Intercorporate Entities, i.e., consolidations, equity investments, partnerships

1
Intercorporate Entities, i.e., consolidations,
equity investments, partnerships

• Chapter 7

2
Acquisitions

• Purchase (old and new)
• Goodwill
• mark-to-market analogy
• Pooling
• Simply added BVs of assets and liabilities
• No reflection of MVs at purchase
• 12 criteria (p. 467)
• practice no longer allowed under GAAP

3
Equity Investments

• Majority gt gt 50
• control
• consolidated (Vs. acquired)
• Minority Active gt 20 to 50
• create an asset and adjust for share in NI and
  dividends
• Equity method
• Minority Passive gt lt 20
• mark to market
• Market value method

4
Comprehensive Income

• Stockholder Equity impact (SFAS 130)
• as compared with I/S impact
• Arises from
• hedging (foreign currency and other derivatives)
  (SFAS 133)
• pension reporting
• certain mark to market adjustments

5
Segment Reporting (SFAS 131)

• Reportable operating segments
• Geographic coverage
• Major customers
• Be able to identify unique risk in each

6
Segments, continued

• What is reported?
• Operating segments
• Sales
• Profit / Loss
• Assets
• Customers (if ? 10)
• Have to report sales
• Often named
• Geographic Segments
• Sales and fixed assets

7
Chapter 8

• Profitability
• ROA and ROE expanded

8
ROA, as a function of

• Operating Leverage
• i.e., fixed costs (committed and discretionary)
• Business Cycle
• Product Life Cycle

9
Leverage

• Earn a higher return than the cost of the
  investment
• Operating Leverage
• Reflects investment in fixed costs
• Measure as fixed costs (expense) as a percent of
  total expenses

10
Strategic Management

• Life cycle of a firm
• Introduction
• Growth
• Maturity
• Decline

11
Industry-Specific ROA Problems

• High Tech
• Airlines / Travel and Transport
• Service firms
• Retailers

12
Expand to ROCE

• ROCE ROA x CEL x CSL
• Reversion to the Mean