Intercorporate Investments

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Jeffrey Burns
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1 Intercorporate Investments Investments in Financial Assets - Held to maturity - Trading - Available for sale - Designated fair value Investments in Associates - Equity method Joint Ventures - Proportional consolidation Business combinations - Consolidation Example 1: 2010 EPS for State Corp. are $3, State Corp. pays out 1/3 of its earnings as dividends. Peterman Inc. acquired 100 shares of State Corp. on January 1, 2010 at $40 per share and sold all of its shares on January 2 nd 2011 at $39 per share. The market price of State Corp. as of December 31, 2010 is $37. Part A How would this investment be reported on the Balance Sheet, Income Statement, and Statement of Shareholder s Equity at December 31, 2010, under both US GAAP and IFRS, if Peterman designated the investment as: (1) HTM (2) Trading (3) AFS (4) Designated fair value Part B Assuming that the shares were sold on January 2 nd, 2011 as noted above, what gain/loss would be recognized under both US GAAP and IFRS, if Peterman designated the investment as: (1) HTM (2) Trading (3) AFS Exam Preparation & Investment Sales Training 1 info@examsuccess.ca

2 Solution: Part A 1) HTM applies only to debt securities, so it is not applicable in this situation. 2) AFS: US GAAP: I/S: Dividend income of $100 B/S: Investment carried at fair value equal to $3,700 S/E: Unrealized loss of $300 reported as OCI IFRS: I/S: Dividend income of $100 B/S: Investment carried at fair value equal to $3,700 S/E: Unrealized loss of $300 is reported in net income, reported directly as equity on the statement of recognized income and expenses 3) Trading: I/S: Dividend income of $100 and unrealized loss of $300 would be reported B/S: Investment carried at fair value equal to $3,700 E/S: No effect 4) Designated FV: I/S: Dividend income of $100 and unrealized loss of $300 would be reported B/S: Investment carried at fair value equal to $3,700 S/E: No effect Part B 1) HTM: Not applicable 2) AFS: US GAAP: Loss on I/S of $100, $300 removed from OCI IFRS: Loss on I/S of $100, $300 removed from income reported directly in equity 3) Trading: Gain on I/S of $200 Exam Preparation & Investment Sales Training 2 info@examsuccess.ca

3 Example 2: Jackson Corp. is an international company located in France. Jackson held a 19% equity ownership in Harpo Corp. Jackson s management classified the investment as available for sale and follows IFRS. During the year the value of the Harpo investment increased by 2 million. In a news letter to shareholders, Jackson announced that it intends to increase its investment in Harpo to 50% at the beginning of next year. Select financial data (in millions) for Jackson and Harpo are given below: Jackson - Year ending December E Total Assets 1,170 1,317 Shareholders Equity Sales 1,400 1,575 EBIT EAT The contribution to Jackson s 2009 EBT resulting from the investment The remainder of this Item Set can be found on our Level 2 Test Bank. The Level 2 Test Bank contains 60 full Item Sets. The cost of the Test Bank is only $99 (+tax) To gain access, simply click on the Buy Now below and you will be taken to our ecommerce/paypal site where you can complete the transaction. Thank you. Best of luck with your studies! Exam Success Buy Now Exam Preparation & Investment Sales Training 3 info@examsuccess.ca

4 Employee Compensation: Post Employment and Share Based Pension Formulas PBO END = PBO BEG + SC + IC Benefits Paid + Actuarial Loss +/- Plan Amendments PA END = PA BEG + Actual Return on PA + Contributions Benefits Paid PC = SC + IC Expected Return on PA + PSC +/- Actuarial Loss/Gain Key Pension Assumptions 1. Discount rate PBO, PC, IC 2. Compensation growth rate PBO, SC, PC 3. Expected return on PA PC Stock Options/Grants Expenses = Fair market value, allocated over the service life Key issue: changing the valuation assumptions, changes the related expense and thus could potentially manipulate reported earnings Exam Preparation & Investment Sales Training 4 info@examsuccess.ca

