What are the 3 methods of accounting available to investors when acquiring equity securities?
- 1. Cost method or marketable securities
- -0-20% ownership
- -the implication is that no influence over the investee company exists
- -if the security isn't marketable, use the cost method.
- 2. Equity Method(one-line consolidation)
- -20-50% ownership
- -the implication is that the investor has significant voting influence over the investee.
- 3. Consolidation(Far-8)
- -the implication is that the investor has control over the investee.
- -members of the investor company constitute a majority of the board of directors of the investee.
What are the journal entries involved with the equity method?
For example, let's assume the investor paid $300 on 1/1/x1 to acquire 30% of the stock of the investee, at a time when the investee's net assets equaled 1,000 so that the original investment equaled the investor's 30% share of equity. In 20x1 the investee reported income of $400 and paid dividends totaling $100 to stockholders of record on 12/31/x1 with a payment date of 1/7/x2.
- The entries are as follows:
- Investment 300(1,000x.30)
- Cash 300
- 12/31/x1(share of income)
- Investment 120(400x.30)
- Equity in Investee 120
- 12/31/x1(to record the dividend)
- Dividends Recievable 30(100x.30)
- Investment 30
if any any depreciation of fmv assets then they would be depreciated over there lives. Also amortization and goodwill impairment go in this same entry.
- Equity in Investee Income x
- Investment x
When to use cost method or marketable securities method?
If a market value exists use the marketable securities method(trading, A4S, HTM securities)
If no market value exists then we use the cost method.
How do we determine whether there is goodwill or an increase in FMV of assets or a Gain?
When determining whether there is any of the above you need to look at the info like this.
- Purchase Price 1,000
- FMV of NA 900
BV of NA 800
- -so goodwill is diff between 1,000-900= 100
- -FMV write-up on assets is diff between 900-800= 100
- -A gain only arises if the FMV of NA is greater than purchase price.
what are the journal entries for the Cost Method?
- The acquisition of investment at cost:
- Investment x
- Cash x
- % of dividends income:
- Cash x
- Dividend income x
When looking at changes in ownership percentages between equity and cost method which uses the prospective approach and which uses the retroactive approach?
Equity to Cost method(ownership changes from 40% to 10%) use the cost method going forward prospective approach.
Cost to Equity method(ownership changes from 10% to 40%) use the retrospective approach. This will cause a prior period adjustment in R/E statement and act as if the securities have always been accounted for using the cost method.
- The prior period adjustment will be simply:
- Investment x
- R/E x
If the Fair Value Option(ASC 825) is elected how will this affect the value of the securities and how we account for them?
- If securities are valued at Fair value these changes happen:
- -for A4S securities, any unrealized gains or losses would be reported on the income statement rather than in Comprehensive Income.
- -for HTM securities, the company would no longer report the invesment at amortized cost. instead will be carried at FV at end of the period, and the resulting unrealized g/l would be reported in the Income Statement.
- -for the equity method, the securities at FV, any g/l is recorded in earnings for the period.
- -The rules of SFAS 95 remain in effect for classifying items on the statement of cash flows.
What does investments mean under IFRS?
The term investments refers to investments that are HFT, A4S, and HTM, as well as investments accounted for under the equity method and the investments that require consolidated financial statements.
how can a financial instrument be classified under IFRS?
- a financial instrument can be classified as either:
- -Fair Value Through Profit or Loss
- -Equity Method
If assets are classified as FVTPL how are they accounted for?
if an asset is classified as FVTPL, it is remeasured to fair value at the end of accounting period.
What are the differences in the Equity Method under IFRS as compared to GAAP?
Its recorded the same as GAAP except that there is no goodwill and the difference between the purchase price and FV of NA is not recorded until there are assets to apply the value too.