Intermediate_Accounting_Chapter17 - 1460T_c17.qxd 1/19/06...

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INVESTMENTS The Coca-Cola Company (Coke) owns 36 percent of the shares of Coca-Cola Enterprises (a U.S. bottling business); PepsiCo Inc. owns 46 percent of The Pepsi Bottling Group (PBG) and 41 percent of PepsiAmericas . These bottling businesses are very important to Coca-Cola and PepsiCo, because they are the primary distributors of Coke and Pepsi products. In return, these companies depend on Coca-Cola and PepsiCo to provide sig- nificant marketing and distribution development support. Indeed, it can be said that Coca- Cola and PepsiCo control the bottling companies, who would not exist without their support. However, because The Coca-Cola Company and PepsiCo own less than 50 percent of the shares in these companies, they do not prepare consolidated financial statements. Instead, Coca-Cola and PepsiCo account for these investments using the equity method . Under the equity method, for example, Coca-Cola reports a single income item for its profits from the bottlers, and only the net amount of its investment in the balance sheet. Equity-method accounting gives Coca-Cola and PepsiCo pristine balance sheets and income statements, by separating the assets and liabilities and the profit margins of these bottlers from its beverage-making business. What’s more, the International Accounting Stan- dards Board (IASB) has issued IAS No. 28 which requires that companies use the equity method. Previously, many international companies were permitted to use either the equity method or proportional consolidation for investments similar to Coke’s and Pepsi’s. It is good news that both U.S. and international companies are following the same rules. (On negative side, however, some of these companies should be consolidated but are not.) A final point: In response to a recent FASB interpretation, companies are now starting to consolidate more 20 to 50 percent–owned investments. Consolidation of entities, such as the Coke and Pepsi bottlers, may be required if the risks and rewards of those investments accrue primarily to Coke and Pepsi. 1 In fact, Coke has consolidated some of its bottling com- panies, which should result in the reporting of more complete information on these affiliated companies. Who’s in Control Here? Learning Objectives After studying this chapter, you should be able to: 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. 2 Understand the procedures for discount and premium amortization on bond investments. 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category. 4 Explain the equity method of accounting and compare it to the fair value method for equity securities. 5 Describe the disclosure requirements for investments in debt and equity securities.
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Intermediate_Accounting_Chapter17 - 1460T_c17.qxd 1/19/06...

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