ppt-7 (intercorporate investments)

8/10/2019 PPT-7 (Intercorporate Investments)

1/61

Inter corporate Investments in marketable securities are categorizedas

1. Investments in fnancial assets (when the investing frm has nosignifcant control over the operations o the investee frm)

2. Investments in associates (when investing company hassignifcant inuence over the operations o the investee frm! butnot control)

". #usiness $ombinations (when investing company has control overthe operations o the investee frm)


2/61

Ownership Degree ofInuence

Accounting Treatment

%ess than 2&'(investment in fnancialssets)

o signifcantinuence

*eld to maturity (+ebt,ecurities)! vailable or sale!*eld or trading ordesignated at -air alue(through /roft and %ossaccount)

2&' 0 &' (Investmentin associates)

,ignifcantInuence

3uity 4ethod

4ore than &'(#usiness

$ombinations)

$ontrol c3uisition 4ethod

&'5&' ,hared $ontrol I-6, 7 /roportionate$onsolidation preerred8, 9/ 7 3uity 4ethod


3/61

Investment in AssociatesConditions for ,ignifcant inuence

1. 2&' to &' investment2. 6epresentation on the board o directors". /articipation in the policy making process:. 4aterial transactions between investor and the investee. Interchange o managerial personnel; or


4/61


5/61


6/61

Investment cost thate'ceeds the oo) *a$ue

of the Investee


7/61

=he cost (purchase price ) to ac3uire shares is greater than the bookvalue o those shares. I-6, allows an entity to measure its // using

historical cost or - (less accumulated depreciation). 8, 9/ howeverre3uires the use o historical cost to measure // (less accumulateddepreciation).

+hen cost of Investments , investors proportionate share of

investees net identi#a%$e assets- the di.erence is #rst a$$ocatedto speci#c assets&=hese di?erences are then amortized to investorsproportionate share o investees proft and loss account over theeconomic lie o assets! whose - e@ceeds historical value. =hisallocation is not a ormally recorded7 the frst impact is the investmentaccount on the #5sheet o investor is the $A,= Aver time! as the

di?erences are amortized! the balance in investment account will comecloser to representing the ownership ' o the # o net assets oassociate.

=he di?erence between $A and investors share o - o net identifableassets as /oodwi$$ and is not amortised&( %oth 01 /AA2 and I341

/oodwi$$ is reviewed for impairment on regular basis and writtendown or any identifed impairment. 9oodwill is included in carrying


8/61

=he e@cess purchase price allocated to assets and liabilities is accounted or inthe manner that is consistent with the accounting treatment or that asset

or liability to which it is assigned. mounts allocate to assets and liabilitiesthat are e@pensed (inventory) or periodically depreciated or amortised (//

or intangible assets) must be treated in similar manner.

=hese allocated amounts are not reected on the fnancial statements o theinvestee and the investee>s income statement will not reect the necessary

periodic adBustments. =hereore! the investor must directly record these

adBustment e?ects by reducing it>s share o investee>s proft recognized on

its income statement. mounts allocated to assets or liabilities that are notsystematically amortized (e.g. land) will continue to be reported at their air

value as o the date the investment instead o being separately recognized.

It is not amortized since it is considered to have an indefnite lie.

If the investor"s share of the fair va$ue of the associate"s net assets

(identi#a%$e assets- $ia%i$ities and contingent $ia%i$ities is greaterthan the cost of the investment- the di?erence is e@cluded rom thecarrying amount o the investment and instead included as income in thedetermination o the investor>s share o the associate>s proft or loss in the

period in which the investment is re3uired.


9/61

-air alue Aption #oth I-6,("C) and 8.,. 9/ (,-, 1C) give the investor the option to

account or their e3uity method investment at air value.

8.,. 9/ this option is available to all entities; however!

under I-6, ! its use is restricted to venture capital organizations! mutualriends and similar entities! including investment0linked insurance unds.

