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8/6/2019 Chap012 gmg
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PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Investments
12
McGraw-Hill/IrwinCopyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
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U. S. GAAP vs. IFRS
U.S. GAAP also allowstransfers out of the tradingsecurity category.
Reclassifications underU.S.GAAP are rare.
Until recently, IFRS did not allow transfers out of theirfair value through profit and loss classification.
IAS No. 39 now allows transferof debt investments out of thefair value category into AFS or
HTM in rare circumstances. The current financial crisis
qualified as one of thosecircumstances.
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U. S. GAAP vs. IFRS
U.S. GAAP permitsclassification as HTM, AFS,and TS.
No significant tests arerequired to classify a debtinvestment.
There is no comparableFVTPL or FVTOCIclassification.
IFRS No. 9 eliminates the HTM andAFS classifications, replaced by newclassifications that are more restrictive. This has the general effect ofpushing more investments into being accounted for at Fair Value ThroughProfit & Loss (FVTPL), and thus having unrealized gains and lossesincluded in net income.
Investments in debt securities areclassified as either Amortized Costor FVTPL.
To be classified as a debt investment,
two important tests must be met. Thecurrent financial crisis qualified as oneof those circumstances.
Investments in equity securities areclassified as either FVTPL orFVTOCI (Fair Value through Other
Comprehensive Income).
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U. S. GAAP vs. IFRS
U.S. GAAP has no prohibitionagainst transfers betweencategories as long as they can
be reasonably justified.
Until recently, IFRS did not allow transfers out of the fair valuethrough P&L (FVTPL) classification (which is roughlyequivalent to the trading securities classification in U.S. GAAP).
In recent changes, IAS No. 39allows transfers of debtinvestments out of the FVTPL
category into AFS or HTM inrare circumstances,
The 2008, financial crisisqualifies as one of those rarecircumstances.
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U. S. GAAP vs. IFRS
IFRS, unlike U.S. GAAP,there is no equivalent torecognizing OCI any non-credit losses on debtinvestments.
UnderIAS No. 39, companies recognize OTT impairments if there existsobjective evidence of impairment. Objective evidence must relate to one ormore events occurring after initial recognition of the asset that affect thefuture cash flows that are going to be generated by the asset.
Calculation of the amount ofimpairment differs depending on theclassification of an investment.
Under IFRS, an OTT impairment for adebt investment is likely to be larger if
it is classified as AFS than if it isclassified as HTM, because itincludes the entire decline in fairvalue if classified as AFS but only thecredit loss if classified as HTM.
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Nature of Investments
Bonds andnotes
(Debtsecurities)
Common andpreferred stock
(Equitysecurities)
Investments can be accounted for in avariety of ways, depending on the natureof the investment relationship.
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Reporting Categories for Investments
Control Characteristics of the Investment Reporting Method Used by the Investor
The investor lacks significant influence over the
operating and financial policies of the investee:
Investment in debt securities for which the investor
has the "positive intent and ability" to hold to
maturity.
Held-to-maturity (HTM) - investment reported at
amortized cost.*
Investment held in an active trading account.
Trading securities (TS) - investment reported at fair
value with unrealized holding gains and losses included
in net income.
Other.
Securities available-for-sale (AFS) - investment
reported at fair value with unrealized holding gains and
losses excluded from net income and reported in other
comprehensive income.*
The investor has significant influence over the
operating and financial policies of the investee:Typically the investor owns between 20% and 50%
of the voting stock of the investee.
Equity method - investment cost adjusted for
subsequent earnings and dividends of the investee.*
The investor controls the investee:
The investor owns more than 50% of the voting
stock of the investee.
Consolidation - the financial statements of the investor
and investee are combined as if they are a single
company.
Reporting Categories for Investments
* If the investor elects the fair value option , this type of investment also can be accounted for using the same approach that's used for
trading securities, with the investment reported at fair value and unrealized holding gains and losses included in earnings.
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Fair Value Option
GAAP allows companies to use a fair value option for HTM, AFSGAAP allows companies to use a fair value option for HTM, AFSand equity method investments.and equity method investments.
The investment is carried at fair value.The investment is carried at fair value.Unrealized gains and losses are included in income.Unrealized gains and losses are included in income.
For HTM and AFS investments, this amounts to classifying theFor HTM and AFS investments, this amounts to classifying theinvestments as trading.investments as trading.
