1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Reporting and Interpreting Investments in Other Corporations Chapter 12

2. 12-2 Passive Investments in Debt and Equity Securities Investments in debt securities are always considered passive investments. Passive investments are made to earn a high rate of return on funds that may be needed for future purposes. Equity security investments are presumed passive if the investing company owns less than 20% of the outstanding voting shares. The investor is not interested in controlling or influencing the other company.

3. 12-3 Investments made with the intent of exerting significant influence over another corporation. The ability of the investing company to have an important impact on the operating and financial policies of another company. Significant Influence 20% - 50% outstanding shares Significant Influence 20% - 50% outstanding shares Investments in Stock for Significant Influence

4. 12-4 Investments made with the intent to exert control over another corporation. Control >50% outstanding shares Control >50% outstanding shares The investing company has the ability to determine the operating and financial policies of another corporation. Investments in Stock for Control

5. 12-5 Types of Investments and Accounting Methods The accounting method depends on the type of security and the level of ownership (influence).

6. 12-6 Debt Held To Maturity: Amortized Cost Method Record at cost on acquisition date. Amortize discount or premium. Record interest received. Record principal received at maturity.

7. 12-7 Passive Stock Investments: The Fair Value Method Date of acquisition Investment is initially recorded at cost. Future measurement date Unrealized holding gains and losses are recorded. Investment carrying amount is adjusted to current market value.

8. 12-8 Classifying Passive Investments at Fair Value NOTE: Realized gains and losses go on the Income Statement.

9. 12-9 Comparing Trading and Available for Sale Securities

10. 12-10 Date of acquisition Investment is initially recorded at cost. Future measurement date Unrealized holding gains and losses are not recorded. Investment carrying amount is adjusted for dividends received, and a percentage share of the investee’s income. Investments For Significant Influence: Equity Method

11. 12-11 Investments For Significant Influence: Equity Method

12. 12-12 Reporting Investments under the Equity Method Reported on the balance sheet as a long-term asset, originally at cost. Account is increased by the proportional share of affiliate’s income. Account is decreased by proportional share of affiliate’s losses and by dividends received from the affiliate. No adjustment to fair value at the end of the accounting period. If sold, any gain or loss is reported in the income statement as other income.

13. 12-13 Focus on Cash Flows Investing activities: Purchase of investment (cash outflow) Sale of investment (cash inflow) Investing activities: Purchase of investment (cash outflow) Sale of investment (cash inflow) Operating activities: Gain on sale of investment (subtract from net income) Loss on sale of investment (add to net income) Equity in earnings of investee (subtract from net income) Dividends from investee (add to net income) Unrealized holding gains trading securities (subtract from net income) Unrealized holding losses trading securities (add to net income) Operating activities: Gain on sale of investment (subtract from net income) Loss on sale of investment (add to net income) Equity in earnings of investee (subtract from net income) Dividends from investee (add to net income) Unrealized holding gains trading securities (subtract from net income) Unrealized holding losses trading securities (add to net income)

14. 12-14 What Are Consolidated Statements? The acquiring company is the parent. The company acquired is the subsidiary. Consolidated statements combine two or more companies into a single set of statements. The acquiring company is the parent. The company acquired is the subsidiary. Consolidated statements combine two or more companies into a single set of statements. Any transactions between the parent and subsidiary must be eliminated when preparing consolidated financial statements.

15. 12-15 Occurs when one company buys another company. The amount by which the purchase price exceeds the fair market value of net assets acquired. Only purchased goodwill is an intangible asset. Goodwill Recording a Merger

16. 12-16 Not amortized. Subject to assessment for impairment of value and may be written down. Goodwill Recording a Merger

17. 12-17 End of Chapter 12