#oth standards re3uire that the election to use the air value option occurat the time o initial recognition and is irrevocable. ,ubse3uent ! to initial

recognition! the investment is reported at air value with unrea$i!edgains and $osses arising from changes in fair va$ue as we$$ as any

interest and dividends received inc$uded in the investor"s pro#t or$oss (income& 8nder the air value method! the investment account onthe investor>s balance sheet does not reect the investor>s proportionateshare o the investee>s proft or loss! dividends! or other distributions. Inaddition! the e@cess o cost over the air value o the investee>s

identifable net assets is not amortized! nor is the goodwill created.


10/61


11/61


12/61


13/61

A$ternative way of ca$cu$ating year end investment 5

6 acquired 7 ( %oo) va$ue of net assets %eginning of year 89et Income : Dividends 8 0namorti!ed e'cess purchase price;


14/61

0E1TIO9

ssume $o. ac3uires "&' o outstanding shares o # co. t theac3uisition date! book values and air values o #>s recorded assets

and liabilities are as ollows 7

co. believes the value o # co. is higher than the air value o itsidentifable net assets. =hey o?er D 1&&!&&& or a "&' interest in #co. /art o the e@cess purchase price is attributable to the D &!&&&di?erence between #ook value and air value o the identifable

assets and so the remaining amount is attributable to goodwill.

oo) *a$ue 3air *a$ue

$urrent ssets D 1&!&&& D 1&!&&&

/lant nd3uipment

1C&!&&& 22&!&&&

%and 12&!&&& 1:&!&&&=-=== >=-=== >=-===


15/61


16/61

Impaired

=he impairment loss is recognized on the income statement and the

carrying amount o the investment on the balance sheet is eitherreduced direct$y or through the use of an a$$owanceaccount. s per I-6,

8.,. 9/ takes a di?erent approach. I the air value o theinvestment declines below its carrying value and the decline isdetermined to be permanent! 8.,. 9/ re3uires an impairment

loss to be recognized on the income statement and the carryingva$ue of the investment on the %a$ance sheet is reduced toits fair va$ue&

#oth I-6, and 8.,. 9/ prohibit the reversal o impairmentlosses even i the air value later increases.

Impairment of Investments in Associates

3uity 4ethod investments must be tested or impairment. I the airvalue o the investment alls below the carrying value (investmentaccount on the balance sheet) and decline is considered

permanent! the investment is written down to air value and a loss


17/61

T4A91ACTIO9 +ITF TFE I9*E1TEE

=he proft rom these transactions must be deerred until the proft is

confrmed through use o sale to third party.

Transactions can %e descri%ed as upstream (investee toinvestor or downstream (investor to investee&

In an upstream sale ! the investee has recognized all o the proft in the

income statement. *owever! or the proft that is unconfrmed (goodshave not been used or sold by the investor); the investor musteliminate its proportionate share o the proft rom the e3uity income othe investee.

In the downstream sale the investor has recognized all the proft in the

income statement! so the investor must eliminate the proportionateshare o unconfrmed proft.

8, 9/ and I-6, both re3uire the unearned profts to be eliminated tothe e@tent o investors interest in the associate.


18/61

E'amp$e 5 Investor owns s inventory.ll o the proft is included in Investee>s et Income. Investor mustreduce its e3uity income D 2!2& (D 1&&& G &' G "&').

E'amp$e Investor owns


19/61

Issues for A9AH1T1

1. nalyst should 3uestion whether e3uity method is appropriate

2. Ane line consolidation in e3uity method does not reect signifcantassets and liabilities o investee in investors #5sheet. nd income

or associate is included in investor net income but not specifcallyincluded in sales. #y ignoring Investee>s debt! $everage is $oweror de%t equity ratio is $ower& I9 addition- margin ratios arehigher since the invetees revenues are ignored&

". Huality o e3uity method earnings must be considered. 3uitymethod assumes ' o each dollar earned by investee is earned byinvestor even i cash is not recd. nalyst should consider potentialrestrictions on dividend cash ows.


20/61

usiness Com%inations


21/61

usiness Com%inations

Merger 5 =he distinctive eature o merger is that only one o theentities remain in e@istence. =he et assets o company # are

transerred to company . $ompany # ceases to [email protected] A 8 Company ; Company A

Acquisition 5 #oth companies continue to e@ist in a parent0subsidiary relationship. It may or may not ac3uire 1&&' share o thetarget company. I it ac3uires less than 1&& share o target

company! oncontrolling Interest or 4inority Interest are reported onthe consolidated fnancial statements.Company A 8 Company ; (Company A 8 Company

Conso$idation 5 new legal entity is ormed and none o thepredecessor entities cease to e@ist.

