IM_CH_18 - Chapter 18: Intercorporate Equity Investments...

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Chapter 18: Intercorporate Equity Investments Instructor’s Manual 7 th edition Page 1 of 9 C HAPTER H IGHLIGHTS This chapter focuses on the general question of how to account for equity investments. Framed in this way, one can see how there is an extensive structure of finite uniformity and how this structure ties together the separate topics of equity versus fair value method for nonconsolidated equity investments, plus consolidation ). The overriding relevant circumstance has to do with “effective control” by the investor over the investee company. Exhibit 18-1 sets out the finite uniformity framework for equity investments. Of course the elimination of pooling and the elimination of goodwill but subject to impairment are the big issues in intercorporate equity investments. The question might be raised as to the “symmetry” of the fair value to equity method to consolidation . This may be a rather creaky finite uniformity approach. Hence, proportionate consolidation might provide a worthwhile rigid uniformity alternative. SFAS No. 94 has brought rigid uniformity to consolidation policy by requiring that all majority- owned equity investments be consolidated. ARB 51 allowed exemptions for heterogeneous subsidiaries and for foreign subsidiaries. A criticism of SFAS No. 94 is that it blindly presumes that consolidated accounting “fictions” are informative. In fact, it’s easy to think of situations in which they aren’t—for example, when there are no cross-guarantees of debt between a parent and subsidiary. Therefore, it is regrettable that the FASB did not wait until it thought through the reporting entity project before issuing SFAS No. 94. Foreign currency translation is traced from SFAS No. 8 to SFAS No. 52, showing how the conflicts between accounting exposure and economic exposure were reduced. Q UESTIONS Q-1 Are there relevant circumstance differences between purchase and pooling of interests? No, we do not believe so. Suffice it to say that relevant circumstances do not deal with how assets are acquired; they deal with potential uses thereafter.
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Chapter 18: Intercorporate Equity Investments Instructor’s Manual 7 th edition Page 2 of 9 Q-2 The logic of pooling rests heavily on the assumption that no substantive economic transaction occurs between the combinor and stockholders of the combinee. Evaluate this assumption. We suggest this is a weak argument. Clearly a transaction between the combinor and stockholders of the combinee has occurred. Q-3 Why may companies not be indifferent to purchase and pooling accounting, and what do we know about this issue from research studies? Pooling produces a better income statement because combinee assets aren’t written up and goodwill is not recognized. ROI is also higher due to a lower asset base in the combined balance sheet. The limited research has not shown that the use of pooling versus purchase accounting produces any gains via security prices. Q-4
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This note was uploaded on 02/12/2012 for the course ACCOUNTING 632 taught by Professor Johnlynch during the Fall '11 term at St. John's.

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IM_CH_18 - Chapter 18: Intercorporate Equity Investments...

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