Cost vs Equity Method

Cost vs Equity Method - Acct 415/515 Prof Teresa Gordon...

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Acct 415/515 Prof. Teresa Gordon Accounting for Investments under FASB No. 115 – A Review For commercial enterprises (nonprofit entities follow SFAS No.124) Presentation on Financial Statements Change in Fair Value Temporary Other than Temporary Loss Does the investor have substantial influence or control? Investor owns 20% to 50% of stock and has significant influence but not control of the corporation Use Equity Method On BS at historical cost plus share of earnings since acquisition less dividends received (amortization may also be required) N/A Realized loss on IS, new basis on BS Investor owns over 50% of stock or otherwise controls the corporation Consolidation required Consolidated financial statements N/A N/A Does a readily determinable fair value exist? If not, use Cost Method On BS at historical cost N/A Realized loss on IS, new basis on BS For debt securities, does the enterprise have the positive intent and ability to hold to maturity? Classify as held-to-maturity On BS at amortized cost IS includes amortization of Disclose fair value in notes N/A Realized loss on IS, new cost basis on BS Is the investment objective to generate profits on short-term differences in price? Classify as Trading Securities On BS at fair value IS reports unrealized gain/loss for period Recognized on IS and included in RE No additional entries needed All other debt and equity securities are classified as Available-for-Sale Securities On BS at fair value SCI reports holding gain/loss for period Reported on SCI and included in AOCI Realized loss on IS, new cost basis on BS BS = balance sheet; IS = income statement; SCI = statement of comprehensive income; AOCI = accumulated other comprehensive income (owners’ equity account); FV = fair value; N/A = not applicable since investments are not carried at fair value 953aaa6af49c355be9f4d7aa033e0d0d29c8cb11.doc as of 3/7/11 Page 1
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Acct 415/515 Prof. Teresa Gordon Accounting for investment on parent’s books Cost Method versus Equity Method Cost Method The original cost of the investment is recorded on the parent’s books. No adjustments are made to reflect subsequent changes in fair value
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Cost vs Equity Method - Acct 415/515 Prof Teresa Gordon...

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