Session 1 — Introduction & Equity Method of Accounting

1. Session 1 — Introduction & Equity Method of Accounting • Course Introduction • Syllabus • Use of Notes—outline only • Equity Method of Accounting • Investment Methods • Equity Method Basics • Equity Method Options • Fair Value Reporting Option • Elimination of Unrealized Profit in Inventory Advanced Accounting-2012

2. Investment Methods • See Table on page 6 • Less than 20% • Lack of influence • Fair value or cost • Between 20% and 50% • Significant influence • Fair value or equity method • More than 50% • Control • Consolidation Advanced Accounting-2012

3. Equity Method Basics • Record at cost • Increase investment for share of income or loss • Decrease investment for dividends received • Consider the investment account a mirror of the investee’s equity account Advanced Accounting-2012

4. Equity Method Options • Changes to the equity method • Initial entry as prior period adjustment to R/E • Unrealized mark-to-market account eliminated as well • Investee income and loss from sources other than continuing operations • Individual reporting in unique categories, but not as a “separately reported item” • Investee losses • Normal treatment until zero balance is reached, then OBS Advanced Accounting-2012

5. Excess of Investment over Book Value • Important concept in terms of future consolidation accounting • Value excess and identify accounts • Amortize to equity income in investee and the investment account Advanced Accounting-2012

6. Fair Value Reporting Option • ASC Topic 825 • Irrevocable election when equity method is first an option • Applies to investments under 50% • Direct income statement impact • Companies lose “available for sale” treatment in OCI Advanced Accounting-2012