Professional Documents
Culture Documents
Intercorporate Investments
Marketable securities
less than 20% ownership
Equity method
20-50% ownership
Consolidation
50-100% ownership
Marketable Securities
Generally bonds or stock held as investments of excess cash Highly liquid and readily valued Less than 20% passive ownership interest Three methods of accounting based on why you hold it (intent)
the identical debt security could receive any of the three treatments based on why you hold it
Numbers from Problem 11.22, Security M At acquisition, recorded at cost Marketable Sec. (B/S-A) 37.0 Cash (B/S-A) 37.0 Div. or int. revenue recorded when earned Cash or Rec. (B/S-A) 1.5 Div. or Int. Rev. (I/S-R) 1.5 Acquis. and div./int. are always as above
Trading Securities
Trading securities
Securities held to trade for short-term profits Most common in banks Revalue securities to market Recognize unrealized holding gains or losses on the income statement
2.0
2.0
2.0
2.0
Back out gain or loss from equity account at sale and record any additional gain or loss Cash (B/S-A) 43.0 Unreal. Loss on SAS (B/S-SE) 2.0 Mktable Sec.--SAS (B/S-A) 35.0 Realized Gain on SAS (I/S-Gain) 6.0
When company earns money, increase investment by your share of their earnings
Equity Investments Equity Income 5 5
When they pay dividends, reduce investment by dividend Cash Equity Investments 1
1
Majority Ownership
Fold the other company into the consolidated entity Add their financials to the rest of the groups
Each line on the income statement, balance sheet and cash flow statement is the sum for the group
In some countries (e.g., Continental model countries), parent also provides parent-only statements using equity method for subsidaries
Acquisition Example
Assume you acquire another company: Mkt. Book Value Value Identifiable Assets $120M $80M Goodwill $20M Liabilities - $40M - $40M Shareholders Equity $100M $40M
Purchase Accounting
Now required in US, common outside US
Ident. Assets (AR, Inv., PP&E) $120M Goodwill (plug) $20M Liab. (AP, L-T Debt, etc.) $40M Cash $100M
E.g., acquiring 90% Ident. Assets (AR, Inv., PP&E) Goodwill (plug) Liab. (AP, L-T Debt, etc.) Cash Minority Interest (Liab)
Merger of Equals
Was called pooling accounting in US
Now prohibited
Ident. Assets (AR, Inv., PP&E) $80M Liab. (AP, L-T Debt, etc.) $40M Common stock & APIC $40M
Goodwill
Currently not amortized in US for accounting purposes
Tested for impairment annually