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Intercorporate Investments

Intercorporate Investments. 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

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Intercorporate Investments

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  1. Intercorporate Investments

  2. Intercorporate Investments • Marketable securities • less than 20% ownership • Equity method • 20-50% ownership • Consolidation • 50-100% ownership

  3. 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

  4. 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

  5. Debt Held to Maturity • Only for debt you intend to hold to maturity • Measure based on historical value • Recognize interest as earned • At maturity Cash 37.0 Marketable Sec. 37.0

  6. 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 Unreal. Loss on TS (I/S-Loss) 2.0 Mktable Sec--TS (B/S-A) 2.0

  7. Recognize remaining gain or loss on sale Cash (B/S-A) 43.0 Mktable. Sec.--TS (B/S-A) 35.0 Realized Gain on TS (I/S-Gain) 8.0

  8. Securities available for sale • Not trading securities or debt held to mat. • Revalue securities to market • Record gains/losses in other equity account Unreal. Loss on SAS (B/S-SE) 2.0 Mktable. Sec.--SAS (B/S-A) 2.0

  9. 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

  10. Equity Method Accounting • For “active” investments of 20%-50% • At acquisition, treat like any other purchase Equity Investments 100 Cash 100

  11. When company earns money, increase investment by your share of their earnings Equity Investments 5 Equity Income 5

  12. When they pay dividends, reduce investment by dividend Cash 1 Equity Investments 1

  13. Majority Ownership • Fold the other company into the consolidated entity • Add their financials to the rest of the group’s • 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

  14. Acquisition Example • Assume you acquire another company: Mkt. Book ValueValue Identifiable Assets $120M $80M Goodwill $20M Liabilities - $40M- $40M Shareholders’ Equity $100M $40M

  15. 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

  16. Acquiring >50% and < 100% creates minority interest • liability in US, SH equity in some countries • E.g., acquiring 90% Ident. Assets (AR, Inv., PP&E) $120M Goodwill (plug) $20M Liab. (AP, L-T Debt, etc.) $40M Cash $90M Minority Interest (Liab) $10M

  17. Merger of Equals • Was called “pooling accounting” in US • Now prohibited • Allowed in limited contexts internationally • Stock deal for two firms of about equal size • Bring on book value of other firm Ident. Assets (AR, Inv., PP&E) $80M Liab. (AP, L-T Debt, etc.) $40M Common stock & APIC $40M

  18. Goodwill • Currently not amortized in US for accounting purposes • Tested for impairment annually • Outside of the US, goodwill is sometimes charged directly to equity • results in lower asset values and higher future earnings

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