Lecture notes S2 L 4 - 7/22/2011 1 Analyzing Investing...

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7/22/2011 1 1 Analyzing Investing Activities: Intercorporate Investments • Main References: – Subramanyam and Wild, Chapter 5 – Robinson, Greuning, Henry, Broihahn, ch 15 – CFA Program Curriculum II. 2 Key Concepts and objectives Companies often invest in marketable debt and securities in other companies Reasons such as, diversification, entry into international markets, growth and competitive opportunities lead companies to make investments in other companies The characteristics of each investment dictates how it is reported Differences in reporting standards for various intercompany investments make it difficult to analyse
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7/22/2011 2 3 Key Concepts and objectives The key objectives in analysing intercompany investments are as follows: – Evaluate the relevance of various types of intercorporate investments in financial analysis – Differentiate between return earned on marketable securities and the recognition of that return in financial statements – Analyse and interpret consolidated financial statements – Discuss the conditions under which the equity method or consolidation is required – Contrast the purchase method from the pooling method and evaluate the impact of each method on reported financial results – Identify the issues associated with special purpose entities (SPEs) or variable interest entities – Identify accounting distortions in analysing intercompany investments 4 Methods of investment Investment ( marketable) securities Purpose • Temporary repository of excess cash • Deploy idle cash in a productive way Types Debt Securities – Government or corporate debt securities Equity Securities – Common stock and preferred stock
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7/22/2011 3 5 Investment Securities • SFAS 115 departs from the traditional lower-of-cost- or-market principle. Prescribes that investment in securities be reported on the balance sheet at cost or fair (market) value, depending on the type of security and the degree of influence or control that the investor company has over the investee company. Characteristics of each investment dictates the appropriate accounting treatment. Accounting for Investment Securities 6 Investment Securities
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7/22/2011 4 7 Investment Securities 8 Investment Securities Classification and Accounting for Equity Securities
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7/22/2011 5 9 Analyzing Investment Securities • Two main objectives: (1) To separate operating performance from investing (and financing) performance; Analyst should: • Remove all gains (losses) relating to investing activities • Separate operating and nonoperating assets when determining return on net operating assets (RNOA) – Rule of thumb: all debt securities & marketable non influential equity securities are classified as investing activities • How about financial institutions? • How about non financial institutions (eg. General Electric and
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This note was uploaded on 08/27/2011 for the course CORPFIN 7827 taught by Professor Prokim during the Three '11 term at University of Adelaide.

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Lecture notes S2 L 4 - 7/22/2011 1 Analyzing Investing...

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