For equityFor equity--method investments, the investment is still classified onmethod investments, the investment is still classified onthe balance sheet with equity method investments, but the portion atthe balance sheet with equity method investments, but the portion at
fair value must be clearly indicated.fair value must be clearly indicated.
The fair value option is determined for each individual investment,The fair value option is determined for each individual investment,and is irrevocable.and is irrevocable.
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Other Investments Appendix 12A
It is often convenient for companies to set aside money tobe used for specific purposes. In the short-term, funds maybe set aside for
1. Petty cash funds.
2. Payroll accounts.
In the long-run, funds are often set aside to:
1. Pay long-term debt when it comes due.
2. Acquire treasury stock.
Special purpose funds set aside for the long-term areclassified as investments.
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Appendix 12A Other Investments
It is a common practice for companies to purchaselife insurance policies on key officers. The
company pays the premium and is the beneficiaryof the policy. If the officer dies, the company
receives the proceeds from the policy. Some typesof policies build a portion of each premium as cashsurrender value. The cash surrender value of such
a policy is classified as an investment on the
balance sheet of the company.
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Investor Lacks Significant InfluenceSection
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Investor Lacks Significant Influence
Reporting Approach
reatment of Unrealized
Holding Gains and Losses
Investment
Reported in the
Balance Sheet at
Held-to-maturity (H M): used for debt Not recognized Amortized Cost
that is planned to be held for it entire
life
Trading ( S): used for debt or equity Recognized in net income Fair Value
that is held in an active trading and therefore in retained
account for immediate resale or for earnings as part of
which the fair value option had been stockholders' equity
elected.
Available-for-sale (AFS): used for debt Recognized in other Fair Value
or equity that does not qualify as comprehensive income
held-to-maturity or trading. and therefore in
accumulated other
comprehensive income
in shareholders' equity
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Securities to Be Held to Maturity
Investments in bonds or other debt security that have aspecified maturity date. The bonds or other debt are initiallyrecorded at cost. The investor may have the positive intentand ability to hold the securities to maturity and classified
as held-to-maturity (HTM).They are reported on the balance sheet at amortized cost.
Amortized cost (Face amount less unamortized
discount, or plus unamortized premium).
Balance
Sheet
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Securities to Be Held to Maturity
On January 1, 2011, Matrix, Inc. purchased as an investment$1,000,000, of10%, 10-year bonds, interest paid semi-
annually. The market rate for similar bonds is 12%. Lets lookat calculation of the present value of the bond issue.
PresentAmount PV Factor Value
Interest $ 50,000 11.46992 = $573,496
Principal 1,000,000 0.31180 = 311,805Present value of bonds $885,301
PV of ordinary annuity of $1, n = 20, i = 6%
PVof $
1, n =
20, i = 6%
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Interest Interest Discount Unamortized Carrying
Date Payment Revenue Amortization Discount Value
1/1/11 114,699$ ,301$
6/30/11 50,000$ 53,118$ 3,118$ 111,581 888,419
12/31/11 50,000 53,305 3,305 108,276 891,724
6/30/12 50,000 53,503 3,503 104,772 895,228
12/31/12 50,000 53,714 3,714 101,059 898,941
Securities to Be Held to Maturity
Partial Bond Amortization Table
January 1, 2011Investment in bonds 1,000,000
Discount on bond investment 114,699Cash 885,301
June 30, 2011Cash (stated rate face amount) 50,000Discount on bond investment 3,118
Investment revenue 53,118
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Securities to Be Held to Maturity
June 30, 2011
Investment in bonds 1,000,000$
Less: Discount on bond investment 111,581
Book value (amortized cost) 888,419$
$114,699 - $3,118 = $111,581 unamortized discount
This investment would appear on theJune 30, 2011, as follows:
Unrealized holdinggains and losses are notrecognized for HTM investments.
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Interest Interest Discount Unamortized Carrying
Date Payment Revenue Amortization Discount Value
1/1/11 114,699$ 885,301$
6/30/11 50,000$ 53,118$ 3,118$ 111,581 888,419
12/31/11 50,000 53,305 3,305 108,276 891,724
6/30/12 50,000 53,503 3,503 104,772 895,228
12/31/12 50,000 53,714 3,714 101,059 898,941
Securities to Be Held to Maturity
On December 31,2011
, after interest is received byMatrix, all the bonds are sold for $900,000 cash.
