320 Lesson 8a

320 Lesson 8a - Week9 Investingfor StrategicReasons PartII...

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Week9 Investing for Strategic Reasons Part II 1
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Invest for strategic reasons Buy into other companies to influence or control their activities Capture more market share Solidify a customer or supplier 2
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Up to 20% little or no influence maintain at FMV gain/loss in statement of earnings   OR elect for gain/loss in other comprehensive income buy to earn dividend revenue or to sell when profitable 3
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20% to 50% “power to participate in the financial and operating policy decisions of an entity, but not control over those policies” IAS 28 significant influence but no control representation on board of directors participation in decision-making process material intercompany transactions interchange of management personnel provision of technical information influence assumed – disclose if no influence use  equity method investment referred to as an  associate  (IAS 28) 4
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Greater than 50% control prepare  consolidated financial statements Parent Company statement of earnings balance sheet statement of changes   in equity statement of cash flows Subsidiary Company  +   statement of earnings  +   balance sheet  +   statement of changes    in equity  +   statement of cash flows   5
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Equity Method Record at cost plus acquisition expenses Subsequent to acquisition: treat investment as part of company by: increasing investment account by share of earnings decreasing investment account by dividends declared Investment in Grey Company Acquisition price Share of earnings Share of dividends 6
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Two complicating factors 1.  Price paid for the investment Book value of J. Bassell Company = shareholders’ equity = $500,000 Buy 30% of the company and pay $210,000        7
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Excess of purchase price over proportion of book value find fair value of all of J. Bassell’s Identifiable assets and  liabilities Book value Fair value
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320 Lesson 8a - Week9 Investingfor StrategicReasons PartII...

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