Intercorporate Investments

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Intercorporate Investments
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Intercorporate Investments

• Marketable securities
• less than 20 ownership
• Equity method
• 20-50 ownership
• Consolidation
• 50-100 ownership

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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

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• 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

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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

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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

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• 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

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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

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• 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

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Equity Method Accounting

• For active investments of 20-50
• At acquisition, treat like any other purchase
• Equity Investments 100
• Cash 100

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

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

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Majority Ownership

• Fold the other company into the consolidated
  entity
• Add their financials to the rest of the groups
• 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

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Acquisition Example

• Assume you acquire another company
• Mkt. Book
• Value Value
• Identifiable Assets 120M 80M
• Goodwill 20M
• Liabilities - 40M - 40M
• Shareholders Equity 100M 40M

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Purchase Accounting

• Now required in US, common outside US
• Ident. Assets (AR, Inv., PPE) 120M
• Goodwill (plug) 20M
• Liab. (AP, L-T Debt, etc.) 40M
• Cash 100M

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• Acquiring gt50 and lt 100 creates minority
  interest
• liability in US, SH equity in some countries
• E.g., acquiring 90
• Ident. Assets (AR, Inv., PPE) 120M
• Goodwill (plug) 20M
• Liab. (AP, L-T Debt, etc.) 40M
• Cash 90M
• Minority Interest (Liab) 10M

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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., PPE) 80M
• Liab. (AP, L-T Debt, etc.) 40M
• Common stock APIC 40M

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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