Equity investments

Equity Investments

Equity -how classify and account for depends on level of influence

  • No significant influence (< 20%): fair value method through net income
  • Significant but not controlling influence (20-50%): equity method
  • Controlling influence (> 50%): consolidate

Fair-value Through Net Income (ASC 321)

  • Dividends to income statement
  • Adjust to fair value on balance sheet
    • change to income statement
  • Cashflow: classify cash flows from purchases and sales on the basis of the nature and purpose for which it acquired the securities

Equity method (ASC 323)

  • Significant influence but not controlling influence
  • Impairment when permanent loss in fair value (not temporary)
  • Equity account can’t go below zero
  • Equity investments accounted for just like acquisitions
    • any difference between FV and CV allocated to identifiable assets any excess to goodwill

Equity method: significant but not controlling influence

ASC 323-10-15-6: Ability to exercise significant influence over operating and financial policies of an investee may be indicated by

  • Representation on the board of directors
  • Participation in policy-making processes
  • Material intra-entity transactions
  • Interchange of managerial personnel
  • Technological dependency
  • Extent of ownership by an investor in relation to the concentration of other shareholders

Equity method: adjustments to investment

  • Share of earnings or losses
  • Share of dividends
  • Share of other comprehensive income
  • Amortize basis differences between investor cost and investee cost

Fair value election option (ASC 825)

  • Can make election for equity securities classified as available for sale or as equity method
  • When election made for securities accounted for using fair value method
  • Election is non-revocable when made

Fair value method

  • On 2019-02-01, P purchased shares of CAT common stock for $1,403
  • P accounted for the investment using the fair value method
  • On 2019-07-15, P received a cash dividend of $280.60 from CAT
  • On 2019-12-31, the fair value of this investment was $1,571.36

Journal entries: Fair value


PURCHASE DR CR
Marketable securities 1403
Cash 1403
RECEIVES DIVIDEND of $280.60
Cash 280.6
Other income 280.6
Adjust TO FV is $1,571.36
Marketable securities 168.36
Unrealized gain (loss) 168.36

Effects on income statements: fair value method


Income Statement Effect
Other income (loss) 280.60
Equity income (loss) 0.00
Unrealized gain (loss) 168.36
Realized gain (loss) 0.00
NET INCOME 448.96


Comprehensive Income Statement Effect
NET INCOME 448.96
Unrealized gain (loss) on available for sale securities 0.00
TOTAL COMPREHENSIVE INCOME 448.96

Effects on balance sheet statement: fair value method


Balance Sheet Effect
Cash -1122.40
Marketable securities 1571.36
Equity method investments 0.00
TOTAL ASSETS 448.96
Retained earnings 448.96
Accumulated other comprehensive income 0.00
TOTAL SHAREHOLDERS’ EQUITY 448.96

Effects on cash flow statement: fair value method


Statement of Cash flows Effect
Cash flow from (used in) operating activities 280.6
Cash flow from (used in) investing activities -1403.0
Cash flow from (used in) financing activities 0.0
NET CHANGE IN CASH -1122.4

Equity method

  • On 2019-02-01, P purchased 33.0% of the outstanding shares of TAR common stock for $66,262
  • P accounted for the investment using the equity method
  • On 2019-07-15, P received a cash dividend of $9,939.30 from TAR
  • On 2019-12-31, TAR reported net income of $8,031.76. Record P’s share.

Journal entries: equity method

PURCHASE DR CR
Equity method investments 66262
Cash 66262
RECEIVES DIVIDEND of $9,939.30
Cash 9939.3
Equity method investments 9939.3
SHARE OF TAR’s NI
Equity method investments 2650.48
Equity income in investee 2650.48

Effects on income statements: equity method


Income Statement Effect
Other income (loss) 0.00
Equity income (loss) 2650.48
Unrealized gain (loss) 0.00
Realized gain (loss) 0.00
NET INCOME 2650.48


Comprehensive Income Statement Effect
NET INCOME 2650.48
Unrealized gain (loss) on available for sale securities 0.00
TOTAL COMPREHENSIVE INCOME 2650.48

Effects on balance sheet statement: equity method


Balance Sheet Effect
Cash -56322.70
Marketable securities 0.00
Equity method investments 58973.18
TOTAL ASSETS 2650.48
Retained earnings 2650.48
Accumulated other comprehensive income 0.00
TOTAL SHAREHOLDERS’ EQUITY 2650.48

Effects on cash flow statement: equity method


Statement of Cash flows Effect
Cash flow from (used in) operating activities 9939.3
Cash flow from (used in) investing activities -66262.0
Cash flow from (used in) financing activities 0.0
NET CHANGE IN CASH -56322.7

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