December 31, 2011Cash 50,000
Discount on bond investment 3,305Investment revenue 53,305
December 31, 2011Cash 900,000Discount on bond investment 108,276
Investment in bonds 1,000,000Gain on sale of investment 8,276
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Trading Securities
Investments in debt or equity securities acquired principallyfor the purpose of selling them in the near term.Adjustments to fair value are recorded:
1. in a valuation account called Fair Value Adjustment, or
as a direct adjustment to the investment account.2. as a net unrealized holding gain/loss on the Income
Statement.
U
nrealized GainU
nrealized Loss
Income
Statement
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Trading Securities
Matrix, Inc. purchasedMatrix, Inc. purchased securitiessecurities classified as Tradingclassified as TradingSecurities (TS)Securities (TS) on December22, 2011.on December22, 2011. The fair valueThe fair value
amountsamounts for these securities onfor these securities on December 31,December 31, 2011, are2011, areshown below.shown below. Prepare the journal entries for Matrix, Inc. toPrepare the journal entries for Matrix, Inc. to
showing the purchase of the securities, and adjustshowing the purchase of the securities, and adjust thethesecurities to fair value atsecurities to fair value at 12/31/11.12/31/11.
12/31/11 Unrealized
No. of Unit Total Fair Gain or
T e Name Shares Cost Cost Value (Loss)
TS Mining, Inc 1,000 42.00$ 42,000$ 41,000$ (1,000)$TS Toys and Things 1,500 15.00 22,500 20,000 (2,500)
Totals 64,500$ 61,000$ (3,500)$
12/22/11
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Trading Securities
December 22, 2011Investment in Mining, Inc. stock 42,000Investment in Toys and Things stock 22,500
Cash 64,500
December 31, 2011Net unrealized holding gains and losses I/S 3,500
Fair value adjustment 3,500
Sec r C F r e Adjustment
Mining, nc 42,000$ 41,000$ (1,000)$
T s nd Th ings 22,500 20,000 (2,500)
T tal 64,500$ 61,000$ (3,500)$
Existing balancein fair alueadjustment -0-
Changeneededin fair alueadjustment (3,500)$
Reported on the balance sheet asa adjunct account to the investment.
The Net Unrealized Holding Loss is
reported on the Income Statement.
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Trading Securities
On January 3, 2012, Matrix sold all trading securities for$65,000 cash. Lets record the entry for the sale and the
adjustment to the fair value adjustment account.
January 3, 2012
Cash 65,000Investment in Mining, Inc. stock T/S 42,000Investment in Toys and Things stock T/S 22,500Gain on sale of investment 500
December 31, 2012
Fair value adjustment 3,500
Net unrealized holding gains or losses I/S 3,500
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Financial Statement Presentation
Trading securities are presented on the financialstatement as follows:
1. Income Statement and Comprehensive Income Statement:Fair value changes are included on the income statement in theperiods in which they occur, regardless of whether they are
realized or unrealized. Investments in trading securities do notaffect other comprehensive income.
2. Balance Sheet: Securities are reported at fair value, typically ascurrent assets, and do not affect accumulated othercomprehensive income in shareholders equity.
3. Cash Flow Statement: Cash flows from buying and sellingtrading securities typically are classified as operating activities,because the investor that hold trading securities consider them aspart of their normal operations.
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Financial Statement Presentation
Presented below are the partial financial statements showingthe accounting for TS owned by United:
In e State ent 2011 2012
Revenue $ $
Expenses
Other income (expenses):
Interest and dividend income 121, -0-
Realized and unrealized gains and losses on investments (16, ) 1,057
Total expenses
Net income
Balan e S eet
Assets:
Trading securities 3,154, 43 985,000
State ent of Cas Flows (dire t method)
Operating Activities:
Cash from investment revenue 117,000 -0-
Purchase of trading securities (3,166,633) -0-
Sale of trading securities -0- 2,141,000
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Securities Available-for-Sale
Investments in debt or equity securities that are not foractive trading and not to be held to maturity are classified asavailable-for-sale (AFS).Adjustments to fair value are recorded:
1. in a valuation account called fair value adjustment, or asa direct adjustment to the investment account.
2. as a net unrealized holding gain/loss in othercomprehensive income (OCI), which accumulates inaccumulated other comprehensive income (ACOI).
Unrealized Gain Unrealized Loss
Other Comprehensive
Income (OCI)
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Other Comprehensive Income (OCI)
Other comprehensive income:
Foreign currency translation gains (losses) $ XX,XXX
Net unrealized holding gains (losses) on investments -12,500
Minimum pension liability adjustment XXX
Deferred gains (losses) from derivatives XXX $ XX,XXX
Less: aggregate income tax expense (benefit) X,XXX
Other comprehensive income $ XX,XXX
When we add other comprehensive income to netincome we refer to the result as comprehensive income.
