Intercorporate Investments

INTERCORPORATE
INVESTMENTS
CFA - Level 2
INTERCORPORATE INVESTMENTS
Intercorporate investments include investments in the debt and equity

securities of other companies.
Reasons for investing in other companies:
• To achieve additional profitability.
• To enter new markets through companies established in those
areas.
• To diversify.
• To obtain competitive advantages.
The classification of intercorporate investments is based on the degree
of influence or control that the investor is able to exercise over the
investee.
Copyright © University of Finance and Economics, Mongolia.

CLASSIFYING INTERCORPORATE
INVESTMENTS
Held-To-Maturity
Available-For-Sale
Financial Assets
Intercorporate Investments
Fair value through profit or

loss
Associate
Loans and receivables
Business combinations
Joint venture

CLASSIFYING INTERCORPORATE
INVESTMENTS
Business In Joint
In Financial Assets In Associates
Combinations Ventures
Shared
Influence Not significant Significant Controlling
Control
Typical
Usually 20%-
percentag Usually < 20% Usually < 50% Varies
50%
e interest
Classified:
• Held-to-maturity
• Available-for-
Current IFRS: Equity
sale
Financial method or
• Fair value Equity method Consolidation
Reporting Proportionate
through profit or
Treatment consolidation
loss
• Loans and
receivables

ACCOUNTING FOR
INVESTMENTS IN FINANCIAL ASSETS
Type Intent
Held-to-maturity Has intent and ability to hold the

(for debt securities) debt until it matures.
Fair value through profit or loss:

Intends to sell in the near term (i.e.,
• Held-for-trading
held for trading) or has otherwise
• Designated as fair value
elected fair value accounting.
through profit or loss
Does not intend to sell in the near

Available-for-sale term, elect fair value accounting, or
hold until maturity.

IN FINANCIAL ASSETS: HELD-TO-
MATURITY (HTM)
IFRS GAAP
Recognized on the Recognized on the
balance sheet at balance sheet at
Initial recognition Fair value Initial Price paid
Usually, fair value = initial price paid
Subsequently reported at amortized cost
using the effective interest method (unless
At each reporting objective evidence of impairment exists)
date (after the
Unrealized
initial Changes in fair value is ignored.
gain/losses
recognition)
Realized Recognized on the income statement. (i.e.,
gain/losses interest income)

IN FINANCIAL ASSETS: FAIR VALUE
THROUGH PROFIT OR LOSS
Fair value through profit or loss include:
• Held-for-trading (HFT)
• Designated at fair value
IFRS GAAP
Recognized on the balance sheet at Fair
Initial recognition
value
Subsequently reported at Fair value
(remeasured at each reporting date to reflect
At each reporting fair value)
date (after the
Unrealized
initial
gain/losses
recognition) Recognized on the income statement
Realized
gain/losses

IN FINANCIAL ASSETS: AVAILABLE-
FOR-SALE (AFS)
IFRS GAAP
Recognized on the balance sheet at Fair
Initial recognition
value
Subsequently reported at Fair value
(remeasured at each reporting date to reflect
fair value)
Recognized in other comprehensive
income (i.e., changes in fair value, except
Unrealized
At each reporting for gains/losses on AFS debt securities
gain/losses
date (after the arising from exchange rate movements
initial /IFRS/)
recognition) Recognized on the income statement and
reversed out of other comprehensive income
Realized (i.e., interest income, dividend income, when
gain/losses securities are sold, unrealized gains/losses on
AFS debt securities resulting from exchange
rate movements)

IN FINANCIAL ASSETS: LOANS AND
RECEIVABLES
Loans and receivables are defined as non-derivative financial
assets with fixed or determinable payments that are not quoted in
an active market.
• IFRS has a specific definition (does not rely on legal form)
for loans and receivables. Items that meet the definition are
carried at amortized cost unless they are designated as (1) fair
value through profit or loss or (2) available-for-sale.
/Accounting treatment for loans and receivables are similar
with HTM assets./
• U.S.GAAP relies on legal form for the classification of debt
securities. Loans and receivables that meet the definition of
debt securities are classified as HFT, AFS, or HTM, with HFT
and AFS securities being measured at fair value.

