1. Intercorporate Investments

2. Marketable securities –less than 20% ownership Equity method –20-50% ownership Consolidation –50-100% ownership

3. 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

4. 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

5. Debt Held to Maturity Only for debt you intend to hold to maturity Measure based on historical value Recognize interest as earned At maturity Cash37.0 Marketable Sec.37.0

7. 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)2.0 Mktable Sec--TS (B/S-A)2.0

8. 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

9. 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)2.0 Mktable. Sec.--SAS (B/S-A)2.0

10. 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

11. Equity Method Accounting For “active” investments of 20%-50% At acquisition, treat like any other purchase Equity Investments100 Cash100

12. When company earns money, increase investment by your share of their earnings Equity Investments5 Equity Income5

13. When they pay dividends, reduce investment by dividend Cash1 Equity Investments1

14. 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

15. Acquisition Example Assume you acquire another company: Mkt.BookValue Identifiable Assets$120M$80M Goodwill$20M Liabilities - $40M - $40M Shareholders’ Equity$100M$40M

16. 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

17. 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) $120M Goodwill (plug) $20M Liab. (AP, L-T Debt, etc.) $40M Cash $90M Minority Interest (Liab) $10M

18. 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

19. 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