FRA Intercorporate Investments

CFA Level II
#1

Is amortization of excess purchase price subtracted from both:

  1. Calculation of NI

  2. Calculation of Investment value

#2

Only calculation of inv Val. NI to reflect proportionate share of NI of investee without any adjustments.

#3

Sorry I couldn’t understand. So we subtract amortization and dividends only from the calculation of Investment value?

NI will not be adjusted for amortization or dividend?

In Example 6 in the book, amortization is being subtracted from the calculation of net income. Why is that so?

#4

Technically it flows through both the investment value and the share of equity income, but I wouldn’t try and memorize where it shows up. It seems better to understand how each of the accounts relate to each other.

Equity income = % share of the subsidiary’s net income - % share of any amortization of excess purchase price - % share in inter-company unrealized profits + inter-company realized gross profits (that were previously unrealized)

Investment value = Beginning investment value + equity income - % share in dividends

As you can see, you subtract excess amortization of purchase price from only equity income, but ultimately that flows to the investment value as well.

#5

Hang on, for % share of any amortization of excess purchase price, doesn’t this just show up in GW? What’s the mechanics of the amortization?

#6

Yes, affects your equity income, see blue box example 5 in CFAI curriculum.

#7

Thanks, and on a related topic, when accounting for partial goodwill, how does show up on acquirer’s balance sheet? Is it included part of the investment in associates as a single line item?

#8

Goodwill is a separate line item on the acquirer’s balance sheet.

With consolidation, there is no single line item “investment in associates” as both companies financial statements are consolidated.

#9

Guys as far as I know, in the income statement we only account for the share of NI. The amortization is substracted once we want to find the investment value in the balance sheet

#10

In fact, I was also thinking the same.way till.yday, but then I checked back and found tht, we need to subtract both, amortization of excess price and any unrealised profit to arrive at equity income.to.be reported.

#11

Yes. As far as I know, there has to be a double effect otherwise the books won’t tally.

So your purchase price (which is on the debit side) will get subtracted - credit effect

And that amount you’ll show as a non operating expense by subtracting it from Net Income - debit effect

#12

thank you

#13

This is my understanding-

Income Statement-

Share of investee’s Net income/earnings

(-) share of excess of FV over BV depreciation/amortization

(-) share of profits not yet realized i.e. still in A-T pocket

Balance Sheet

Initial investment

(+) Share of investee’s Net income/earnings

(-) share of investee’s dividends

(-) share of excess of FV over BV depreciation/amortization