INVESTMENTS IN FINANCIAL ASSETS:
RECLASSIFICATION (IFRS)
Designated at
Prohibited into Out of Prohibited
fair value
Held For
into Restricted
Trading (HFT) If (1) the definition is met and (2) the
company expects to hold them for the for
HFT or AFS Loans and seeable future.
into
(debt) receivables
• Remeasured at fair value and

recognized in other comprehensive
income by (fair value – carrying
amount)
HTM (debt) into AFS
• Company may be prohibited from
using the HTM classification for
other existing debt securities and
new purchases

RECLASSIFICATION (IFRS)
• Fair value at time of
reclassification becomes new
amortized cost
• Any unrealized gains/losses
previously recognized in other
comprehensive income are
amortized to profit or loss over
AFS (debt) into HTM the security’s remaining life using
the effective interest method.
• Differences between the new
amortized cost and par (maturity)
value are also amortized over the
remaining term of the securities
using the effective interest
method.

RECLASSIFICATION (U.S.GAAP)
U.S.GAAP generally allows reclassifications of securities between all
classifications when justified, with fair values being determined at the transfer
date.
Held For Unrealized gains/losses have already been
into AFS
Trading (HFT) recognized in profit and loss.
Unrealized gains/losses are recognized

Securities into HFT immediately in profit and loss.
HTM into AFS • Similar with IFRS.

• Company may be precluded from
using the HTM classification for
AFS (debt) into HTM other investments.

IMPAIRMENT - IFRS
All financial assets that are not carried at fair value must be
assessed for impairment at the end of each reporting period, and
impairment must be recognized in profit or loss.
• A debt securities are considered impaired if at least one loss
event has occurred. Examples of loss events:
• The issuer facing financial difficulty
• Default or delinquency in interest or principal payments
• An equity security is considered impaired if
• There have been a substantial and extended decline in
the fair value of the security below its cost
• The initial cost of the investment may not be recovered.

IMPAIRMENT - IFRS (CONTINUED)
• For HTM (debt) securities and loans and receivables that have
become impaired:
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡
− 𝑃𝑉 𝑜𝑓 𝑖𝑡𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑓𝑢𝑡𝑢𝑟𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
• The carrying amount of the security is reduced by impairment
loss and the impairment loss is recognized in profit or loss.
Reversals of impairment losses are allowed.
• For AFS securities that have become impaired, the cumulative
loss recognized in other comprehensive income is transferred from
OCI to the income statement.
• Reversals of impairment losses is only allowed for AFS debt
securities, not for AFS equity securities.

IMPAIRMENT – U.S.GAAP
• AFS and HTM securities must be assessed for
impairment at each balance sheet date. A security is
considered impaired if the decline in its value is “other
than temporary.”
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒

• The impairment loss is treated as a realized loss on the
income statement.
• For AFS debt and equity securities, reversals of
impairment losses are not allowed.
o Subsequent increases in fair value are treated as
unrealized gains and included in OCI.

EXAMPLES OF INVESTMENTS IN
FINANCIAL ASSETS
• On 1 January 2008, Baxter Inc. invested £300,000 in
Cartel Co. debt securities (with a 6% stated rate on par
value, payable each 31 December).
• The par value of the securities was £275,000.
• On 31 December 2008, the fair value of Baxter’s
investment in Cartel is £350,000.
• Assume the market interest rate when the bonds were
purchased was 4.5%.
• If the investment is designated as held to maturity, the
investment is reported at amortized cost using the
effective interest method.

FINANCIAL ASSETS (CONTINUED)
A portion of the amortization table is as follows:
Interest Interest Carrying

End of Year Amortization
Payment Income Value
0 £300,000
1* £16,500 £13,500 £3,000 297,000
2 16,500 13,365 3,135 293.865
3 16,500 13,224 3,276 290,589
*6% × Par value (£275,000) = £16,500; 4.5% × Carrying value (£300,000) =