Company A 8 Company ; Company C

1pecia$ 2urpose entities 5 special purpose or variable interestentity is typically created or single purpose by sponsoring company.

=he e3uity investor may lack control and when control e?ectivelyremains with the sponsoring company


22/61

ACCO09TI9/ METFOD

?& 2oo$ing of Interest Accounting Method 7 8nder I-6,! pooling oineterest method! combines the ownership interest o two entities. =he

assets and liabilities o two entities are simply combines. ey attributeso pooling method includes the ollowing 7

=he two frms are combined using historical book value. (-airalue plays no role in accounting or a business combination)

Aperating results or prior periods are restated as though thetwo frms were always combined.

Awnership interest continue! and ormer accounting bases aremaintained.

>& In purchase or acquisition method ! the purchase is viewed aspurchase o net assets! and those of net assets recorded at fairva$ues. n increase in the value o depreciable assets resulted inadditional depreciation e@pense. s a result! or the same level orevenue! the purchase method resulted in lower reported income thenpooling o interests method.-air value o net assets ac3uired at the ac3uisition date is the

appropriate measurement or ac3uisitions. =he air value is usuallye3ual to consideration given by the ac3uiring frm. +irect costs o the


23/61

The maJor issues that arise in %usiness com%ination andpreparation on conso$idated #nancia$ statements are 7

1. 6ecognition and measurement oIdenti#a%$e assets andHia%i$ities7I-6s and 8, 9/ re3uire that the ac3uirer measure theIdentifable assets and %iabilities at 3AI4 *AH0E as on date ofacquisition&=he ac3uirer must also recognize any assets andliabilities that the ac3uiree has not previously recognized as assets

and liabilities.

2. 6ecognition and measurement o Contingent Hia%i$ities 5 I-6,include contingent liabilities i the -air alue can be reliablymeasured. 8, 9/ includes only those contingent liabilities thatare probable and can be reasonably estimated. $ontingent %iabilitiesis recognized i 1) it is a present obligation that arises rom pastevents 2) it can be measured reliably. $ost that the ac3uirer e@pects(but is not obliged) to incur are not recognized as liabilities as o theac3uisition date. Instead these cost are recognized when incurred.


24/61

". 6ecognition and measurement o Indemni#cation Assets

The se$$er in a %usiness com%ination may contractua$$yindemnify the acquirer for the outcome of a contingency oruncertainty re$ated to a$$ or part of a speci#c asset or$ia%i$ity& 3or e'amp$e- the se$$er may indemnify theacquirer against $osses a%ove a certain amount on a$ia%i$ity arising from a particu$ar contingency- such as $ega$

action or income ta' uncertainty& As a resu$t- the acquirero%tains an

indemni#cation asset& KI341 L

I-6, " re3uires the ac3uirer to recognise an indemnifcation asset at

the same time that it recognises the indemnifed item and that theindemnifcation asset be measured on the same basis as theindemnifed item! assuming that there is no

uncertainty over the recovery o the indemnifcation asset. =hereore!i the indemnifcation relates to an asset or liability that isrecognised at the ac3uisition date and that is measured at airvalue! the ac3uirer should recognise the indemnifcation asset at


25/61

:. 6ecognition and measurement o 3inancia$ Assets andHia%i$ities 7 c3uirer can reclassiy the fnancial assets on thebasis o contractual terms ! economic conditions! and the

ac3uirer>s operating or accounting policies and other pertinentconditions that e@ist on ac3uisition date.

