Intercoporate Investment

So I’m reviewing this again, and still can’t quite get it to click. For the equity method you are reporting the revenues and that is it everything else stays the same i.e. liabilities?

For the Prop. Consolidation method which is used for JVs which is used for IFRS, or Equity method for GAAP all BS and IS items are proportionately combined.

For acquisition method all of the items IS and BS are brought over and combined, correct?

Equity method is a single BS item and single IS item- no revenues, expenses, etc reported. You report your share of net income. It doesnt change regardless of whether it is a JV or not (for GAAP)

For IFRS, prop consolidation is fo JV’s only (while GAAP just uses equity method).

The single IS item being net income and the single BS item being…?

IS item is your proportionate share of the firms Net income. If you own 40%, you report 40% of their net income in your IS.

BS item is usually called “Investment in Associate”, and is considered a LT asset. If you purchase 40% of a firm with cash, for instance, for $1mm

Cash goes down by $1mm, “Investment in Associate” goes up by $1mm

At the next reporting date, say the next year, the firm you invested in reports $100k of net income. You own 40%, so would report $40k in Net income on your IS.

The value of your investment is on the BS at $1mm the net income you report raises the value of the investment by 40k to make it 1,040,000. . The offset is in Shareholders Equity for 40k.

If the firm you invested in reports dividends, the accounting is a little different. The dividends you report are treated as a return of capital. So, with 100k of net income and 60k in dividends, you still report 40k in net income. However, the value of the investment will be reduced. INvestment in associate goes up by the 40k of net income but is reduced by 40% * 60k in dividends (24k). End result is a net increase in the investment of 16k. Cash goes up by 24k in dividends, assets still go up by 40k total. Equity still goes up by 40k.

Ah thanks that makes a lot of sense.

I’m struggling with this goodwill problem from the CFAI EOC

I know the general rule of thumb is that equity method will have the highest NPM and highest current ratio. So I’m not looking for a generalization. However with this problem Company A is buying 50% of company B for 320 mm. I 'm trying to figure out how the full and partial goodwill would effect, since the equity method would eb the same.

Company A Company B

Cash 50 20

Receivables 70 45

Inv 130 75

Total CA 250 140

CL 110 90

Total Equity 1430 580

They said that using either full or partial current ratio would be 390/200 and I have no clue how they got it. !

Well, we’d need more info about the problem. What is the book value of Net assets vs FMV?

This may be case of control over sub, where you are forced to consolidate and report min interests. In this case, you will end up same current ratio in either cases. I think. Let people comment.

haven’t they just added together the current assets of both companies, and the current liabilities?

goodwill is a noncurrent asset so it wouldn’t affect the current ratio.

@misscleo: this vignette need to be read carefully. it states that the excess amount over fair value will be allocated to new assets => in this case, Goodwill doesn’t exist => so full or partial GW have same Equity :slight_smile:

NM - error on my part. Equity of B = 580, so 50% = 290. Company A is paying 320, and Apr mentions that the extra 30 is due to FMV of assets.

So, there is no goodwill (and regardless, as Kia said goodwill is a noncurrent asset)