5 Multinational Operations General Rules Current rate method applies if the functional currency is the same as the local currency Temporal method applies if the functional currency is the same as the parent s currency Current Rate Method Balance Sheet Accounts - All assets and liabilities translated at the current rate - Equity is translated at the historical rate Income Statement Accounts - All accounts translated at the average rate Translation gain/loss is reported in OCI in equity on the B/S Temporal Method Balance Sheet Accounts - Monetary assets and liabilities (Cash, A/R, A/P, LTD) are remeasured at the current rate - Non-monetary assets and liabilities (FA, CS) are remeasured at the historical rate - Inventory can be remeasured using the average rate Income Statement - Revenue and expenses are remeasured at the average rate - COGS, Depreciation and Amortization are remeasured at the historical rate (or Average rate) Translation gain/loss is reported in on the I/S Hyperinflationary Economies US GAAP: requires use of the temporal method IFRS: requires restatement for local inflation, then use current rate method Exam Preparation & Investment Sales Training 5 info@examsuccess.ca

6 Multinational Example 1: Stopper Corporation, located in France, manufactures and sells corks for the French wine industry. It is a subsidiary of Tiara & Cork, Inc. (T&C), which is located in the United States. Although Stopper is a subsidiary, it is treated as an independent corporation by T&C. TABLE 1 Stopper Corporation Income Statement (12/31/01) in millions Sales 70.1 COGS 27.4 Gross Margin 42.7 S,G,&A 12.6 Depreciation 13.5 EBIT 16.6 Interest Expense 4.6 EBT 12.0 Taxes (40%) 4.8 Net Income 7.2 Stopper Corporation Balance Sheet (12/31/01) in millions Cash 20.1 Accounts Receivable 9.3 Inventories 14.4 Current Assets 43.8 Fixed Assets (net) 42.7 Total Assets 86.5 Accounts Payable 22.3 Accruals 8.5 Current Liabilities 30.8 Long Term Debt 38.4 Total Liabilities 69.2 Contributed Capital 9.3 Retained Earnings 8.0 Translation Adjustment Total Liabilities & Equity 86.5 Exchange Rate Data Date /$ January 1, December 31, Average for Historic Rate (purchase of fixed assets) 5.8 Exam Preparation & Investment Sales Training 6 info@examsuccess.ca

7 1. Which currency translation method is appropriate for T&C when converting Stopper s financial statements back to dollars? a. Current/noncurrent method. b. Temporal method. c. Functional method. d. All-current method. 2. What would the dollar amount of Stopper s sales be using the all-current method to translate Stopper s sales back to T&C s reporting currency? a. $10.00 b. $11.00 c. $ d. $ What would the dollar amount of Stopper s fixed assets be using the all-current method to translate Stopper s fixed assets back to T&C s reporting currency? a. $6.11 b. $6.67 c. $7.36 d. $ Using the all-current method to translate Stopper s contributed capital back to T&C s reporting currency, what would be the dollar amount of Stopper s contributed capital? a. $1.60 b. $53.94 c. $59.52 d. $65.10 Exam Preparation & Investment Sales Training 7 info@examsuccess.ca

8 Multinational Example 1 Solutions: Solutions: 1. X 2. X 3. X 4. X Solutions to this Item Set can be found on our Level 2 Test Bank. The Level 2 Test Bank contains 60 full Item Sets. The cost of the Test Bank is only $99 (+tax) To gain access, simply click on the Buy Now below and you will be taken to our ecommerce/paypal site where you can complete the transaction. Thank you. Best of luck with your studies! Exam Success Buy Now Exam Preparation & Investment Sales Training 8 info@examsuccess.ca

FINANCIAL ACCOUNTING 4 Module 8

FINANCIAL ACCOUNTING 4 Module 8 Foreign Subsidiaries Canadian companies are required by GAAP to produce consolidated financial statements. Thus, if the company has operations in England then the company