SESSION 5INTERCORPORATE INVESTMENTS

& CONSOLIDATION

ADVANCEDFINANCIAL ACCOUNTING

SHORT-TERM INVESTMENTS

TEMPORARY INVESTMENT IN MARKETABLE SECURITIES (NOTES, BONDS OR STOCKS) THAT CAN BE SOLD EASILY

DEBT SECURITIES AND STOCK SECURITIES

EXPECTED TO BE CONVERTED INTO CASH WITHIN A YEAR

RECORDED AT ACQUISITION AT COST

FUTURE EVALUATION (1)

TRADING SECURITIES : THE INTENT TO SELL THEM QUICKLYCURRENT ASSETSMARKET VALUE (FAIR VALUE)IMPACT ON INCOME STATEMENT

EXAMPLE 1

ON OCTOBER, 1 PURCHASE OF 10 SHARES OF

COMPANY A AT € 130 & 10 SHARES OF COMPANY B AT € 80

ON DECEMBER 31 NOTHING SOLD THE MARKET PRICE OF A IS € 95 &

THAT OF B IS € 90

FUTURE VALUATION (2)

HELD TO MATURITY SECURITIES : DEBT SECURITIES WITH THE INTENT TO HOLD THEM UNTIL THEIR MATURE CURRENT OR NON-CURRENT ASSETSAT COST (CHANGES IN MARKET

VALUE ARE IGNORED)NO IMPACT ON INCOME STATEMENT

EXAMPLE 2

ON MARCH 31, 2000 PURCHASE OF 10 5% EDF BONDS AT €100

REIMBURSED AT PAR VALUE ON MARCH 31, 2003

ON JULY 1 PURCHASE OF 5 GOVERNMENT BONDS AT

€150 REIMBURSED AT 150 ON JUNE 30, 2001ON DECEMBER 31

MARKET VALUE OF EDF BONDS: 90 MARKET VALUE OF GOVERNMENT BONDS:

148

FUTURE VALUATION (3)

AVAILABLE-FOR-SALE SECURITIES = EQUITY SECURITIES + DEBT SECURITIES. NO INTENT TO SELL NOR KEEP MARKET VALUE NO IMPACT ON INCOME STATEMENT UNREALISED GAINS OR LOSSES SPECIAL ITEM IN

SHAREHOLDERS ’EQUITY

EXAMPLE 3(2 REVISITED)

ON OCTOBER, 1 PURCHASE OF 10 SHARES OF

COMPANY A AT € 130 & 10 SHARES OF COMPANY B AT € 80

ON DECEMBER 31 NOTHING SOLD THE MARKET PRICE OF A IS € 95 &

THAT OF B IS € 90

IAS 39 – FINANCIAL INSTRUMENTS

SUGGESTED CLASSIFICATION Trading securities, Held to maturity

securities, Available for sale securitiesTRADING SECURITIES

Fair value Income statement

HELD TO MATURITY SECURITIES Amortized cost

AVAILABLE FOR SALE SECURITIES Fair value Balance sheet

VALUATION METHODS FOR INTERCORPORATE INVESTMENTS

EQUITY SECURITIES = LONG-TERM INVESTMENTS IN MANY COMPANIES

ACCOUNTING METHOD DEPENDS ON THE RELATIONSHIP BETWEEN THE INVESTOR AND THE INVESTEE

HOW CAN THE INVESTOR INFLUENCE THE OPERATIONS OF THE INVESTEE ?

IF NO INFLUENCE THE MARKET METHOD

IF SIGNIFICANT INFLUENCE THE EQUITY METHOD

IF FULL CONTROL CONSOLIDATION

MARKET METHOD

ORIGINAL INVESTMENT = AT COST

PROFIT FOR THE INVESTEE = NO IMPACT

COLLECTION OF DIVIDENDS = CONSIDERED AS REVENUE

CHANGE IN VALUE = IMPACT ON INCOME STATEMENT

WHEN SOLD = IMPACT ON INCOME STATEMENT

EXAMPLE 4

A PARENT COMPANY BOUGHT 10% OF COMPANY A FOR 1,000 (JAN 1, 2000)

NO DIVIDEND COLLECTED IN 2000NET INCOME OF THE SUBSIDIARY IN

2000: 2,000DIVIDEND COLLECTED IN JUNE 2001:

