Professional Documents
Culture Documents
Stock
Investments
Investor
Accounting and
Reporting
2-2
Objectives (continued)
4. Identify factors beyond stock ownership
that affect an investor's ability to exert
influence or control over an investee.
5. Apply the equity method to stock
investments.
6. Learn how to test goodwill for impairment.
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1: LEVELS OF INFLUENCE
OR CONTROL
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Levels of Influence
Percent Ownership of Voting Stock
<20% presumes lack of
significant influence fair
value (cost) method
20% to 50% presumes
significant influence equity
method
>50% presumes control
consolidated financial
statements
>50%
<20%
Fair
value
(cost)
method
Consolidated
financial
statements
Equity
method
20-50%
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2: ACCOUNTING REFLECTS
ECONOMICS
2-6
Investment's carrying
value
Investment
income
Lack of
significant
influence
Dividends
declared
Significant
influence
Proportionate
share of investee's
periodic earnings*
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2-8
50,000
Cash (-A)
50,000
2,000
2,000
2-9
500
500
10,500
10,500
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2-11
Equity Method
At acquisition: Pal buys 2,000 shares of Sid for
$50,000.
Investment in Sid (+A)
50,000
Cash (-A)
50,000
2,000
2,000
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2,500
2,500
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4: ABILITY TO INFLUENCE
OR CONTROL
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Significant Influence
20% to 50% voting stock ownership is a
presumption of significant influence. Use the
equity method.
Don't use equity method if there is a lack of
significant influence.
Opposition by investee,
Surrender of significant shareholder rights,
Concentration of majority ownership,
Lack of information for equity method, and
Failure to obtain board representation
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Control
More than 50% voting stock ownership is
presumptive evidence of control. Prepare
consolidated financial statements.
Don't consolidate if the parent lacks control
Legal reorganization or bankruptcy
Severe foreign restrictions
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2-17
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5,000
Cash (-A)
2,000
2,000
1,000
50
100
150
2-20
$5,000
3,600
$1,400
Amount
Amortization
$300
1st year
(60)
1st year
900
20 years
60
200
5 years
None
$1,400
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300
300
2-22
Initial
amount
$300
($300)
$0
(60)
60
Equipment
900
(45)
855
60
(12)
48
200
200
$1,400
($297)
$1,103
Note payable
Goodwill
Total
2-23
603
603
2-24
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Bargain Purchase
When the acquisition cost is less than the fair
value of the identifiable net assets, a gain is
recognized on the acquisition.
The investment is recorded at the fair value of
the identifiable net assets
Investment in ABC
XXX
XXX
XXX
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Interim Acquisitions
Book value of net assets = BV equity.
If equity is given as beginning of year, add
current earnings and deduct dividends to date.
Amortization for first, partial, year:
Take full amortization for inventory and other
current assets disposed of by year-end.
Take partial year's amortization for equipment,
buildings, and debt to be written off over multiple
years.
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Acquisition in Stages
Also called a step-by-step acquisition.
Fair value (cost) method
equity method
Restate prior-period statements
XXX
XXX
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Disclosures
For significant equity investees
Name, percent ownership
Accounting policy
Difference between investment carrying value
and underlying equity in net assets
Aggregate market value
Summarized assets, liabilities, results of
operations
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6: GOODWILL
IMPAIRMENT
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Goodwill Impairment
Test annually, and if significant events occur, two-step
process [FASB ASC 350-20-35]
1. If the fair value of the whole reporting unit < the
carrying value of the reporting unit including its
goodwill, there might be impairment.
If no implied impairment, step 2 is not needed.
Use quoted market prices of reporting unit, or
valuation techniques applied to similar groups of
assets and liabilities.
2. If the implied fair value of the goodwill < the
carrying value of the goodwill, record an
impairment loss for the difference.
Pearson Education Limited 2015
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