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
• 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
• 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
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
Marketable Sec.
37.0
37.0
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)
Mktable Sec--TS (B/S-A)
2.0
2.0
• 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
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)
Mktable. Sec.--SAS (B/S-A)
2.0
2.0
• 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
Equity Method Accounting
• For “active” investments of 20%-50%
• At acquisition, treat like any other purchase
Equity Investments
Cash
100
100
• When company earns money, increase
investment by your share of their earnings
Equity Investments
Equity Income
5
5
• When they pay dividends, reduce
investment by dividend
Cash
Equity Investments
1
1
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
Acquisition Example
• Assume you acquire another company:
Mkt.
Book
Value
Value
Identifiable Assets
$120M
$80M
Goodwill
$20M
Liabilities
- $40M
- $40M
Shareholders’ Equity $100M
$40M
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
• 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)
Goodwill (plug)
Liab. (AP, L-T Debt, etc.)
Cash
Minority Interest (Liab)
$120M
$20M
$40M
$90M
$10M
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
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