£13,500
1. How would this investment be reported on the financial statements at
31 December 2008 under either IFRS or U.S. GAAP (accounting is
essentially the same in this case) if Baxter designated the investment as
(1) held-to-maturity, (2) held for trading, (3) available-for-sale, or (4)
designated at fair value?
Statement of
Income Statement Balance Sheet
Owners’ Equity
Held to Reported at amortized
Interest income: £13,500 No effect
maturity cost: £297,000
Interest income: £13,500
Held for Reported at fair value:
and £53,000 unrealized gain No effect
trading £350,000
recognized through profit
£53,000 unrealized
Available- Reported at fair value:
Interest income: £13,500 gain (net of tax)
for-sale £350,000
reported as OCI
Designated Interest income £13,500
Reported at fair value:
at fair and £53,000 unrealized gain No effect
£350,000
value recognized through profit

2. How would the gain be recognized if the debt securities were sold on 1
January 2009 for £352,000?
Held-to-maturity £352,000 – £297,000 = £55,000
Fair value through profit or loss

£352,000 – £350,000 = £2,000
(held for trading)
(£352,000 – £350,000) + £53,000
Available-for-sale
(removed from OCI) = £55,000
3. How would this investment appear on the balance sheet at 31 December 2009?
If the investment was held-to-maturity, the reported amount at amortized cost on

the balance sheet would be £293,865.
If it was classified as either held for trading, available-for-sale, or designated at
fair value, it would be reported at its fair value at 31 December 2009.

IFRS 9 (AS OF DECEMBER 2012) /NEW
TREATMENT/
DEBT EQUITY
YES YES
1.Is the business objective for YES
financial assets to collect Held-For-Trading
contractual cash flows? And NO
2.Are the contractual cash NO
flows solely for principal
and interest on principal? YES
YES Designated at FVOCI?
YES
Designated at FVPL?
NO
NO
Changes in fair Changes in fair

Amortized Cost value recognized value recognized
in profit or loss OCI

ACCOUNTING FOR
INVESTMENTS IN ASSOCIATES
The equity method is used to account for investments in associates.
To qualify, a company must have significant influence over the investee.
Significant influence is presumed with 20–50% ownership, but
exceptions can be made based on other indicators of influence,
including
› Representation on the board of directors
› Participation in policy-making process
› Material transactions between companies
› Interchange of managerial personnel
› Technological dependency
Because of this influence, it is presumed that the investee’s income is at
least partially attributed to the influence of the investor. As such, the
investor recognizes a proportionate amount of investee’s income.

EQUITY METHOD
• The investment is initially recognized on the investor's

balance sheet at cost (within a single line item) under
noncurrent assets.
o The investor's proportionate share of investee
earnings increases the carrying amount of the
investment, while its proportionate share of losses
and dividends decreases the carrying value of the
investment.
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑝𝑜𝑠𝑡 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
−𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

EQUITY METHOD (CONTINUED)
• The investor's proportionate share of investee earnings is

reported within a single line item on its income
statement.
o Dividend payments have no impact on the amount
reported on the income statement.
• If the value of the investment falls to zero, use of the
equity method to account for the investment is
discontinued.

EQUITY METHOD (EXAMPLE)
Branch Inc. purchases a 20% interest in Williams Inc. for €200,000
on 1 January 2008. Williams reports income and dividends as
follows:
Income Dividends
2008 €200,000 €50,000
2009 300,000 100,000
2010 400,000 200,000
€900,000 €350,000
Calculate the investment in Williams that appears on Branch’s

balance sheet as of the end of 2010:
€200,000 + 20% × (€900,000 – €350,000) = €310,000
On income statement:
20% × €900,000 = €180,000

INVESTMENTS IN ASSOCIATES:
WHEN INVESTMENT COSTS > BOOK VALUE OF
INVESTEE
When investment costs exceed the investor’s proportionate share of the

investee’s net identifiable assets, the difference is allocated to the
following:
• Any specific assets whose fair values exceed book values. These
amounts are then amortized over the useful life of these specific
assets.
o Amount allocated to inventory are expensed.
o Amount allocated to land and other assets or liabilities that are
not amortized continue to be reported at fair value as of the date
of investment
• Any remaining difference between the investment cost and the fair
value of net identifiable assets that cannot be allocated to specific
assets is treated as goodwill.
• Goodwill is not amortized; it is checked for impairment annually.
INVESTEE (EXAMPLE)
Assume that Blake Co. acquires 30% of the outstanding shares of
Brown Co. At the acquisition date, information on Brown’s recorded
assets and liabilities is as follows:
Book Value Fair Value
Current assets €10,000 €10,000
Plant and equipment 190,000 220,000
Land 120,000 140,000
€320,000 €370,000
Liabilities 100,000 100,000
Net assets €220,000 €270,000
Blake Co. believes the value of Brown Co. is higher than the fair
value of its identifiable net assets. They offer €100,000 for a 30%
interest in Brown Co. Calculate goodwill.