. 6ecognition and measurement of /oodwi$$ 7 alue that theac3uirer sees in the ac3uiree beyond the -air value o ac3uiree>s

tangible and identifable intangible assets. 8nder I-6, 9oodwill isrecognized as the -air alue o the ac3uisition less than theacquirer"s share of the fair va$ue of a$$ identi#a%$etangi%$e and intangible assets! liabilities and contingentliabilities ac3uired. =his is reerred as /6=I% 9AA+MI%%. 8,9/ considers the entity as whole. 9oodwill is recognized as the

-air alue o the ac3uisition less than the fair va$ue of a$$identi#a%$e tangi%$e and intangible assets! liabilities andcontingent liabilities ac3uired. =his is reerred as -8%% 9AA+MI%%.I-6, also permits this 1&& ' goodwill under ull goodwill optionon a transaction by transaction basis. 9et income is note.ected %y whichever method we use for /oodwi$$& The

impact on ratios wou$d %e di.erent 4OA and 4OE in fu$$


26/61

@& Minority Interest or 9on Contro$$ing Interest ($I)$lassifed (same as per 8, 9/ + I-6,)on consolidated#alance ,heet as a separate component o stockholders 3uity.-or aluation I-6, and 8, 9/ di?er. I-6, the $I is valuedeither at - method (ull 9oodwill) or $I;s proportionate share oac3uirees identifable net assets (partial 9oodwill). 8nder 8,9/! the parent must use ull goodwill method and $I value$I at -air alue.

K. 6ecognition and measurement when Acquisition 2rice is $essthan the 3air *a$ue 7 In ac3uisition process i /urchase price isless than the - o targets net assets! the ac3uisition isconsidered to be %argain acquisition& egative 9oodwill is

generated. ny contingent consideration must be measured andrecognized at - at the time o business combination. nysubse3uent changes in the value o contingent considerations arerecognized in proft and loss account. s per both 8, 9/ andI-6, any di?erence between - o the net assets ac3uired andpurchase price is recognized immediately as gain in proft or loss.

Goodwill


27/61

Missi$e partia$ goodwi$$

Identifable net assets 0 air value 2!1K&

on0controlling interest

("&' @ 2!1K&)(


28/61

0E1TIO9


29/61

1o$ution


30/61


31/61


32/61


33/61


34/61


35/61

0E1TIO9 3ran)$in oo)*a$ue

Ne.eresonoo) *a$ue

Ne.ereson3air *a$ue

$ash and6eceivable

1&!&&& "&& "&&

Inventory 12!&&& 1!K&& "!&&&//N (et) 2K!&&& 2!&& :!&&

:C!&&& :!&& K!F&&

$urrent /ayables F!&&&

et ssets 2!&&& 1!C&& !:&&

,hareholder 3uity;

$apital stock (1par)

!&&& :&&

dditional paid incapital

6etained arnings 1:!&&& F&&

-ranklin co ac3uired 1&&'o outstanding shares o Ee?erson by issuing1!&&&!&&& shares o 1D (1 D 4arket alue). ,how the #alances in postcombination method 8nder c3uisition 4ethod.


36/61

3air *a$ue of stoc) issued ?-===-===#ook alue o Ee?erson>s etssets

1!C&&!&&&

E'cess 2urchase 2rice ?


37/61

3ran)$in Conso$idated a$ance 1heet "===

$ash and 6eceivable 1&!"&&

Inventory 1!&&&

//N (et) "1!&&

9oodwill C!dditional /aid in capital 2&!&&&

6etained arnings 1:!&&&

Tota$ 1toc)ho$ders" Equity G=-===Tota$ Hia%i$ities and 1toc)ho$ders" Equity @@-G==


38/61

0E1TIO9 parent oo)*a$ue

1u%sidiaryoo) *a$ue

1u%sidiary3air *a$ue

$ash and

6eceivable

:&!&&& 1!&&& 1!&&&

Inventory 12!&&& F&!&&& F&!&&&

//N (et) 2"!&&& C!&&& 1!&&&

G==-=== ?B=-=== >-=-===

$urrent /ayables !&&& 2&!&&& 2&!&&&

%ong term +ebt 12&!&&& K&!&&& K&!&&&

?-=== B=-=== B=-===

9et Assets >->-=== ?-==-=== ?@=-===

,hareholder 3uity;

$apital stock (1par)

