Professional Documents
Culture Documents
Intercorporate Investments
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Graphs, charts, tables, examples, and figures are copyright 2012, CFA Institute. Reproduced
and republished with permission from CFA Institute. All rights reserved.
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6. Business Combinations
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Available-for-Sale
Two sub-categories:
Held for trading: intent to sell in
the near term
Designated at fair value
Loans and receivables are broadly defined as non-derivative financial assets with fixed
or determinable payments.
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Impairments
Financial asset is impaired whenever its carrying amount is expected to permanently exceed its
recoverable amount
IFRS: at the end of each reporting period, financial assets not carried at fair value need to be
reviewed for any objective evidence that the assets are impaired; for HTM securities, loss =
difference between carrying value and PV of cash flows
U.S. GAAP: For AFS or HTM securities, determine whether decrease in value is temporary. If not
temporary, the cost base is written down and loss recognized in the income statement
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Example 1
How would this investment be reported on the
balance sheet, income statement, and statement of
shareholders equity at 31 December 2011, 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?
How would the gain be recognized if the debt
securities were sold on 1 January 2012 for 352,000?
How would this investment appear on the balance
sheet at 31 December 2012?
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5.2 Investment Costs That Exceed the Book Value of the Investee
Value of investment (in proportion to investors stake) consists of:
Reported net asset value of investee (on investees B/S)
Fair value surplus/deficit relating to investees identifiable
assets/liabilities
Surplus is amortized over time
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Both IFRS and U.S. GAAP require periodic reviews of equity method investments for
impairment. If the fair value of the investment is below its carrying value and this
decline is deemed to be other than temporary, an impairment loss must be
recognized.
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Example 5
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Example 6
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6. Business Combinations
Involve the combination of two or more organizations into a larger economic entity
IFRS: No distinction among business combinations; one party identified as acquirer
US GAAP: Four types of business combinations
Merger
Acquisition
Consolidation
Variable interest (special purpose) entity
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Both U.S. GAAP and IFRS require use of acquisition method (replaces the purchase
method)
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Purchase Method
Net assets were recorded at fair values
For the same level of revenue, the purchase method results in lower reported income than the
pooling of interests method
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Example 9 - Working
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Goodwill Impairment
Goodwill is not amortized, it must be tested for impairment at least annually. Once written down,
goodwill cannot be restored.
IFRS
Goodwill is allocated to acquirers cash generating units
Goodwill impairment testing is done using a one-step approach
Impairment loss is based on difference between carrying value and recoverable amount
U.S. GAAP
Goodwill is allocated to acquirers reporting units
Goodwill impairment testing is done using a two-step approach
1. Identify impairment possibility by comparing carrying value and fair value
2. Determine implied fair value of goodwill: fair value of reporting unit fair value of net assets
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IFRS and U.S. GAAP have similar formats for consolidated income statements.
Each line item (e.g., turnover [sales], cost of sales, etc.) includes 100% of the
parent and the subsidiary transactions after eliminating any upstream (subsidiary
sells to parent) or downstream (parent sells to subsidiary) intercompany
transactions. The portion of income accruing to non-controlling shareholders is
presented as a separate line item on the consolidated income statement.
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Example 12 - Working
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In-Process R&D
Restructuring Costs
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Summary
Investments in Financial
Assets
Investment in
Associates
Joint Ventures
Business
Combinations
Description
No significant influence
Significant influence
Shared control
Control
Accounting
Equity
Equity
Acquisition Method
Assets
Liabilities
Equity
Revenue
Net Income
Leverage
NPM
ROE
ROA
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Conclusion
Read the summary
Review learning objectives
Examples
Practice problems
Practice questions from other sources
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