INVESTEE (EXAMPLE)
Purchase price €100,000

30% of book value of Brown (30% ×
66,000
€220,000)
Excess purchase price 34,000
Attributable to net assets:
Plant and equipment (30% × €30,000) 9,000
Land (30% × €20,000) 6,000
Goodwill (residual) 19,000

INVESTEE (EXAMPLE)
• Brown Co. reported net income of €80,000 for 2008 and

pays dividends of €20,000.
• Plant and equipment are depreciated on a straight-line basis
to zero over a term of 10 years.
1. The amount of equity income to be reported on Blake’s
incomes statement for 2010.
Proportionate share in Brown’s 2010

€24,000
income (=30% × €80,000)
Amortization of excess purchase price
attributable to plant and equipment (900)
(=9,000/10)
Equity income 23,100
INVESTEE (EXAMPLE)
1. The value of its investment in Blake recognized by Prime

on its balance sheet for 2010.

Proportionate share in net income (=30% ×
24,000
80,000)
Amortization of excess purchase price (900)
Dividend received (=30% × 20,000) (6,000)
Investment balance at December 31, 2010 117,100

FAIR VALUE OPTION AND
IMPAIRMENT
Fair value option: The option at the time of initial recognition
to record an equity method investment at fair value.
• Unrealized gains/losses arising from changes in fair value
as well as interest and dividends received are included in
the investor’s income.
• The investment account on the investor’s balance sheet does
not reflect the investor’s proportionate share in the
investee’s earnings, dividends, or other distributions.
• The excess of cost over the fair value of the investee’s
identifiable net assets is not amortized.
• Goodwill is not created.
SIMILAR WITH HFT ACCOUNTING TREATMENT

FAIR VALUE OPTION AND
IMPAIRMENT
Equity method investments need periodic reviews for impairment.
• Under IFRS, an impairment is recorded only if there is objective
evidence of a loss event.
𝐼𝑚𝑝𝑎𝑖𝑟𝑒𝑑: 𝑖𝑓 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 > 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = 𝑀𝑎𝑥(𝑉𝑎𝑙𝑢𝑒 𝑖𝑛 𝑢𝑠𝑒, 𝑁𝑒𝑡 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒)
• Under U.S. GAAP, an impairment must be recognized if the fair
value of the investment falls below its carrying value and if the
decline is considered permanent.
𝐼𝑚𝑝𝑎𝑖𝑟𝑒𝑑: 𝑖𝑓 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 > 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒
• Impairment results in a decrease in net income and reduces the
investment’s carrying amount on the balance sheet.
• Reversal of an impairment loss is not allowed under IFRS or
U.S.GAAP

TRANSACTIONS WITH ASSOCIATES
An investor company can influence the terms and timing of
transactions with its associates. Thus, the investor
company’s share of any profits resulting from transactions
with associates must be deferred until the transactions are
confirmed with a third party.
• In an upstream sale, the investee sells goods to the
investor.
• In a downstream sale, the investor sells goods to the
investee.
• Regardless of directions, IFRS and U.S. GAAP require
the elimination of profits to the extent of the investor’s
ownership of the investee.

(EXAMPLE)
Prime Manufacturers acquired a 25% equity interest in Alton
Corp. Equity income on Prime’s (the investor’s) income
statement for 2010 to be $57,500 and the value of the investment
in Alton on Prime’s balance sheet for 2010 to be $732,500.
Suppose that the following transactions also took place.
1. $12,000 of profit from an upstream sale from Alton to Prime
during 2010 was still in Prime's inventory at the end of 2010
as the goods had not been sold to an outside party yet.
2. Prime made downstream sales of $100,000 worth of goods
to Alton for $160,000. During 2010, Alton sold goods worth
$140,000 to outside parties, while the remaining $20,000
worth of goods was sold in 2011.

