Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
Stock Investment – Investor Accounting and
Reporting
Pertemuan 13-14
Levels of Influence
Percent Ownership of Voting Stock
• <20% – presumes lack of
significant influence – fair
value (cost) method
• 20% to 50% – presumes
significant influence – equity
method
• >50% – presumes control –
consolidated financial
statements
Bina Nusantara University
<20%
>50%
Consolidated
financial
statements
Fair value
(cost)
method
Equity
method
20-50%
3
Accounting for the Investment
Degree of
influence
Investment's carrying value
Investment income
Lack of
significant
influence
Fair value (cost, if
Dividends declared
Significant
influence
Original cost adjusted to
periodic earnings and
proportionate share of
assets
Proportionate
Consolidated
investee's periodic
financial
statements
Equity
method
* If income were measured as dividends declared, by influencing or controlling
dividend decisions, the investor could manipulate its own investment income.
Bina Nusantara University
4
Fair Value (Cost) Method
FASB Statement No. 115
• At acquisition: Pilzner buys 2,000 shares of Sud
for $100,000.
Investment in Sud
Cash
100,000
100,000
• Pilzner receives $4,000 in dividends from Sud.
Cash
Dividend income
Bina Nusantara University
4,000
4,000
5
Fair Value Method, at Year-end
• Reduce dividend income recognized, if needed
Dividend income
1,000
Investment in Sud
1,000
If Pilzner determines that cumulative dividends exceed its
$1,000.
• Adjust investment to fair value
Allowance to adjust available-forfair value
Other comprehensive income
21,000
21,000
If fair value of increases to $120,000 and the Investment in
$99,000.
Bina Nusantara University
6
Equity Method
APB Opinion No. 18
• At acquisition: Pilzner buys 2,000 shares of Sud
for $100,000.
Investment in Sud
Cash
100,000
100,000
• Pilzner receives $4,000 in dividends from Sud.
Cash
Investment in Sud
Bina Nusantara University
4,000
4,000
7
Equity Method at Year End
• Pilzner determines that its share of Sud's income
is $5,000.
Cash
Investment in Sud
4,000
4,000
• The ending balance in the Investment in Sud is:
$100,000 cost - $4,000 dividends + $5,000 income
= $101,000.
Bina Nusantara University
8
Significant Influence
•
•
20% to 50% voting stock ownership is a
presumption of significant influence. Use the
equity method.
Don't use equity method if there is a lack of
significant influence
1.
2.
3.
4.
5.
Opposition by investee,
Surrender of significant shareholder rights,
Concentration of majority ownership,
Lack of information for equity method, and
Failure to obtain board representation.
Bina Nusantara University
9
Control
•
•
More than 50% voting stock ownership is
presumptive evidence of control. Prepare
consolidated financial statements.
Don't consolidate
–
–
if control is temporary or
if the parent lacks control
1. Legal reorganization or bankruptcy
2. Severe foreign restrictions.
Bina Nusantara University
10
Applying the Equity Method
Acquisition Cost > FV net assets
FV net assets > BV net assets
Payne acquires 30% of Sloan for $5,000. Sloan's identifiable net assets (assets less liabilities) are:
Fair value: A – L = $18,800 - $2,800 = $16,000.
Book value: A – L = E = $15,000 - $3,000 = $12,000
The $4,000 difference ($16,000 - $12,000) is due to:
•
$1,000 undervalued inventories sold this year,
•
$200 overvalued other current assets used this year,
•
$3,000 undervalued equipment with a life of 20 years, and
•
$200 overvalued notes payable due in 5 years.
$5,000 > 30%(16,000) > 30%(12,000)
$5,000 > $4,800 > $3,600
Bina Nusantara University
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Acquisition of Sloan Stock
At acquisition, Payne pays $2,000 cash and issues common
stock with a fair value of $3,000 and par value of $2,000.
Payne also pays $50 to register the securities and $100 in
consulting fees.
Investment in Sloan
5,000
Cash
2,000
Common stock, at par
2,000
Additional paid in capital
1,000
Additional paid in capital
Investment expense
Cash
Bina Nusantara University
50
100
150
12
Cost/Book Value Assignment
Cost of acquisition
Less 30% book value = 30%(12,000)
Excess of cost over book value
Assigned to:
Inventories 30%(+1,000)
Other curr. assets 30%(-200)
$5,000
3,600
$1,400
Amount Amortization
$300 1st year
(60) 1st year
Equipment 30%(+3,000)
900 20 years
Note payable 30%(+200)
60 5 years
Goodwill (to balance)
Total
Bina Nusantara University
200 None
$1,400
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Dividends and Income
Payne receives $300 dividends from Sloan.
Cash
Investment in Sloan
300
300
Sloan reports net income of $900.
Payne will recognize its share (30%) of Sloan's
income, but will adjust it for amortization of the
differences between book and fair values.
Bina Nusantara University
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Amortization and Investment Income
Initial
amount
1st year
amort.
