Module 7 - Module 7 Module 7 Reporting and Analyzing...

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Unformatted text preview: Module 7 Module 7 Reporting and Analyzing Intercorporate Investments Intercorporate Investments Intercorporate Investments Accounting Treatment and Accounting Treatment and Financial Statement Effects Operation activity 20­50% Passive Investments ­Market Method Passive Investments ­Market Method Initially record at purchase price (fair market value on purchase date) Are Changes in Asset Value During Are Changes in Asset Value During the Holding Period Income? During holding period, investment is recorded at current market value (“marked­ to­market”) Changes in the carrying amount of the investment (asset) has a corresponding effect on equity: Is the change in equity is income? The answer depends on the investment classification. Financial Statement Effects Financial Statement Effects Fair Value Adjustments Fair Value Adjustments During Holding Period Google’s Footnote Google’s Footnote Google’s Disclosure of Google’s Disclosure of Fair Value Gains and Losses Investments are reported on Cisco’s balance sheet at $21,044 million. Cisco’s Disclosure of Cisco’s Disclosure of Fair Value Gains and Losses Bond Investment Classifications Bond Investment Classifications Available­for­sale Trading Held­to­maturity Google’s Investments Reported at Cost Google’s Investments Reported at Cost Google uses historical cost to account for investments in non­marketable securities. Google monitors the value of these investments and writes them down to market value if they suffer a permanent decline in value. If such an investee company ever goes public, Google will change its accounting method. Equity Method Investments Equity Method Investments Investments are recorded at their purchase cost. Dividends received are treated as a recovery of the investment and, thus, reduce the investment balance (dividends are not reported as income). The investor reports income equal to its percentage share of the investee’s reported net income; The investment account is increased by the percentage share of the investee’s income or is decreased by the percentage share of any loss. Changes in fair value do not affect the investment’s carrying value. Equity Method Accounting Mechanics Equity Method Accounting Mechanics Google’s footnote on consolidated entities: Investments with Control — Investments with Control — Consolidation Accounting Consolidation accounting replaces the investment balance with the assets and liabilities to which it relates, and it replaces the equity income reported by the investor company with the sales and expenses of the investee company to which it relates. Consolidation Accounting Consolidation Accounting Consolidation of Less than Consolidation of Less than Wholly­Owned Subsidiaries Consolidation When Purchase Consolidation When Purchase Price Exceeds Book Value of Stockholders’ Equity CAT’s Consolidating Balance Sheet Acquired Intangible Assets Acquired Intangible Assets The purchase price is allocated to acquired identifiable intangible assets, which include the following: Marketing­related assets like trademarks and internet domain names Customer­related assets like customer lists, production backlog, and customer contracts Artistic­related assets like plays, books, and video Contract­based assets like licensing and royalty agreements, lease agreements, franchise agreements, and servicing contracts Technology­based assets like patents, computer software, databases and trade secrets P&G’s Allocation of Gillette Purchase P&G’s Allocation of Gillette Purchase Impairment of Goodwill Impairment of Goodwill The impairment test is a two­step process. First, if the market value of the investee company is less than the investment balance, the investment is deemed impaired. Second, the investor estimates the goodwill value as if the subsidiary were acquired at current market value, and the imputed balance for goodwill becomes the balance in the goodwill account. Goodwill Impairment Example Goodwill Impairment Example Assume that an investment currently reported on the investor's balance sheet in the amount of $1 million has a current fair market value of $900,000. Further assume that the fair market value of the net assets of the investee company is $700,000 and the current value of goodwill on the consolidated balance sheet is 300,000. This indicates an impairment loss of $100,000, which is computed as follows: FedEx’s Goodwill Write­Off FedEx’s Goodwill Write­Off Clear Channel Communications Clear Channel Communications Clear Channel’s equity method investment account increased by$600.6 million. Clear Channel recognized a corresponding $600.6 million increase in stockholders’ equity in two parts. 1. Clear Channel added $479.7 million to additional paid-in capital. 2. It recorded minority interest for $120.9 million, which represents the book value of the CCO shares that were sold to the public. Minority interest is the part of CCO not owned by Clear Channel. Limitations of Consolidated Limitations of Consolidated Financial Statements Consolidation income does not imply that cash is received by the parent company Comparisons across companies are often complicated by the mix of subsidiaries included in the financial statements Segment profitability can be affected by intercorporate transfer pricing and allocation of overhead Appendix 7A: Accounting for Appendix 7A: Accounting for Derivatives You are not responsible for Appendix 7A ...
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