(EXAMPLE)
1. $12,000 of profit from an upstream sale from Alton to
Prime during 2010 was still in Prime's inventory at the
end of 2010 as the goods had not been sold to an
outside party yet.
Upstream sale:
𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = $12,000

𝑃𝑟𝑖𝑚𝑒’𝑠 𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑠ℎ𝑎𝑟𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑢𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
= 25% × 12,000 = $3,000

(EXAMPLE)
2. Prime made downstream sales of $100,000 worth of goods
to Alton for $160,000. During 2010, Alton sold goods worth
$140,000 to outside parties, while the remaining $20,000
worth of goods was sold in 2011.
Downstream sale:
𝑃𝑟𝑖𝑚𝑒 ′ 𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑛 𝑠𝑎𝑙𝑒𝑠 𝑡𝑜 𝐴𝑙𝑡𝑜𝑛 = 160,000 − 100,000
= $60,000
𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
(160,000 − 140,000)
= ൗ160,000 × 60,000 = $7,500
𝑃𝑟𝑖𝑚𝑒’𝑠 𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑢𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
= 25% × 7,500 = $1,875

(EXAMPLE)
3. Calculate the amount of equity income reported on
Prime's income statement for 2010 and the value of the
investment in Alton on Prime's 2010 balance sheet after
incorporating the effects of the above transactions.
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑜𝑟 2010

= 57,500 − 3,000 − 1,875 = $52,625
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 2010
= 732,500 − 3,000 − 1,875 = $727,625

JOINT VENTURE
A joint venture can be a convenient way to enter foreign markets,

conduct specialized activities, and engage in risky projects.
Joint ventures are defined differently under IFRS and U.S. GAAP.
Under IFRS:
• Proportionate consolidation is the preferred accounting treatment.
It requires the venturer’s share of assets, liabilities, income, and
expenses of the joint venture to be combined on a line-by-line basis.
Under U.S. GAAP:
• Joint venture refers only to jointly controlled separate entities.
• Requires the use of the equity method to account for joint ventures.

EQUITY METHOD VS.
PROPORTIONATE CONSOLIDATION (EXAMPLE)
Company A Venturer
Joint
Venture Proportionate
Equity Method
Consolidation
Balance Sheet
Cash 40,000 400,000 420,000
Inventory 500,000 500,000
Investment in Joint venture 450,000
Other assets 1,160,000 1,500,00 2,080,000
Total Assets 1,200,000 2,850,000 3,000,000
Accounts payable 200,000 200,000
Long-term debt 300,000 1,650,000 1,800,000
Capital stock 600,000 600,000
Retained earnings 400,000 400,000
Ventures' equity (company A and B) 900,000
1,200,000 2,850,000 3,000,000

EQUITY METHOD VS.
Company A Venturer
Joint
Venture Proportionate
Equity Method
Consolidation
Income Statement
Sales 400,000 1,000,000 1,200,000
Equity in joint venture income 60,000
Cost of sales 200,000 500,000 600,000
Other Expenses 80,000 240,000 280,000
Net income 120,000 320,000 320,000

EQUITY METHOD VS.
Equity Proportionate
Method Consolidation
Net profit margin 32.0% 26.7%
Return on assets 11.2% 10.7%
Debt/Equity 1.65 1.80
Analysts will observe differences in performance ratios based on the

accounting method used for joint ventures.
IFRS prefer proportional consolidation because it more effectively
conveys the economic scope of an entity’s operation when those
operations include interests in one or more jointly controlled entities.

BUSINESS COMBINATIONS
Business combinations involve the combination of two or

more entities into a larger economic entity. They are
motivated by expectations of added value through
synergies.
Types of business combinations
• Under IFRS, there is no distinction among business
combinations based on the resulting structure of the
larger economic entity.
• Under U.S. GAAP, business combinations are
categorized as merger, acquisition, or consolidation
based on the structure after the combination.

ACCOUNTING FOR BUSINESS COMBINATIONS
IFRS and U.S. GAAP now require that all business combinations be
accounted for using the acquisition method.
• Identifiable assets and liabilities of the acquired company are
measured at fair value on the date of the acquisition.
• Assets and liabilities that were not previously recognized by the
acquiree must be recognized by the acquirer.
• At the acquisition date, the acquirer can reclassify the financial
assets and liabilities of the acquiree (e.g., from trading security to
available for sale security).
• Goodwill is recognized as:
o “Partial goodwill” under IFRS: the difference between purchase
price and the acquirer’s share of acquiree’s assets and liabilities.
o “Full goodwill” under U.S. GAAP: the difference between total
fair value of the acquiree and fair value of the acquiree’s
identifiable net assets.