FK!&&& ":!&&&

6etained arnings 1"F!&&&


39/61

3u$$ /oodwi$$Method

2artia$ /oodwi$$Method

$ash and 6eceivable !&&& !&&&

Inventory 2&!&&& 2&!&&&

//N (et) "C&!&&& "C&!&&&

9oodwill :&!&&& "

Tota$ Assets @B=-=== @@-===

$urrent /ayables K!&&& K!&&&

%ong term +ebt 1C&!&&& 1C&!&&&Tota$ Hia%i$ities >@-=== >@-===

1hareho$der Equity 5

on $ontrolling Interests 2&!&&& 1

$apital stock 2?-===

Tota$ Hia%i$ities and1hareho$ders Equity

@B=-=== @@-===


40/61

Noint *entures are de#ned di.erent$y in 01 /AA2 and I341& I341identify the fo$$owing common characteristics of Noint *enture (?contractua$ agreement e'ists %etween two or more venturers and

> the contractua$ agreement esta%$ished the Joint contro$& The


41/61

8nder 8, 9/ the term Boint venture reers only to Bointly controlledseparate entity in which business activities are conducted . corporate

E is a corporation that is owned and operated by 2 or more venturers asa separate and specifc business or the mutual beneft o venturers. /#re3uires use o H8I=O 4=*A+ to account or E>s. /roportionateconsolidation s not generally permitted e@cept or unincorporatedentities operating in certain industries./roportionate consolidation re3uires ventures share o assets and

liabilities! income and e@penses o E to combine line by line! in contrastwith e3uity method results in single line item (3uity income o E) onincome statement and single line item (investment in E) on the balancesheet.TFE TOTAH I9COME 4ECO/9I1ED I1 IDE9TICAH 09DE4 T+OMETFOD1& AH1O TFE TOTAH 9ET A11ET1 of the investor is

IDE9TICAH 09DE4 OTF METFOD1. =here can be signifcantdi?erences! however! in ratio analysis because o di?erent e?ects onvalues o =otal assets! liabilities! sales! e@penses.


42/61


43/61


44/61


45/61

Equity Method 2roportionateConso$idation

Method

Acquisition Method

%everage %ower (more-avorable) P %iabilitiesare lower and e3uityis the same

In 0 between *igher

et /roft 4argin *igher P ,ales arelower and et Incomeis the same

In 0 between %ower

6A *igher P 3uity islower and et Incomeis the same

,ame %ower

6A *igher P et Incomeis the same andassets are lower

In 0 between %ower

E33ECT O94ATIO1


46/61

0E1TIO9An "1st4arch 2&&2! ,un company was merged into 4oon $ompany. sper the condition ! 4oon $ompany issued :!&&!&&& shares o itscommon stock o 6s 1& each when its market value was 6s 1F per

share in e@change o ll outstanding shares o ,un %td. =he stockholdere3uity section in the balance sheet o these companies immediatelybeore the merger was as ollows 7

I the merger 3ualifes or treatment as a purchase than on "1st4arch2&&2! what amount should be reported in consolidated balance sheet

as the value o additional paid in capitalQ

Moon 1un

$ommon ,tock

6etained arnings &!&&&!&&& 1K!&&!&&&

?-


47/61

0E1TIO9An 1stpril ! #ig company ac3uired small company by issuing2!&&!&&& shares o 6s 1& each in e@change o all outstanding shareso small company. =he business combination is accounted byollowing as a pooling o interest. An the same day the air value oeach common share o #ig company was 6, 1C. Ather inormation isas ollows 7

$alculate the amount o 9oodwill resulting rom #usinesscombinationQ

Carrying Amount 3air *a$ue

$ash :!F&!&&& :!F&!&&&

6eceivables !:&!&&& !:&!&&&

Inventory F!K&!&&& F!1&!&&&

// 2

%iabilities (1&!&!&&&) (1&!&!&&&)et ssets ":!&!&&& "


48/61

/urchase accounting is the most appropriate method or accounting abusiness combination. Mhich o the ollowing should be deducted in

determining the combined corporation>s net income or the currentperiodQ

Direct cost of acquisition /enera$e'penses re$ated

to acquisition

Oes o

# Oes Oes

$ o Oes

+ o o

0E1TIO9

0E1TIO9


49/61

0E1TIO9An 1stpril 2&&2,uraB and ,hekhar companies urnished theollowing balance sheet o their own 7

1he)har 1uraJ

$urrent ssets 1!:&!&&& :&!&&&

on $urrent ssets 1!F&!&&& F&!&&&

Tota$ Assets =-=== ?->=-===

$urrent %iabilities s 3uity 1!


