The fine print about Intercorporate Investments

Here’s some easily testable stuff that people often miss. 1. GAAP allows Proportionate Consolidation for Joint Ventures only if the firm is an unincorporated venture in a specialised industry. 2. GAAP and IFRS allow Equity Method Balance Sheet reporting to be Fair Value. However, this is irrevocable, and IFRS only allows it for financial firms. In this case, dividends and unrealised g/l actually do pass through the Income Statement, which is unusual for Equity Method. 3. Reversal of impairment not allowed for Equity Method investments under GAAP and IFRS. 4. HTM and AFS securities are initially reported with transactions costs included. HFT do not have transaction costs included in their initial reporting. By the way, HTM securities can recognize an impairment by either creating an allowance for doubtful accounts or simply marking the asset down. HTM’s debt only, but I’m sure you already knew that. FOREX LOSSES for AFS securities wash through OCI in Equity, all except for debt securities under IFRS. They wash through the Income Statement. te to sett 5. Impairment on AFS debt can be reversed and the asset can be marked up on the BS, but for AFS equities, the impairment reversal is recognised as a gain on the income statement immediately. The asset stays at the previous impaired value. 6. In an acquisition, IFRS recognizes only liabilities for contingent considerations. GAAP recognizes liabilities as well as assets. These contingent considerations are recognized at their Fair Values only if they can be reliably measured. Subsequent changes in value are recognized in the Income Statement. For a financial guarantee, after initial recognition, record it at higher of best estimate to settle or amount initially recognized. 7. GAAP determines voting stock only with number of voting shares outstanding. IFRS considers that as well as those securities with potential voting rights, like warrants. 8. IFRS prohibits reclassification of securities into/out of Designated at Fair Value (which is just like an asset that would be classed as AFS, but treated like HFT). IFRS severely restricts reclassification into/out of HTM securities, allowing it once every 2 years. GAAP allows it once, and then you can’t do it again. GAAP does, however, allow reclassification of investments in financial associates, as long as it’s done at fair value. IFRS allows reclassifying an HFT security into AFS as long as unrealised g/l are recognised in the Income Statement. 9. In an acquisition, restructuring costs are expenses. However, in-process R&D is capitalized at its FV. 10. I can’t figure out the effective interest rate method. Anyone care to comment?


God Bless you David Young, may God Bless you

Dave, I became aware of several misconceptions on my part thanks to this post. Thank you.

good stuff, hard stuff too

If you had the urge to post something similar for pension accounting, I don’t think anyone would complain!