ACCOUNTING FOR BUSINESS COMBINATIONS
Noncontrolling interests are shown as a separate component of equity on

the balance sheet and a separate line item in the income statement.
IFRS and U.S. GAAP differ on the measurement of noncontrolling
interest:
• Under IFRS, the value of the noncontrolling interest is either its fair
value (full goodwill method) or the noncontrolling interest’s
proportionate share of the acquiree’s identifiable net assets (partial
goodwill method).
• Under U.S. GAAP, the parent must use the full goodwill method
and measure the noncontrolling interest at fair value.

100% ACQUISITION: (EXAMPLE)
Franklin Co. acquired 100% of Jefferson, Inc. by issuing 1,000,000 shares of

its €1 par common stock (€15 market value). Immediately before the
transaction, the two companies had the following information:
Franklin Book Jefferson Book Jefferson Fair
Value (000) Value (000) Value (000)
Cash and receivables 10000 300 300
Inventory 12,000 1,700 3,000
PP&E (net) 27,000 2,500 4,500
49000 4500 7800
Current payables 8,000 600 600
Long-term debt 16,000 2,000 1,800
24,000 2,600 2,400
Net assets 25000 1900 5400
Shareholders’ equity:
Capital stock (€1 par) 5000 400
Additional paid in capital 6,000 700
Retained earnings 14000 800
Show the post combination balance sheet using the acquisition method.

100% ACQUISITION: (EXAMPLE)
The post acquisition balance sheet of the combined entity:
Franklin Consolidated Balance Sheet (€ thousands)
Cash and receivables €10,300
Inventory 15,000
PP&E (net) 31,500
Goodwill 9,600
Total assets €66,400
Current payables €8,600
Long-term debt 17,800
Total liabilities €26,400
Capital stock (€1 par) €6,000
Additional paid in capital 20,000
Retained earnings 14,000
Total stockholders’ equity €40,000
Total liabilities and stockholders’ equity €66,400

LESS THAN 100% ACQUISITION: EXAMPLE
On 1 January 2009, Parent Co. acquired 90% of Subsidiary Co. in

exchange for shares of Parent Co.’s no par common stock with a fair
value of €180,000. The fair market value of the subsidiary’s shares on
the date of transaction was €200,000. Below is selected financial
information from the two companies immediately before the parent
recorded the acquisition:
Subsidiary
Parent Book
Value Book Value Fair Value
Cash and receivables 40,000 15,000 15,000
Inventory 125,000 80,000 80,000
PP&E (net) 235,000 95,000 155,000
400,000 190,000 250,000
Payables 55,000 20,000 20,000
Long-term debt 120,000 70,000 70,000
175,000 90,000 90,000
Net assets 225,000 100,000 160,000
Shareholders’ equity:
Capital stock (no par) 87,000 34,000
Retained earnings 138,000 66,000

1. Calculate the value of PP&E (property, plant, and equipment) on

the consolidated balance sheet under both IFRS and U.S. GAAP.
€235,000 + €155,000 = €390,000

2. Calculate the value of goodwill and the value of the
noncontrolling interest at the acquisition date under the full
goodwill method.
Fair value of subsidiary €200,000

Fair value of subsidiary’s identifiable net assets 160,000
Goodwill €40,000
The value of noncontrolling interest = 10% × €200,000 = €20,000

3. Calculate the value of goodwill and the value of the noncontrolling

interest at the acquisition date under the partial goodwill method.

90% of fair value of subsidiary’s identifiable
net assets 144,000
Goodwill €36,000
Value of noncontrolling interest = 10% × €160,000 = €16,000

MORE ON GOODWILL
Because the full goodwill method and the partial goodwill method
result in different total assets and stockholders’ equity, the impact of
these methods on financial ratios would differ.
Goodwill is not amortized, but it is tested for impairment.
• Under IFRS, goodwill is impaired when the recoverable value of
a business unit is below the carrying value (one-step approach).
• Under U.S. GAAP, goodwill is impaired when the carrying value
of a business unit exceeds its fair value. The amount of
impairment loss is the difference between the implied fair value
of the reporting unit’s goodwill and its carrying amount (two-step
approach).

