Chapter 18 Intercorporate Equity Investments.ppt

Chapter 18: Intercorporate Equity Investments Relevant circumstances Consolidation Pooling of interests Purchase method New entity approach Pro rata Equity method Fair value method Reporting on Intercorporate Equity Investments Consolidated reporting as if the two separate legal entities are one accounting entity using either the purchase or pooling method (as appropriate) Nonconsolidation using the equity method of accounting Nonconsolidation using the fair (market) value approaches Relevant Circumstances The relevant circumstances that justify differential accounting for intercorporate equity investments depend on the level of influence held by the investor Three Levels of Control Majority owned company: owner has effective control Majority owned company: control is only temporary or the majority owner does not have effective control Less-than-majority-owned companies: relevant circumstance is whether the investor can exercise significant influence?over operating and financial policies Consolidation A technique in which two or more entities are reported as if they are one common accounting entity Also called a business combination Consolidation Terms Combined enterprise Constituent companies Combinor Combinee Consolidation Central accounting issue is the valuation of the assets and liabilities of the separate entities being combined for reporting purposes FASB (1976) outlined three possible methods of accounting pooling of interests accounting purchase accounting new entity approach Divestitures Sell-off Spin-off Split-off Split-up Pooling of Interests Based on the premise that no substantive transaction occurs between the constituent companies Is argued to be simply the formal unification of two previously separate ownership groups Desirability of pooling is to avoid certain ramifications of purchase accounting Purchase Method Assumption is that the combinor is a parent company that purchases the combinee (subsidiary) and must account fo