120SOLD ON SEPTEMBER 30, 2001: 1,300MARKET VALUE ON DECEMBER 31,

2000: 1,050

EQUITY METHOD

ORIGINAL INVESTMENT = AT COST

PROFIT FOR THE INVESTEE = IMPACT ON INCOME STATEMENT

COLLECTION OF DIVIDENDS = NO IMPACT ON INCOME STATEMENT

CHANGE IN MARKET VALUE = NOT CONSIDERED

WHEN SOLD = IMPACT ON INCOME STATEMENT

EXAMPLE 5

ORIGINAL INVESTMENT IN 2000: 200 (25% OF A SUBSIDIARY)

TOTAL INCOME OF THE INVESTEE IN 2000: 120

DIVIDEND COLLECTED BY THE INVESTOR IN 2000: 10

MARKET VALUE ON DECEMBER 31, 2000: 300

CONSOLIDATED FINANCIAL STATEMENTS

WHICH STATEMENTS ARE USEFUL ?

Usefulness of company's statements is limited

Need for consolidated financial statements

PP

SS

PARENT COMPANY AND SUBSIDIARY

Whatever the % of participation of P in S, the 2 companie remain independant legal entities Each company publishes its own financial statements

PP

SS

CONSOLIDATION MECHANISM (1)

PARENT SUBSIDIARY CONSOLIDATED

Total 1,200

Total 1,600

Total 1,800 2,800

InvestIn S

1,000

CurrentAssets

200Currentliabilities

100

SH'sEquity1,100

Long-Lived

Assets1,200

CurrentAssets

400

SH'sEquity1,000

LTDebts400

Currentliabilities

200

Long-Lived

Assets1,200

SH'sEquity1,100

LTDebts400

Currentliabilities

300

CurrentAssets

600

CONSOLIDATION MECHANISM (2)

PARENT SUBSIDIARY CONSOLIDATED

COGS(outside)

850

OtherExpenses(outside)

550

Income200

SalesTo S500

SalesOutside1,000

Int Rev from S / 100

COGSfrom P

500

OtherExpenses(outside)

500

Income 100

Int Expens.to P / 100

SalesOutside1,000

COGS P(outside)

850

Sales P(outside)

1,000

Sales S(outside)

1,200

OtherExpenses P

(outside)550

OtherExpenses S

(outside)500

Income 300Total 1,600

Total 1,200

Total 2,200 2,800

MINORITY INTERESTS

MinorityInterests

500

MinorityInterests

500

InvestIn S

1.500

Cash700

SH'sEquity2.200 Assets

2.500

SH'sEquity2.000

Debts500

Assets2.500

SH'sEquity2.200

Debts500

Cash700

MINORITY INTERESTS

DEFINITIONBALANCE SHEET

CLASSIFIED BETWEEN SHAREHOLDERS’ EQUITY AND LIABILITIES

ARE MINORITY INTERESTS A LIABILITY OR A PART OF SHAREHOLDERS’ EQUITY ?

INCOME STATEMENT CLASSIFIED BEFORE NET INCOME ARE MINORITY INTERESTS AN EXPENSE

OR A PART OF INCOME ?

INTERCOMPANY ELIMINATIONS

OBJECTIVEBALANCE SHEET ITEMS

ACCOUNTS RECEIVABLE VS ACCOUNTS PAYABLE

CREDIT ACCOUNTS VS DEBIT ACCOUNTS INVESTMENT VS SHAREHOLDER’ EQUITY

INCOME STATEMENT ITEMS SALES VS PURCHASES INTEREST EXPENSE VS INTEREST REVENUE

GOODWILL

EXAMPLE P purchases 100 % of S for 100 million € Book value of S: 40 millions Fair value of identifiable tangible assets: 50

millions Fair value of identifiable intangible assets: 30

millions Non identifiable assets: 20 millions

MEANING OF GOODWILL Ability to attract customers, to make good

business and profitsACCOUNTING FOR GOODWILL

DEPRECIATION OF GOODWILL

IS GOODWILL DEPRECIABLE?US GAAP ANSWER

PAST ANSWER: NORMAL DEPRECIATION (AMORTIZATION, UP TO 40 YEARS)

PRESENT SITUATION: NO SYSTEMATIC AMORTIZATION ; POSSIBLE DEPRECIATION (IMPAIRMENT TEST)

IASB ANSWER PRESENT SITUATION: IMPAIRMENT TEST