilities.
Define the term “Fair Value Increment”
When the investor pays an amount greater than the book value of INA, due to the differences between fair values and book values of individual assets and liabilities.
When does a fair value increment arise for an asset?
When does it arise for a liability?
Asset- when the fair value exceeds the book value
Liability- when the fair value of the liability is less than the carrying value and occurs because the liability is overstated in the statement of financial position (SFP)
Define the term “Fair Value Decrement”
When the investor pays an amount less than the book value of INA because of the difference between fair values and book values of individual assets and liabilities.
What is Goodwill?
Any amount in excess of the cost of the investment over the investor’s share of the net fair value of the investee’s INA is accounted for as goodwill; it is part of the purchase price and is included in the carrying value of the investment in associate in the SFP.