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Accumulated Other ComprehensiveIncome
Unrealized holding gains and losses on available-for-sale securities are accumulated in the
shareholders equity section of the balance sheet.
Specifically, the account is included in accumulatedother comprehensive income (AOCI).
Shareholders EquityCommon StockPaid-in Capital in Excess of par
Accumulated other comprehensive incomeRetained earningsTotal Shareholders Equity
Net unrealizedholding gains
and losses.
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Securities Available for Sale Example
Assume the same information for our T/Sexample for Matrix, Inc., except that the
investments are classified as available-for-salesecurities rather than trading securities.
Securi C s air Value A jus ent
Mining, Inc 42,000$ 41,000$ (1,000)$
T sand T ings 22,500 20,000 (2,500)
T tal 64,500$ 61,000$ ( ,500)$
E isting balance in fair value adjustment -0-
C ange needed ( ,500)$
December 31, 2011Net unrealized holding gains and losses OCIOCI 3,500
Fair value adjustment 3,500
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Financial Statement Presentation
AFS securities are presented on the financial statement asfollows:
1. Income Statement and Comprehensive Income Statement:Realizedgains and losses are shown in net income in the period in
which securities are sold. Unrealizedgains and losses are shownin OCI in the periods in which changes in fair value occur, andreclassified out of OCI in the periods in which securities are sold.
2. Balance Sheet: Investments in AFS securities are reported at fairvalue. Unrealizedgains and losses affect AOCI in shareholders
equity, and are reclassified out of AOCI in the periods in whichsecurities are sold.3. Cash Flow Statement: Cash flows from buying and selling AFS
securities typically are classified as investing activities.
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Financial Statement Presentation
Presented below are the partial income statement showingthe accounting for AFS ofUnited:
Incom tat m nt
Revenue $ $
Expen es
Other inc me (expenses):Interest anddividendinc me 121, -0-
Realizednet l ss on sale ofinvestments -0- (297)
Total expenses
Net income
Other comprehensive income (loss) items:
Unrealizedholdin gains (losses) oninvestments (16, ) (5,000)
Reclassificationadjustment for net gains (losses) -0- 6, 54
Total (16, 54) 1, 54
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Financial Statement Presentation
Finally, we have the partial balance sheet and statement ofcash flows for the company.
Balance Sheet 2011 2012
Assets:
Available-for-sale securities 3,154,943$ 985,000$Stockholders' equity:
Accumulated other comprehensive income (16,354) (15,000)
Statement of Cash Flows (direct method)
Operating Activities:
Cash from investgment revenue 117,000 -0-
Investing Activities:
Purchase of available-for-sale securities (3,166,633) -0-
Sale of available-for-sale securities -0- 2,171,000
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Financial Statement Presentationand Disclosure
AggregateFairValue
Maturities ofdebt securities
Change in netunrealized holdinggains and losses
Gross realized &unrealized holding
gains & losses
Amortized costbasis by majorsecurity type
Inputs to fairvalue estimates
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Impairment of Investments
Occasionally, anOccasionally, aninvestments value willinvestments value will
decline for reasonsdecline for reasons
that are other thanthat are other thantemporary (OTT).temporary (OTT).
Impairment
in Value
For HTM and AFS investments, a company recognizes an
OTT impairment loss in earnings. Determining an otherthan temporary decline for debt securities can be quitecomplex. For both equity and debt investments, after anOTT impairment is recognized, the ordinary treatment of
unrealized gains and losses is resumed.
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Appendix 12B Impairment of Investments
If the fair value of an investment declines to a level belowcost, and that decline is not viewed as temporary, companiestypically have to recognize an other-than-temporary (OTT)impairment loss in earnings.
We use a three-step process to determine whether an OTTimpairment loss must be recognized: (1) determine if theinvestment is impaired, (2) determine whether any
impairment is OTT, and (3) recognize any OTT impairment inthe financial statements.
