Chapter+9+Equity+Investments+and+PE+GAAP+Completed

Chapter+9+Equity+Investments+and+PE+GAAP+Completed - I II...

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I. Basic concepts and definitions II. Accounting for debt investments III. Accounting for equity investments IV. Private entity GAAP V. Impairment VI. Pre-2011 GAAP
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IASB recommendations (required after 2012, can be adopted early) * eg. if holding for strategic purposes, but don’t yet have SI Investor’s influence over the investee? (consider % of voting shares owned) INSIGNIFICANT (usually < 20%) Not strategic CONTROL (usually 50% or more) CONSOLIDATE YES NO FV-NI METHOD SIGNIFICANT (usually between 20% and 50%) Held for trading? NO Makes special election to use FV-OCI? * YES FV-OCI METHOD (without recycling) EQUITY METHOD
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1) What factors might determine if an investor has  “significant influence” over an investee? Significant Influence: The power to participate in the financial and operating policy  decisions of an entity But not control those policies “associate” = firm over which investor has significant influence  (“SI”) If investor owns 20% or more, assume SI unless circumstances  suggest otherwise.  It’s possible to own >20% and not have SI,  possible to own < 20% and have SI.
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1) What factors might determine if an investor has  “significant influence” over an investee? Does investor have representation on investee’s Board? Do investor and investee share management personnel? Are there other blocks of voting shares larger than investor’s? How material are intercompany transactions? Is investee technologically dependent on investor? If investee operates in a foreign country, foreign government may  restrict investor’s ability to influence investee.
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2) How should the investor account for: a) Dividends declared (paid) by investee? DR   Dividend receivable CR   Investment This is to prevent investor from manipulating  investment income by simply influencing investee  to declare more dividends.
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2) How should the investor account for: b) Gains or losses reported by investee? Record its % share of amounts reported by investee, using same  classification as investee (ordinary inc, discontinued operations, capital or  equity adjustment, etc.) DR Investment CR Investment Income (extraordinary gain, gain or discontinued operations) DR Income loss (extraordinary loss, loss on discontinued operations, OCI, RE, contributed  surplus) CR Investment
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2) How should the investor account for: c) Intercompany profits between investor and investee? Eliminate from investment income d) Excess of purchase price of investment over investor’s share of NBV of  investee’s net assets at acquisition date?
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