Group Financial Reporting And other investment issues

2007/01/31International Business Program Financial Accounting 1 Enterprise Groups Why do enterprises form groups?

2007/01/31International Business Program Financial Accounting 2 Enterprise Groups Why do enterprises form groups? Too many reasons to list. Examples: –A company acquires existing company –International operations must be legally separate –Limit legal liability –SPEs

2007/01/31International Business Program Financial Accounting 3 Objective of Group Reporting Financial reports as though group were a single company Transparency Group reports vs. parent company reports –Parent company reports not permitted in some countries. Why?

2007/01/31International Business Program Financial Accounting 4 Group Reporting at Acquisition Shareholders’ equity is parent company only! Individual assets and liabilities of acquired company at fair value Goodwill Minority interest Assets and liabilities combined line by line

2007/01/31International Business Program Financial Accounting 5 Group Reporting after Acquisition Effect of transactions among the group is eliminated!!!!!!!!!!!!! Excess of fair value over book value of subsidiary assets and liabilities subject to depreciation and amortization Goodwill is amortized (not in textbook)

2007/01/31International Business Program Financial Accounting 6 Group Reporting after Acquisition (continued) Profit of subsidiaries allocated to minority interests Goodwill and assets of subsidiaries subject to impairment write-down Income statement combines revenues and expenses line by line

2007/01/31International Business Program Financial Accounting 7 Joint Ventures See textbook

2007/01/31International Business Program Financial Accounting 8 Associated companies If significant influence, must use equity method Significant influence assumed if ownership is 20% or more. NB: 20% is a guideline, not a rule!!!!!! Applies to SPEs and other controlled companies if not consolidated in group

2007/01/31International Business Program Financial Accounting 9 Associated companies (continued) Eliminate effect of intercompany transactions!!!!!!!!!!!!!!!!!!!! Amortize implied goodwill and similar items Proportionate share of associate’s profit or loss single line item Proportionate amount of associate’s single item on balance sheet

2007/01/31International Business Program Financial Accounting 10 Minority investments and derivatives Investments with no significant influence, guideline < 20% Derivatives (not in text but crucial to understanding)

2007/01/31International Business Program Financial Accounting 11 Minority investments and derivatives What are they and why held Investments with no significant influence, guideline < 20% –E.g. Insurance company Derivatives (not in text but crucial) –Derive their value from something else Financial instruments Commodity futures

2007/01/31International Business Program Financial Accounting 12 Minority investments and derivatives (continued) Mark to market accounting –Continuously adjust to market value –Recognize gain or loss as occurs Why? What accounting principle?

2007/01/31International Business Program Financial Accounting 13 Minority investments and derivatives (continued) Mark to market accounting –Continuously adjust to market value –Recognize gain or loss as occurs Why? What accounting principle? –Substance over form; faithful representation. –Economic value derived from holding not sale

2007/01/31International Business Program Financial Accounting 14 Minority investments and derivatives (continued) Mark-to-market accounting (continued) Assumptions: –Market exists –Short-term maturity –Sale virtually certain –No significant uncertainties