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Lecture21 Spring 2009

Lecture21 Spring 2009 - Lecture21 Spring2009 Goals of...

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Lecture 21 Spring 2009 Inter-corporate Investments
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Goals of Today’s Class Accounting for investments in other firms Debt investments Equity investments Financial disclosures: Deere Co.
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WHY CORPORATIONS INVEST Reason Typical Investment To house excess cash until needed Low-risk, high-liquidity, short-term securities such as government- issued securities To generate earnings Debt securities (banks and other financial institutions); and stock securities (mutual funds and pension funds) To meet strategic goals Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter
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Investments Important times in accounting and reporting: 1) Valuation at acquisition 2) Valuation subsequent to acquisition as the securities are held by the investor 3) Recognition of income – accounting both for distributions receivable or received and for changes in the market value of the securities subsequent to acquisition.
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Accounting at Acquisition The accounting for inter-corporate investments is the same in all cases – the investment is recorded and reported at cost, at the fair value of what was paid to acquire the securities.
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ACCOUNTING GUIDELINES FOR STOCK INVESTMENTS Stock investments are investments in the capital stock of corporations. When a company holds stock or debt of various corporations, the group of securities is identified as an investment portfolio.
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Accounting After Acquisition The accounting for inter-corporate investments following acquisition depends upon, for debt securities, the intended/expected length of the investor’s holding period for the investment and, for equity securities, the nature and purpose for the investment. Investments in Debt Securities As we shall see, the post-acquisition accounting for debt securities (the valuation of the investment and the recognition of income from the investment) depends upon whether the investor’s intention is to hold the securities to maturity or not.
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Accounting After Acquisition Investments in Equity Securities The post-acquisition accounting for equity securities (the valuation of the investment and the recognition of income from the investment) depends upon: Control The accounting for equity securities differs depending upon whether the investment is passive or active . Passive investments are those investments in equity securities which do not enable the investor to exercise significant influence over the decisions and activities of the investee. Since an investor’s influence over an investee depends, significantly, on the proportion of voting stock it holds, one of the criteria to identify a passive investment is the magnitude of the investor’s interest in voting securities. A passive minority investment is generally considered to exist if the investor holds less than approximately 20% of the investee’s outstanding voting stock.
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