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Appendix 12B Impairment of InvestmentsUnited Intergroup, Inc., buys and sells both debt and equity securities of
other companies as investments.Uniteds fiscal year-end is December 31.The following events during 2011 and 2012 pertain to the investmentportfolio. Purchase Investment: July 1, 2011, $1,000,000 of Bendaccommon stock. Adjust Investment to FairValue: December 31, 2011Valued the Bendac stock at $990,000 and determined that the decline in
FV should not be treated as an OTTimpairment. December 31, 2012Valued the Bendac stock at $985,000 and determined that the decline inFV should be treated as an OTT impairment The journal entries to recordthe adjustments of the Bendac stock investment to fair value are:
December 31, 2011Net unrealized holding gains and losses OCI 10,000
Fair value adjustment 10,000
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Appendix 12B Impairment of Investments
December 31, 2012Other-than-temporary impairment loss I/S 15,000
Investment in Bendac 15,000
Fair value adjustment 10,000Net unrealized holding gains and losses OCI 10,000
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Appendix 12B Impairment of Investments
United Intergroup, Inc., buys and sells both debt and equity securities ofother companies as investments, and classifies these investments as AFS.Uniteds fiscal year-end is December 31. The following events occurredduring 2012, Purchase Investment: July 1, 2012, $1,000,000 of Bendacbonds, maturing on December 31, 2017. Adjust Investment to FairValue: December 31, 2012, valued the Bendac bonds at $950,000. Of the
$50,000, impairment, $30,000 is credit loss and $20,000 is noncredit loss.Case 1: United either plans to sell the investment or believes it is morelikely than not that it will have to sell the investment before fair valuerecovers.Case 2: United does not intend to sell the investment and does not believe
it is more likely than not that it will have to sell the Bendac investmentbefore fair value recovers, but estimates that $30,000 of credit losses haveoccurred.
Lets look at the necessary journal entries in these two cases.
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Appendix 12B Impairment of Investments
December 31, 2012OTT impairment loss I/S 50,000
Discount on bond investment 50,000
Case 1
Case 2
December 31, 2012OTT impairment loss I/S 30,000
Discount on bond investment 30,000
OTT impairment loss - OCI 20,000Fair value adjustment Noncredit loss 20,000
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Investor HAS Significant Influence
Section
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Investor Has Significant Influence
ControlCharacteri ticsofthe Investment Reporting Method Used y the Investor
Theinvestorlacks significant influence overthe
operatingandfinancialpoliciesoftheinvestee:
Investment n ebtsecur ties f r hich theinvestor
hasthe ositiveintent and ability"to holdto
maturity.
Held-to-maturity (HTM) investment reported at
amortized cost.*
Investment heldin an activetrading account. Tradingsecurities(TS) investment reported at fair
value ith unrealized holdinggains andlossesincludedinnetincome.
Other. Securitiesavailable-for-sale( S)-investment
reported at fair value ith unrealized holdinggains
andlossesexcluded fromnetincome and reportedin
Other omprehensiveincome.*
Theinvestor has significant influence overthe
operatingandfinancialpoliciesoftheinvestee:
Typicallytheinvestor ownsbetween % and %
ofthevotingstockoftheinvestee.
Equity method-investmentcost adjusted for
subsequentearnings anddividendsoftheinvestee.*
Theinvestorcontrols theinvestee:
Theinvestor ownsmorethan % ofthevoting
stockoftheinvestee.
Consolidation-the financialstatementsofthe
investor andinvestee arecombined asifthey are a
singlecompany.
ReportingCategoriesfor Investments
*Iftheinvestor electsthe fair value option,thistypeofinvestment alsocanbe accounted for usingthesame approach that'sused for
tradingsecurities,with theinvestment reported at fair value andunrealized holdinggains andlossesincludedinearnings.
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Investor Has Significant InfluenceExtent o Investo Infl ence Repo ting etho
Lack of significant influence
usually < 20 e uity o ners ip)
Varies depending on classification
previously discussed
Significantinfl ence
( suall % - % equity ownership)Equity etho
Has control
usually > 50 e uity o ners ip) onsolidation
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What Is Significant Influence?
If an investor owns 20% of the voting stock of an investee, it ispresumed that the investor has significant influence over the financialand operating policies of the investee. The presumption can beovercome if :1. the investee challenges the investors ability to exercise significant
influence through litigation or other methods.
2. the investor surrenders significant shareholder rights in a signedagreement.
3. the investor is unable to acquire sufficient information about the
investee to apply the equity method.
4. the investor tries and fails to obtain representation on the board ofdirectors of the investee.
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A Single Entity Concept
Under the equity method . . .1. The investor recognizes investment income equal to its
percentage share (based on stock ownership) of the netincome earned by the investee rather than the portion of
that net income received as cash dividends.
