Mergers, Acquisitions, and Other Inter-corporate Investments

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Mergers, Acquisitions, and Other Inter-corporate
Investments
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Intercorporate Investments
Involvement Ownership Accounting treatment
Passive lt 20 Cost and Market value
Significant 20-50 Equity method
Joint venture Shared control Equity (GAAP) and proportionate consolidation (IAS)
Control gt 50 Consolidation
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Passive InvestmentsThe Cost and Market Method

• Use when recording the purchase of individual
  securities
• Ownership is generally less than 20
• Mark-to-market in aggregate
• Investment asset is adjusted periodically to
  reflect current market value of shares

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Passive InvestmentsThe Cost and Market Method

• Specific steps
• Record investment at cost, price paid
• Recognize dividend income when dividends are
  declared
• Recognize investment impairment on the income
  statement and adjust asset value
• Record gain/loss upon eventual stock sale

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Passive InvestmentsMarked-to-Market

• Done in aggregate on the balance sheet date
• Carrying amount of individual securities may not
  be adjusted
• For trading and available for sale securities

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Passive Investments Investment Classification

• Trading Securities
• intention is to sell in the near term
• Unrealized gains (losses) increase (decrease) the
  carrying value of the investment on the balance
  sheet
• Unrealized gains (losses) are recorded on the
  income statement

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Passive Investments Investment Classification

• Available-for-sale Securities
• No clear intention to sell in the near term
• Unrealized gains (losses) increase (decrease) the
  carrying amount of the investment
• Unrealized gains (losses) increase (decrease)
  equity
• Through the account other comprehensive income, a
  component of Equity

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Passive Investments Investment Classification

• Held-to-Maturity Investments
• Debt investments made with the intent and ability
  to hold to maturity
• Bonds purchased as an investment
• Do not recognize market changes

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Significant InfluenceThe Equity Method

• Used when ownership is between 20 and 50
• Used for joint ventures in the U.S.
• Investor records revenue or losses a share of
  the investees net income in proportion to its
  ownership percentage
• Concurrent adjustment is made to the investment
  asset

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Significant InfluenceThe Equity Method

• Carrying value of the investment asset on balance
  sheet is
• Recorded at cost initially
• Increased (decreased) for percentage of profits
  (losses) equal to percentage of ownership
• Decreased for dividends received

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The Equity Method

• Parent co. purchased 25 of shares in Baby Co. by
  paying 10.000YTL in cash at the end of 2005
• In 2006 Baby Co. reported 1.000YTL net income
  after taxes.
• In 2007 Baby Co. distributed 100YTL dividends in
  total
• Determine the amounts to be presented by Parent
  co. in its income statement and balance sheet for
  2005 and 2006 and 2007

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• Merger when two or more companies agree to
  combine
• Acquisition when one company purchases
  substantially all of the shares or net assets of
  another company
• Business a self-sustaining set of activities and
  assets conducted and managed for the purpose of
  providing a return to investors.

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Business CombinationsUS Standard International
Standards

• Must use purchase method
• Acquirer records (net) assets at fair market
  value, presumably the purchase price
• Goodwill results if purchase price gt FMV

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Purchase Method

• Purchase
• Identify the acquirer
• Determine the price paid
• Determine the fair value of assets and
  liabilities acquired
• Record goodwill

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ControlFull Consolidation

• Appropriate when investor has control over
  investees activities
• Control can be established by
• Majority ownership
• Representation on board of directors
• Control over managerial decision making
• Through contractual arrangements

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ControlFull Consolidation

• Investor includes 100 of investees assets,
  liabilities, revenues and expenses
• Amounts are grossed-up
• Share of assets and liabilities not owned
  minority share are shown separately
• Minority share of income is deducted in the
  income statement

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Shared Control Joint VenturesProportionate
ConsolidationThe International Standard

• Include proportion of investees assets,
  liabilities, revenues and expenses equal to
  percentage ownership
• Also include excess from original investment
• Excess is the difference between fair value and
  book value of underlying (net) assets