Purposes for financial statements: comparability, information usefulness -> accounting harmonization * Factors that influence a country’s accounting standards: 1. Role of Taxation 2. Level of Development of Capital Markets – fairly sophisticated investors demand current and useful information from those who have received their capital 3. Different Legal Systems 4. Ties between Countries 5. Inflation Levels
Chapter 2 Investments in Equity Securities * 5 types of share investments * Strategic Investments (Investor intends to establish or maintain a long-term operating relationship with the entity in which the investment is made): * Control – Full Consolidation * Significant Influence – Equity Method * Joint Ventures – Proportionate Consolidation * Non-Strategic Investments: * Fair Value through Profit and Loss (FVTPL) – Fair Value Method * Available-For-Sale (AFS) – Cost Method
Available-for-sale is now a separate category of equity investment and the initial recognition can elect to present the fair value changes on an equity investment that is not held for short-term trading in other comprehensive income (OCI) – Gain or losses are cleared out of OCI and credited or charged directly to retained earnings when the investment is sold and are never recycled through net income
Control (over 50% voting shares) * Investment in Sub will be removed from Parent’s balance sheet and replacing it with assets & liabilities from the sub’s balance sheet * Control exists if parent company has the power to direct the activities of sub to generate returns for the parent company – can determine the key operating and financing policies of sub * Consists majority of the sub’s voting shares * Business combination – acquire control thru investing in voting shares or purchasing the net assets Significant Influence (20% – 50% voting shares)
An investment does not convey control or joint control, but allow the investor to exercise significant influence over the strategic operating and financing policies of the investee * Equity method – initially recorded at cost then adjusted after to include associate’s acquisition differentia, elimination and subsequent recognition of all unrealized intercompany profits * Dividends received from the associate are recorded as a reduction of the investment Joint Ventures * The venturer reports its investment in venturee by either proportionate consolidation or equity method
Cost method: income is recognized when dividends are received or receivable DR Investment in company $95,000 CR Cash$95,000 DR Cash$7,500 CR Dividend Income$7,500 * Equity method: income is recognized based on the income reported by the associate, and dividends are reported as a reduction of the investment account DR Investment in company$95,000 CR Cash$95,000 DR Investment in company$10,000 CR Investment Income$10,000 (10% of the company’s net income – significant influence) DR Cash$7,500 CR Investment in company$7,500
One of the major tasks for consolidation is to eliminate all intercompany transactions, especially intercompany profits, so that the consolidated statements reflect only transactions with outsiders – “you can’t make a profit selling to yourself” – “unrealized profits” from intercompany transfers of inventory or other assets must be held back until the specific assets are sold to outside entities Chapter 3 Business Combinations * Methods of Accounting for Business Combinations: 1. The Purchase Method (Required by GAAP prior January.
The Acquisition Method (New method must be adopted by January 1, 2011 or earlier) 3. The Pooling-of-Interests method (No longer acceptable) 4. The New Entity Method (Never achieved status) Chapter 4 Consolidated Statements on Date of Acquisition * 4 solutions to consolidate financial statement for non-wholly owned subsidiaries: (differ in the valuation of NCI and how much of the subsidiary’s value pertaining to the NCI is brought onto the consolidated financial statements) 5. Proprietary Theory
Present GAAP when consolidating joint ventures but may be discontinued * View the consolidated entity from the standpoint of the shareholders of the parent company * The consolidated statements do not acknowledge or show the equity of the non-controlling shareholders * Consolidated B/S on acquisition date only reflects the parent’s share of assets & liabilities of the subsidiary, based on fair values and the resultant goodwill from the combination * Goodwill is established based on the parent’s acquisition cost 6.
Parent Company Theory * Was GAAP for consolidating subsidiaries but no longer after January 1, 2011 * Similar to Proprietary Theory except NCI is recognized and reflected as a liability in the consolidated B/S 7. Parent Company Extension Theory * An acceptable method of consolidating subsidiaries after January
Invented to address the concerns of goodwill valuation under the entity theory * Values both the parent’s share and the NCI’s share of identifiable net assets at fair value, only the parent’s share of the subsidiary’s goodwill is brought onto the consolidated statements at the value paid by the parent * NCI is recognized in shareholder’s equity in the consolidated B/S 8. Entity Theory
The preferred method for consolidating subsidiaries after January 1, 2011 * Views the consolidated entity as 2 distinct groups of shareholders – controlling & non-controlling * NCI is presented as a separate component of shareholders’ equity on the consolidated B/S * The consolidated B/S reflects the full fair values of the subsidiary’s identifiable net assets + goodwill Chapter 5 Consolidation Subsequent to Acquisition Date * Investment in Sub with Control -> Require Consolidation -> Cost Method or Equity Method 9.
Cost Method: Investment is initially recorded at cost, income from subsidiary is recognized in net income (dividend) 10. Equity Method: * Investment is initially recognized at cost and adjusted for post-acquisition change in the investor’s share of net assets of the investee * Profit/Loss of the investor includes investor’s share of profit/loss of the investee * Distributions received from the investee reduce the carrying amount of the investment, may also need to change OCI * Module 10 Ethics, additional issues, and integration
Professionals must have a number of important character traits, as well as the skill to make expert technical and moral judgements which serve the interest of society * Obligate to act in the interest of stakeholders include employers, clients, various identifiable 3rd parties, and the public at large * CCEPRC applies to the behavior of members of the Association when they either perform the role of a professional accountant or represent themselves as members of the Association.
Competence and due care are the necessity and ability to make ethical judgements * CGA are committed to the public interest – if there is a conflict between public and one’s client/employer, first obligation is to the public at large * CGA must act with integrity (commit to a high standard of behavior and strive to achieve it in their work) and be trustworthy (others may safely put themselves in a position in which a CGA is expected to help them) * Code of Ethical Principles.