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Investments in Equity Securities Overview of the course

Chapter 2. 2. Outline. Broad overview of accounting options when one company buys shares of another companyReview of 5 different types of investmentsHeld-for-tradingAvailable-for-saleSignificant influenceControlJoint venture. Chapter 2. 3. Learning Objectives. 2 main accounting methodologies

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Investments in Equity Securities Overview of the course

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    1. Chapter 2 1 Chapter 2 Investments in Equity Securities (Overview of the course)

    2. Chapter 2 2 Outline Broad overview of accounting options when one company buys shares of another company Review of 5 different types of investments Held-for-trading Available-for-sale Significant influence Control Joint venture

    3. Chapter 2 3 Learning Objectives 2 main accounting methodologies: Cost method Equity method Overview of purchase discrepancy and amortization of purchase discrepancy Overview of the concepts involved with differential reporting

    4. Chapter 2 4 The main question of the course How can a Canadian company report in its financial statements an investment in shares of another company?

    5. Chapter 2 5 5 types of share investments Held for trading Available for sale Significant influence Control Joint venture

    6. Chapter 2 6 Definitions Subsidiaries (Sec. 1590) If P controls S then P is the parent and S is the subsidiary Eg. Pepsi & Pizza Hut Control: exists if P has the continuing power to determine the strategic operating, investing, and financing policies of S without the cooperation of others (sec. 1590.03)

    7. Chapter 2 7 Definitions (subsidiary) Control is assumed if P owns more than 50% of the shares but there are also other considerations “Business combination” (sec 1581) is the technical term where one company aquires another company either through: Buying its assets directly Buying voting shares Accounting method = Consolidation Pooling used to be allowed but is no longer allowedPooling used to be allowed but is no longer allowed

    8. Chapter 2 8 Definitions- Investments (sec 3051) Significant Influence: An investment in another company which does not convey control and is not an investment in a joint venture but allows the investor to exercise significant influence over the strategic operating, investing, and financing policies of the investee Accounting method = Equity method

    9. Chapter 2 9 Definitions – Joint Ventures (sec 3055) Each venturer shares the power to determine the strategic operating, financing, and investing policies and no single venturer is able to unilaterally control the venture Accounting method: proportionate consolidation

    10. Chapter 2 10 Other handbook sections Pages 37 – 40 list various other handbook sections and definitions for which we will look at the details later in the course

    11. Chapter 2 11 Other Related Handbook Sections Section 1300: “Differential Reporting” Section 1530: “Comprehensive Income” Section 1581: “Business Combinations” Section 1600: “Consolidated Financial Statements” Section 1625: “Comprehensive Revaluation of Assets and Liabilities” Section 1650: “Foreign Currency Translation” Section 1701: “Segment Disclosures” Section 3062: “Goodwill and Other Intangible Assets”

    12. Chapter 2 12 Other Related Handbook Sections Section 3465: “Income Taxes” Section 3475: “Discontinued Operations” Section 3865: “Hedges” Accounting Guideline 15: “Consolidation of Variable Interest Entities” Related EIC Abstracts

    13. Chapter 2 13 Investments valued at Fair Value Investments held for trading: Current assets Investments that are actively traded and intended by mgmt to be sold within one year Reported at cost and revalued at FMV every reporting date Unrealized gains/losses reported in income

    14. Chapter 2 14 Investments at FMV Available-for-sale investments: Can be current or non-current assets, depending on mgmt’s intentions as to how long they want to hold them for Reported at cost and revalued to FMV every reporting period Unrealized gains/losses reported in “other comprehensive income” When investment is sold, unrealized gains/losses are removed from comp. income and realized gains/losses reported in regular income

    15. Chapter 2 15 Comprehensive income Sec 1530 is a new handbook sections which requires companies to differentiate between net income and comprehensive income Comp. income includes: Gains/losses on available-for-sale securities Gains/losses on derivatives designated as cash flow hedges Unrealized gains/losses on translating foreign financial statements Reporting of comp. income is not required for this course

    16. Chapter 2 16 Investments Not Valued at Fair Value Sections 3855 and 3051 cover two types of investments which will not be valued at fair value at each reporting date and describe two methods of accounting for them 1) Available-for-sale investments for which a quoted market price in an active market is not available - Accounting method is COST METHOD 2) Significant influence investments Accounting method is EQUITY METHOD

    17. Chapter 2 17 Investments Not Valued at Fair Value Available-for-sale With No Quoted Market Value – if a quoted market price in an active market is not available for available-for-sale investments, then these investments are reported using the cost method Dividends are recorded to dividend income account unless they are a liquidating dividend in which case the investment account is reduced (as in previous acct’g classes)

    18. Chapter 2 18 EXAMPLE Jan 1, year 1, Jensatar puchases 10% of the outstanding common shares of Safebuy at $95,000. Net income dividends Year 1 $100,000 $75,000 Year 2 $65,000 $75,000 Year 3 $30,000 $75,000

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