2. Initially, the investment is recorded at cost. The carryingamount of this investment subsequently is:a) Increased by the investors percentage share of the
investees net income (or decreased by its share of aloss).
b) Decreased by dividends paid.
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Equity Method
On January 1,On January 1, 2011, Wilmer,2011, Wilmer, Inc. acquired 45% ofInc. acquired 45% ofthe equity securities of Apex, Inc. for $1,350,000.the equity securities of Apex, Inc. for $1,350,000.On the acquisition date, Apexs net assets had aOn the acquisition date, Apexs net assets had a
fair value of $3,000,000. Duringfair value of $3,000,000. During 2011,2011, ApexApex paidpaidcash dividendscash dividends of $150,000 and reported netof $150,000 and reported netincome of $1,750,000.income of $1,750,000.
What amount will Wilmer, Inc. report on the balance sheetas Investment in Apex, Inc. on December 31, 2011?
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Equity Method
3,000,000$ Fair value of net assets
45% Percentage ownership
1,350,000$ Fair value of assets purchased
January 1, 2011Investment in Apex, Inc. stock 1,350,000
Cash 1,350,000
1,750,000$ Reported earnings
45% Percentage ownership
787,500$ Share of earnings
2011
Investment in Apex, Inc. stock 787,500Investment revenue 787,500
2011
Cash 67,500Investment in Apex, Inc. stock 67,500
150,000$ Dividends paid
45% Percentage ownership
67,500$ Share of dividends
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Equity Method
Investment in Apex, Inc.
Investment 1,350,000 67,500 45% Dividends
45% Earnings 787,500
Reported amount 2,070,000
If the investee had a loss,the investment account
would have beenreduced.
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Equity Method
On January1,2011
, Wilmer, Inc. purchased25%
of thecommon stock of Apex, Inc. for $180,000. At the date ofacquisition, the book value of the net assets of Apex was$400,000, and the fair value of these assets is $600,000.During 2011, Apex paid cash dividends of $40,000, and
reported earnings of $100,000.
air value of assets 600,000$
ercentage ownership 25%
Share of fair value of assets 150,000ost of investment in Apex 180,000
Excess of cost over fair value 0,000$
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Equity Method
The excess of the fair value of net assets over book value ofthose net assets is 75% is attributable to depreciable assetswith a remaining life of20 years and 25% is attributable to
land. Wilmer uses the straight-line depreciation.
Fairval ofnetassets 600,000$
Bookval eofnetassets 400,000
ifference 200,000
Percentageofnetassetsacq ired 25%
Excess 50,000
mo ntattri tabletoland(25% orexcess 12,500mo ntattributabletodepreciableassets 7,500
emaininglifeofdepreciableassets 20 ears
dditionaldepreciationexpenseper ear 1, 75$
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Equity Method
40,000$ Dividends paid
25% Percentage ownership
10,000$ Share of dividends
100,000$ Reported earnings
25% Percentage ownership
25,000$ Share of earnings
January 1, 2011Investment in Apex stock 180,000Cash 180,000
2011
Cash 10,000
Investment in Apex stock 10,000
Investment in Apex stock 25,000Investment revenue 25,000
December 31,2011
Investment revenue 1,875Investment in Apex stock 1,875
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Changing From the Equity Method toAnother Method
At the transfer date,the carrying valueof the investment
under the equitymethod is regarded
as cost.
When the investors level of influence changes, itmay be necessary to change from the equity
method to another method.
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Changing From Another Method to theEquity Method
When the investors ownership level increases to thepoint where they can exert significant influence, the
investor should change to the equity method.
At the transfer date, the recorded value is the initialcost of the investment adjusted forthe investors
equity in the undistributed earnings of the investeesince the original investment.
eported earnings
ividends paid
Undistributed Earnings
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Changing From Another Method to theEquity Method
The original cost, the unrealized holdinggain or loss, and the valuation account
are closed.A retroactive change is recorded torecognize the investors share of the
investees earnings since the originalinvestment.
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Financial Instruments andInvestment Derivatives
Financial Instruments:Financial Instruments:
1.1. Cash.Cash.
2.2. Evidence of anEvidence of anownership interestownership interestinin
an entity.an entity.
3.3. Contracts meetingContracts meetingcertain conditions.certain conditions.
Investment Derivatives:Investment Derivatives:
1.1. Value is derived fromValue is derived fromother securities.other securities.
2.2. Derivatives are oftenDerivatives are oftenused to hedge (offset)used to hedge (offset)risks created by otherrisks created by otherinvestments orinvestments or
transactionstransactions