Anything out of the ordinary, or just standard rules that apply to financial assets being held to mty, trading, sale?
I dont get the question
You don’t use the equity method if they don’t have significant control, despite having >20% interest. There is an example somewhere that gives a scenario where the firm’s shares are basically useless as they can never have any influence over decisions. No influence -> investment in securities.
Usually you want to use equity method of accounting when you have >20% ownership AND can exert significant influence. I have seen points mentioned however that a company can have say 19.5% ownership and be deemed to have significant influence and thus must use the equity method of accounting. I’ve never seen a question this way where you own 30% of a company and dont have significant influence. I think it would be practically impossible not to have significant influence over a publicly traded company if you have 30% of the shares…I would go equity method.
@OnToTheNextOne any chance you can provide a reference :S
Not to back up a 30% case. I was assuming the OP was just throwing a random number out there. I would have to believe that they would make it clear on the test as to whether or not the firm has control over the investment. In the real world you are likely right, but for the next 5 days I’m not living in the real world.
Yeap, if they say 30% and can’t determine significant influence, investment in securities, despite what may be practical real world sense.
They have to provide you with some type of description of the degree of influence. The question may not explicitly say that the company has influence, but it may mention board presence, contractual business relationships, technology arrangements, etc… and then you’ll have to go from there. If all else fails, I am going with common sense that 30% does indeed indicate significant influence.
Regarding Joint Ventures: Does the question have to specifically state that the investment is a joint venture? I’ve been burned on questions before where the question said that “Company X acquired 50% of Company A”. Following IFRS I naturally assumed Proportionate Consolidation. I would think that we have to be explicitly told it’s a joint venture right?
And if there’s no description as to the degree of influence…are you still assuming eqy method?
There would have to be some indication of control for it to be considered JV.
Yep Equity Method all day.
Use standard rules for investment in financial assets. I guess u got this one from the mock. In the question, it should be classified as available for sale.