InvestmentsInOtherCorpAugust2008 - OLC Supplement Chapter...

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OLC Supplement – Chapter 14 Reporting and Interpreting Investments in Other Corporations L E A R N I N G O B J E C T I V E S After studying this chapter, you should be able to: 1. Analyze and report bond investments held to maturity. p. 4 2. Analyze and report passive investments in securities using the market value method. p. 6 3. Analyze and report investments involving significant influence using the equity method. p. 15 4. Analyze and report investments in controlling interests. p. 20 If you bought food items at Sobeys or watched a movie at Empire Theatres, you contributed to the net income of the Empire Company Limited ( ). Empire’s head office is in Stellarton, Nova Scotia, and its shares are traded on the Toronto Stock Exchange. Empire’s key businesses include food retailing, real estate, and media entertainment. Empire grew over time through its careful investment in the shares of other companies which have operations in three different industries. Its most recognizable business specialty is the retail food distribution under the banners Sobeys, IGA, Foodland and Price Chopper. Empire owns and operates more than 1,300 stores in all 10 provinces. F O C U S C O M P A N Y: Empire Company Limited INVESTMENT STRATEGIES AND DIVERSIFICATION Empire also operates 51 theatres with more than 370 screens, making it the second largest movie exhibitor in Canada. Less recognizable perhaps are Empire’s investments in the residential land development business, primarily in western Canada, and its ownership of various commercial properties held for redevelopment. Empire’s recent history of investments in shares of other companies includes acquisition of the remaining shares of Sobeys Inc. in June 2007 and the purchase in July 2007 of the supermarket chain Thrifty Foods Inc. which is based in British Columbia. Clearly, Empire’s strategy for profitable growth depends heavily on its investments in the shares of other profitable companies. UNDERSTANDING THE BUSINESS Many strategic factors motivate managers to invest in securities. A company that has extra cash and simply wants to earn a return on the idle funds can invest those funds in the shares and bonds issued by other companies, either long- or short-term. We say these investments are passive because the managers are not interested in influencing or controlling the other companies. Empire’s 2007 balance sheet, shown in Exhibit 14.1, does not reflect any short- term investments but does report two long-term Investments accounts. Sometimes a company decides to invest in another company with the purpose of influencing that company’s policies and activities. Empire’s balance sheet reports these types of investments as “Investments, at equity”. Finally, managers may determine that controlling another company, either by purchasing it directly or becoming the majority shareholder, is
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CHAPTER 14 Reporting and Interpreting Investments in Other Corporations 2 desirable. In this case, the two companies’ financial reports are combined into consolidated financial statements, as Empire has done (see the title to its “consolidated” balance sheet).
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This note was uploaded on 10/18/2011 for the course COMM 293 taught by Professor Jackes during the Spring '08 term at UBC.

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InvestmentsInOtherCorpAugust2008 - OLC Supplement Chapter...

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