class 1 slides final

class 1 slides final - Fall 2010 Advanced Financial...

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1 Fall 2010 Advanced Financial Accounting RSM 321 Class 1 Business Combinations
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2 Objectives These lecture notes are not meant to be a substitute for the pre-assigned readings or problems. They merely highlight the points we will cover. In each lecture, we will address the how, why, and so what of each topic. How means how to prepare the numbers, why means why does this follow from first principles/theory, and so what means why should users care if we do it that way (i.e. what is the potential user/use impact.) This is mainly a “how” course, but you will be rewarded on the exams for the underlying “whys” and “so whats”.)
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 3 Equity Investments: The Big Picture Companies invest in the shares of other companies: Strategic investments: intending to maintain a long- term relationship, and Non-strategic investments: held for trading (FVTPL) or available for sale (AFS) Strategic investments Non-strategic investments Significant influence Fair value through profit and loss (FVTPL) Control Available-for- sale (AFS) Joint control - Market value available - -Market value not available
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 4 Equity Investments: The Big Picture Reporting methods for investments in equity securities Type Reporting method Reporting unrealized gains Significant influence Equity method Not applicable Control Full consolidation Not applicable Joint control Proportionate consol- idation or equity Not applicable FVTPL Fair value method In net income Available-for-sale - FMV available - FMV not available - Fair value method - Cost method - In OCI (elaboration to follow in these slides) - Not applicable
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 5 Equity Investments: The Big Picture Reporting methods for investments in equity securities Starting January 1, 2013 IFRS 9 requires all nonstrategic investments to be reported at fair value including private companies which do not have a quoted market value. IFRS is developing a standard for fair value measurement. Until then, IAS 39 applies and its requirements for non-strategic investments are explained later in these lecture notes. For the midterm or final, you are not responsible for IFRS 9.
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 6 Equity Investments: The Big Picture Directly related IFRSs IFRS Description IAS 27 – Consolidated and Separate Financial Statements If J Company controls K Company then J is the “parent” and must consolidate K the “subsidiary” by replacing J’s investment in K with the assets and liabilities from K’s balance sheet. Control exists if J has the power to direct the activities of K to generate returns for J.
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 7 IFRS Description IAS 28 – Investments in Associates An associate is an investee over which the investor exercises significant influence and is reported using the equity method. Significant influence allows the
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class 1 slides final - Fall 2010 Advanced Financial...

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