MORE ON GOODWILL
Under IFRS:
𝐼𝑓 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑖𝑡 > 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡 → 𝐼𝑚𝑝𝑎𝑖𝑟𝑒𝑑
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑖𝑡 − 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡
Under U.S.GAAP
𝐼𝑓 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑖𝑡 > 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑖𝑡 → 𝐼𝑚𝑝𝑎𝑖𝑟𝑒𝑑
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠 = 𝑅𝑒𝑐𝑜𝑔𝑛𝑖𝑧𝑒𝑑 𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙 − 𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑖𝑡 − 𝐹𝑉 𝑜𝑓 𝑖𝑑𝑒𝑛𝑡𝑖𝑓𝑖𝑎𝑏𝑙𝑒 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑢𝑛𝑖𝑡

VARIABLE INTEREST AND
SPECIAL PURPOSE ENTITIES
A VIE (variable interest entity) or SPE (special purpose entity) is an

enterprise that is created to accommodate specific needs of the
sponsoring entity. It may be used to securitize receivables, lease assets,
and so on.
In the past, sponsors were able to avoid consolidating SPEs on their
financial statements because they did not have “control” (i.e., own a
majority of the voting interest) of the SPE.
• By avoiding consolidation, sponsors did not have to report the assets
and the liabilities of the SPE; financial performance as measured by
unconsolidated financial statements was potentially misleading. The
benefit to the sponsoring company was improved asset turnover, lower
operating and financial leverage, and higher profitability.

SUMMARY OF ACCOUNTING TREATMENT
FOR INTERCORPORATE INVESTMENTS
Type Financial Assets Associates Combinations Joint Ventures
Influence None/Little Significant Controlling Shared

Typical ownership % < 20% 20%–50% > 50% Varies
Depends on the intent:
Held-to-maturity (debt only):

amortized cost
Held for trading: Equity method

fair value, changes recognized (U.S. GAAP & IFRS)
in P/L Equity or
Accounting treatment Consolidation
method proportionate
Available-for-sale:
Fair value, changes consolidation
(IFRS Only)
recognized in equity
Designated at fair value:

fair value, changes recognized
in P/L

END OF THE READING

Intercorporate Investments

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Intercorporate Investments

Uploaded by

Copyright:

Available Formats

INTERCORPORATE

Intercorporate investments include investments in the debt and equity

Copyright © University of Finance and Economics, Mongolia.

Fair value through profit or

Loans and receivables

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Held-to-maturity Has intent and ability to hold the

Fair value through profit or loss:

Does not intend to sell in the near

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

• Remeasured at fair value and

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Unrealized gains/losses are recognized

HTM into AFS • Similar with IFRS.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Interest Interest Carrying

*6% × Par value (£275,000) = £16,500; 4.5% × Carrying value (£300,000) =

Copyright © University of Finance and Economics, Mongolia.

Fair value through profit or loss

If the investment was held-to-maturity, the reported amount at amortized cost on

Copyright © University of Finance and Economics, Mongolia.

Changes in fair Changes in fair

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

• The investment is initially recognized on the investor's

Copyright © University of Finance and Economics, Mongolia.

• The investor's proportionate share of investee earnings is

Copyright © University of Finance and Economics, Mongolia.

Calculate the investment in Williams that appears on Branch’s

Copyright © University of Finance and Economics, Mongolia.

When investment costs exceed the investor’s proportionate share of the

Copyright © University of Finance and Economics, Mongolia.

Purchase price €100,000

Copyright © University of Finance and Economics, Mongolia.

• Brown Co. reported net income of €80,000 for 2008 and

Proportionate share in Brown’s 2010

1. The value of its investment in Blake recognized by Prime

Purchase price €100,000

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

𝑈𝑛𝑟𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = $12,000

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑜𝑟 2010

Copyright © University of Finance and Economics, Mongolia.

A joint venture can be a convenient way to enter foreign markets,

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.

Copyright © University of Finance and Economics, Mongolia.