1. Mergers, Acquisitions, and Other Inter- corporate Investments

2. Robinson, Munter & Grant Chapter 132 Intercorporate Investments InvolvementOwnershipAccounting treatment Passive< 20%Cost and Market value Significant20-50%Equity method Joint ventureShared control Equity (GAAP) and proportionate consolidation (IAS) Control> 50%Consolidation

3. Robinson, Munter & Grant Chapter 133 Passive Investments The Cost and Market Method Use when recording the purchase of individual securities Ownership is generally less than 20% Mark-to-market in aggregate –Investment asset is adjusted periodically to reflect current market value of shares

4. Robinson, Munter & Grant Chapter 134 Passive Investments The Cost and Market Method Specific steps: 1.Record investment at cost, price paid 2.Recognize dividend income when dividends are declared 3.Recognize investment impairment on the income statement and adjust asset value 4.Record gain/loss upon eventual stock sale

5. Robinson, Munter & Grant Chapter 135 Passive Investments Marked-to-Market Done in aggregate on the balance sheet date Carrying amount of individual securities may not be adjusted For trading and available for sale securities

6. Robinson, Munter & Grant Chapter 136 Passive Investments Investment Classification Trading Securities intention is to sell in the near term Unrealized gains (losses) increase (decrease) the carrying value of the investment on the balance sheet Unrealized gains (losses) are recorded on the income statement

7. Robinson, Munter & Grant Chapter 137 Passive Investments Investment Classification Available-for-sale Securities No clear intention to sell in the near term Unrealized gains (losses) increase (decrease) the carrying amount of the investment Unrealized gains (losses) increase (decrease) equity –Through the account other comprehensive income, a component of Equity

8. Robinson, Munter & Grant Chapter 138 Passive Investments Investment Classification Held-to-Maturity Investments Debt investments made with the intent and ability to hold to maturity –Bonds purchased as an investment Do not recognize market changes

9. Robinson, Munter & Grant Chapter 139 Significant Influence The Equity Method Used when ownership is between 20% and 50% Used for joint ventures in the U.S. Investor records revenue or losses – a share of the investee’s net income – in proportion to it’s ownership percentage –Concurrent adjustment is made to the investment asset

10. Robinson, Munter & Grant Chapter 1310 Significant Influence The Equity Method Carrying value of the investment asset on balance sheet is: –Recorded at cost initially –Increased (decreased) for percentage of profits (losses) equal to percentage of ownership –Decreased for dividends received

11. Robinson, Munter & Grant Chapter 1311 The Equity Method Parent co. purchased 25% of shares in Baby Co. by paying 10.000YTL in cash at the end of 2005 In 2006 Baby Co. reported 1.000YTL net income after taxes. In 2007 Baby Co. distributed 100YTL dividends in total Determine the amounts to be presented by Parent co. in its income statement and balance sheet for 2005 and 2006 and 2007

12. Robinson, Munter & Grant Chapter 1312 Merger: when two or more companies agree to combine Acquisition: when one company purchases substantially all of the shares or net assets of another company Business: a self-sustaining set of activities and assets conducted and managed for the purpose of providing a return to investors.

13. Robinson, Munter & Grant Chapter 1313 Business Combinations US Standard & International Standards Must use purchase method Acquirer records (net) assets at fair market value, presumably the purchase price Goodwill results if purchase price > FMV

14. Robinson, Munter & Grant Chapter 1314 Purchase Method Purchase 1.Identify the acquirer 2.Determine the price paid 3.Determine the fair value of assets and liabilities acquired 4.Record goodwill

15. Robinson, Munter & Grant Chapter 1315 Control Full Consolidation Appropriate when investor has control over investee’s activities Control can be established by –Majority ownership –Representation on board of directors –Control over managerial decision making –Through contractual arrangements

16. Robinson, Munter & Grant Chapter 1316 Control Full Consolidation Investor includes 100% of investee’s assets, liabilities, revenues and expenses –Amounts are grossed-up Share of assets and liabilities not owned – minority share – are shown separately Minority share of income is deducted in the income statement

17. Robinson, Munter & Grant Chapter 1317 Shared Control – Joint Ventures Proportionate Consolidation The International Standard Include proportion of investee’s assets, liabilities, revenues and expenses equal to percentage ownership Also include excess from original investment –Excess is the difference between fair value and book value of underlying (net) assets