BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Why do we make investments?

Why do we have financial statements? Financial statements are the primary means of communicating financial information to parties outside the business organization. Balance Sheet Income Statement Stakeholders

Investments Strategic Investments Investment made with a long-term strategy in mind for the betterment of the Company Passive Investments Primarily made for financial gain directly from the investment.

Google CEO Larry Page: “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti- competitive threats from Microsoft, Apple and other companies.”

Level of Influence Little or None Significant Control Type of No Significant Significant Subsidiary Investment Influence Influence Accounting Fair Value Equity Consolidation; Method (AFS) Method Percentage Ownership 0%20%50%100% Equity Investments: Common Shares

Use the fair value method for investments.

Accounting for Available-for-Sale Investments (Passive Investment) The investor usually holds less than 20% of the voting shares and would normally play no important role in the investee’s operations. Available-for-sale investments are accounted for using the cost method.

Suppose ATCO Ltd. purchases 1,000 Agrium Inc. common shares at the market price of $ ATCO intends to hold these shares for longer than one year. Accounting for Available-for- Sale Investments

Long-term Investment50,000 Cash50,000 Purchased investment (1,000 × $50.00) Accounting for Available-for- Sale Investments

Assume that ATCO receives a $0.14 per share cash dividend on this investment. Remember they purchased 1,000 shares Accounting for Available-for- Sale Investments

Assume that ATCO receives a $0.14 per share cash dividend on this investment. Cash 140 Dividend Revenue140 Received cash dividend (1,000 × $0.14) Accounting for Available-for- Sale Investments

Value of an Investment Assume that the market value of the Agrium common Shares is $53,000 on December 31, Remember, currently recorded at a cost of $50,000

Value of an Investment Assume that the market value of the Agrium common Shares is $53,000 on December 31, Long-Term Investment3,000 Unrealized Gain on Investment3,000 Adjusted investment to market value ($53K - $50K)

10 - Selling an Available-for-Sale Investment Suppose ATCO sells its investment in Agrium Inc. shares for $57,000 during Remember: Purchased for $50K and FMV at last balance sheet date was $53K.

10 - Selling an Available-for-Sale Investment Suppose ATCO sells its investment in Agrium Inc. shares for $57,000 during Remember: Purchased for $50K and FMV at last balance sheet date was $53K. Cash57,000 Long-Term Investment 53,000 Gain on Sale of Investment 4,000

Use the equity method for investments.

Accounting for Equity Method Investments The equity method is used to account for investments in which the investor owns 20 to 50% of the investee’s voting shares and can significantly influence the decisions of the investee.

1.Includes investment as an asset account 1.Recognizes proportionate share of the investee’s operating income as their own income 1.Recognizes proportionate share of dividends paid Increases investment account Decreases investment account Equity Method

NPC Corporation paid $611 million for 32% of the common shares of Bruce Power in Ontario Accounting for Equity Method Investments

NPC Corporation paid $611 million for 32% of the common shares of Bruce Power in Ontario Long-Term Investment611 Cash611 Accounting for Equity Method Investments

Investor’s Percentage of Investee Income Bruce Power reports net income of $100 million for the year. Remember, NPC owns 32% and has significant influence in Bruce power.

Investor’s Percentage of Investee Income Bruce Power reports net income of $100 million for the year. Long-term Investment 32,000,000 Equity Investment Revenue32,000,000 To record investment revenue ($100 × 0.32=$32) Remember, NPC owns 32% and has significant influence in Bruce power.

Receiving Dividends Under the Equity Method Bruce Power declares and pays a cash dividend of $10 million. NPC receives 32% of this amount.

Receiving Dividends Under the Equity Method Bruce Power declares and pays a cash dividend of $10 million. Cash 3,200,000 Long-Term Investment3,200,000 To receive cash dividend on equity-method investment ($10 × 0.32) NPC receives 32% of this amount.

Investment Account Long-Term Investment Jan. 2Purchase 611 Dec. 31Net income 32 Dec. 31Balance 640 Dec. 31Dividends3 After the preceding entries are posted, NPC’s Investment account reflects its equity in the net assets of Bruce Power (in millions):

Understand consolidated financial statements.

Consolidated Subsidiaries Parent Company Subsidiary A 100% ownership Subsidiary B 85% ownership

Consolidated Subsidiaries Subsidiary Financial Statements _____ Consolidated Financial Statements _____ Parent Financial Statements _____

Income of a Consolidated Entity Net Income (Net loss) of Each Company Parent’s Ownership of Each Company Parent Company $330,000100% Subsidiary S-1 $150,000100% Subsidiary S-2 $(100,000)60%

Income of a Consolidated Entity Net Income (Net loss) of Each Company Parent’s Ownership of Each Company Parent’s Consolidate d Net Income (Net Loss) Parent Company $330,000x100%= $330,000 Subsidiary S-1 $150,000x100%= $150,000 Subsidiary S-2 $(100,000)x60%= $(60,000) Consolidated net income $420,000

Account for long-term investments in bonds.

Account for international operations.

Foreign Currencies and Exchange Rates The measure of one currency against another is called the foreign-currency exchange rate. Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency is called a translation. € £ $¥

Foreign Currencies and Exchange Rates Country Monetary Unit Canadian Dollar Value Hong Kong France Germany Italy Japan Mexico United Kingdom United States Dollar Euro (€) Yen (¥) Peso (P) Pound (£) Dollar ($) $

Managing Cash in International Transactions Hedging means to protect oneself from losing money in one transaction by engaging in counterbalancing transactions. Losses on the receipt of one currency may be offset by gains of the payment on another currency.