Struggling with FRA

I am having a really hard time getting through this topic. In particular, intercorporate investments has stopped my momentum in its tracks. It is so boring, I can’t stay awake and focused as it goes on and on and on. Any advice to help me through it?

Elan video.

Yes, the impairments and reclassifications rules in Inter-corporate investments are a real pain. What helped me get pass them was to make a flowchart (some people use mindmaps and tree diagrams which are similar to flowcharts, just the presentation style is different).

The methods (Equity and Acquisition) are quite interesting but they are at the end of the chapter. I am making 2 little summaries if you are struggling with them

Equity Method : aka One line consolidation. On Income Statement , the Parent reports EARNINGS rather than DIVIDENDS as in the case of investment in financial assets. You don’t report dividends in income statement under Equity methods because that would lead to double counting.

On Balance Sheet , there is an investment account created which would represent the investor’s proportionate share in the investee’s NET ASSETS at book value, once the premium paid (price in excess of book value) is fully amortized.

The premium (price in excess of book value of net assets of investee) is distributed into two portions. One portion is allocated to the difference between (the fair value and book value) of investee’s assets and whatever remains is termed as Goodwill.

Cashflow statement: Earnings reported by Investor is a non-cash item. Dividends are a cash item.

Goodwill under Equity method: cannot be separately tested for impairment because it is included in the investment account on the balance sheet. So the whole Equity investment is tested for impairment.

Consolidation Method: You consolidate the books of the parent (at book value) and subsidiary (at fair values) except for the Shareholder’s Equity of the subsidiary. A minority interest account is created whenever you own less than 100% of the subsidiary.

You could think of the minority interest account as the “stuff that you do not own” aka “it’s not your’s”. For example, you and your friend buy a watch for $100, you pay $70 and he pays $30. You would report $100 of equity on your books but since you do not own the $30 worth of watch, you report it as a minority interest account.

Proportionate Consolidation method: No minority interest account is reported here because you just report your proportionate share.

Impact on ratios: Ratios are most favorable under Equity method because you just report investment account on Balance Sheet. Under consolidation methods, you report all Assets and Liabilities of the subsidiary and hence your return ratios such as NI margin and ROA are lower because Denominator is higher.

I hope this somewhat helps.

^ nice

iamMichael - I did, and I love Olinto, but four hours on the study session is more than I can handle. And I still find myself lost after twenty minutes.

Finkid - AWESOME. Thank you!