50/61


51/61

0E1TIO9 A "&th , t b $ i d =


52/61

0E1TIO9 An "&th ,eptember run $ompany ac3uired =arun$ompany in e@change o its "!&&!&&& shares o 6s 2& each. =he airvalue o common stock issued is e3ual to the book value o =aruncompany>s net assets. #oth the companies continue to operate

separately and books o accounts are also kept separate. -ollowinginormation urnished by two companies

An "1st4arch 2&&1! some merchandize was valued at 6, "!&&!&&& withmark up o "&' in the inventory o =arun! ac3uired rom run on "1st4arch 2&&1..a) I the business combination is accounted under purchase accounting

method then in the 2&&&0&1 consolidated income statement! what isthe net income that should be reportedQ

b) I the business combination 3ualifes or treatment as a pooling o0

Arun Tarun

et Income

,i@ 4onths ended ,eptember "&! 2&&& 1!&&!&&& :!&!&&&

,i@ 4onths ended 4arch "1! 2&&1 1

Nu$y >- >=== 1C!&&!&&&

3e%ruary ?- >==?


53/61

201FDO+9 ACCO09TI9/


54/61

,$ 6e3uires /ush0+own

,$ re3uires push0down accountingor ,$ flings when the subsidiary Is substantially ully owned (CK')! and

*as substantially no public debt orpreerred stock

stablishes a new basis or theassets and liabilities

#ased on ac3uisition price


55/61

/ush down accounting is a method oaccounting in which the fnancialstatements o a subsidiary are presented

to reect the costs incurred by the parentcompany in buying the subsidiary insteado the subsidiarySs historical costs. =hepurchase costs o the parent company

are shown in the subsidiarySs statements.


56/61

2ushdown accounting wor)s $i)e this5

$ompany buys $ompany # and borrows to make the ac3uisition.

$ompany pays more than $ompany #>s book value or theollowing7

D1!&&& /roperty! plant and e3uipment and defnite lived intangiblesD && 9oodwill

Instead o making the entry or the air market value increments

(i.e. e@cluding book value) to $ompany >s books or the purchase!which (simplifed) would be00

+r //N D1!&&&+r 9oodwill D &&$r +ebt D1!&&

00$ompany makes the above entry in $ompany #>s legal entitybooks! instead o its own books.

=he entry being made in $ompany #>s books makes no di?erence tothe consolidated fnancial statements.


57/61


58/61

/ush0+own /rocedure

ssets and liabilities are revalued

9oodwill! i any! is recorded

6etained earnings (prior toac3uisition) are eliminated

/ush0down capital replaces retainedearnings Includes old retained earnings

ny adBustments to assets and liabilities!including goodwill


59/61

/ush0+own @ample

/aly buys C&' o ,im. ,imSs book and airvalues are7

I ,im applies push0down accounting! it wouldrevalue its inventories! f@ed assets! liabilities!and record goodwill.

# - # -

$ash %iabilities 2 "&

Inventory 1& 1 $apital stock1&&

/lantassets

2&&

"&& 6etained earnings C&

9oodwill & & =otal 21

=otal21

"K&

,im 8ses /arent $ompany


60/61

,im 8ses /arent $ompany=heory

,im revalues assets and liabilitiesonly to the e@tent o /alySsownership. Anly C&' o the

increases5decreases are recorded.Inventory :./lant assets C&.&

9oodwill :.&

6etained earnings C&.&%iabilities :.

/ush0downcapital 22.&


61/61

,im 8ses ntity =heory

,im ully revalues assets andliabilities. 1&&' o theincreases5decreases are recorded.Inventory

/lant assets 1&&

9oodwill &

6etained earnings C&

%iabilities /ush0downcapital 2:&

ppt-7 (intercorporate investments)

Documents