Unamortized
end
$300
($300)
$0
Other curr. Assets
(60)
60
0
Equipment
900
(45)
855
60
(12)
48
200
0
200
$1,400
($297)
$1,103
Cost/book value
Inventories
Note payable
Goodwill
Total
Investment income is 30% of Sloan's net income – amortization
Bina Nusantara University
30%($3,000) – $297 = $603.
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Year-end Entry & Balance
Record the investment income
Investment in Sloan
603
Income from Sloan
603
The ending balance in the investment account is:
Cost – dividends + investment income
5,000 – 300 + 603
= 5,303.
Bina Nusantara University
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More on Cost/Book Value Assignment
• On acquisition date, compare:
– Cost of acquisition,
– Book value of net assets, and
– Fair value of identifiable net assets
• Cost of the investment includes cash paid, fair value
of securities issued, and debt assumed.
• The book value of the investee's net assets
= assets – liabilities, or
= stockholders' equity
Bina Nusantara University
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Fair Values Used in Assignment
• Identifiable net assets include all the investee's assets
and liabilities, whether recorded or not
– Fair value of research in progress
– Fair value of contingent liabilities
– Fair value of unrecorded patents
• Exception: use book value for pensions and
deferred taxes.
• If cost > fair value, goodwill exists.
• If cost < fair value, a bargain purchase exists.
Bina Nusantara University
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Bargain Purchase
When the acquisition cost is less than the fair value of
the identifiable net assets, a gain is recognized on the
acquisition.
The investment is recorded at the fair value of the
identifiable net assets
Investment in ABC
xxx
Cash, CS, APIC
xxx
Gain on bargain purchase
xxx
Bina Nusantara University
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Interim Acquisitions
Book value of net assets = BV equity.
If equity is given as beginning of year, add current
earnings and deduct dividends to date.
Amortization for first, partial, year:
– Take full amortization for inventory and other current
assets disposed of by year-end.
– Take partial year's amortization for equipment, buildings,
and debt to be written off over multiple years.
Record dividends if after the acquisition date.
Bina Nusantara University
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Acquisition in Stages
• Also called a step-by-step acquisition.
• Fair value (cost) method
equity method
– Retroactive adjustment
• Investee's growth in retained earnings is
– Excess of income over dividends declared
• Investment account desired balance using equity
method = original cost + share of growth in
retained earnings – amortization, if any
Investment in XYZ
Retained earnings
Bina Nusantara University
xxx
xxx
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Sale of Equity Investment
• Sale of investment that results in a lack of significant
influence over the investee
• Equity method
fair value (cost) method
– Prospective treatment
• For the sale
– Reduce the investment account for a proportionate share of
the stock sold
– Record a gain or loss on the sale
• Apply the fair value (cost) method to remaining
investment
Bina Nusantara University
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Stock Purchased from Investee
If stock is purchased from old shareholders, the
percentage ownership is based on the shares
outstanding and the investee's equity is not
changed.
• If acquired directly from the investee:
• Percentage acquired = shares acquired / (shares
acquired + previously outstanding shares)
• Investee's new stockholders' equity = Previous equity
+ value received for new shares
Bina Nusantara University
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Investee with Preferred Stock
• Compare cost of acquisition to the book value of the
common stock.
= Total equity – book value of preferred stock*
* BV of PS = call value + dividends in arrears
• Dividends received will be a portion of the dividends to
common shareholders
= total dividends – current PS dividends
• Investment income is based on income available to common
shareholders
= investee net income – PS dividends**
** Pref. Div. = current dividend if cumulative, or dividends
declared if noncumulative.
Bina Nusantara University
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Special Reporting Issues
• If material, the investor continues separate reporting
of extraordinary items and/or discontinued operations
of the investee
– Income from Investee is based on income before
discontinued operations or extraordinary items
• Optionally, the investor may report its equity
investments at fair market value, FASB Statement
Nos. 159 and 157
Bina Nusantara University
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Disclosures
• For significant equity investees
– Name, percent ownership
– Accounting policy
– Difference between investment carrying value and underlying
equity in net assets
– Aggregate market value
– Summarized asset, liability, operations
• Related party disclosures FASB Statement No. 57
Bina Nusantara University
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Impairment of Goodwill
•
•
1.
Test annually, and if significant events occur (e.g.,
adverse legal factors or loss of key personnel)
FASB Statement No. 142: Two step process
If the fair value of the whole reporting unit < the carrying
value of the reporting unit including its goodwill, there
might be impairment.
–
–
2.
If no implied impairment, step 2 is not needed.
Use quoted market prices of reporting unit, or valuation
techniques applied to similar groups of assets and
liabilities.
If the implied fair value of the goodwill < the carrying
value of the goodwill, record an impairment loss for the
difference.
Bina Nusantara University
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Impairment of Equity Investments
• Goodwill implied in equity investments is not tested
for impairment.
• The investment itself is tested for impairment.
• APB Opinion No. 18
Bina Nusantara University
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