Hi Friends,
While doing some assessments, I came across one question. Suppose Company A invest 20% in Company B for $140 Million. Net Book Value of Assets of Company B is $500M. Unrecoded identifiable intangible asset with life of 10 years is $60M.
Now there are two questions in Vignette. To calculate earning attriubutable to Company A for its 20% holding in Company B under two options - Equity Method and Fair Value Option.
Now while going through Scheweser, I found that if you not going for Fair Value Option under USGAAP, you just need to add 20% of Net Income to your Income Statement. Ignoring inter-company transactions.
And if you go for Fair Value Option, any increase in base of assets (which in this case, is $60M of unrecorded identifitable intangible asset), the proportionate expense from this increase in base value should be reduced from your income while calculating net earnings from Company B.
But when I go through the answers, they have made adjustment of this unrecoded identifiable asset under Equity Method (non-fair value) and under Fair Value, they have calculated the difference between closing stock price to opening price and added dividend income to it.
I am not able to figure it out why they are doing all this. Under Equity Method (unless mentioned clearly that Firm will adopt Fair Value Option), why the answers show adjustment of intangible asset under Equity Method and if the investment is an Associate Investment, the Fair Value method should be adopted as Net Income - %expense allocated to investor for intangible asset amortization (ignoring intercompany transaction).