DPM - 5e PPT - ch12 - 030216

FINANCIAL ACCOUNTING
Fifth Edition
Thomas Dyckman
Robert Magee
Michelle Hanlon
Glenn Pfeiffer
CHAPTER 12
Reporting and Analyzing

Financial Investments
Cambridge Business Publishers, 2017
Purchasing Securities
of Other Organizations
Called financial investments
Aimed at activities such as
Short-term investment of excess cash
Alliances for strategic purposes
Market penetration or expansion
Learning Objective 1
Explain and interpret the

three levels of investor influence
over an investeepassive,
significant, and controlling.
Financial Investments
The accounting for financial investments depends on
both the type and the amount of securities
purchased.
Investor Company
Purchaser
Investee Organization
The organization
whose debt or shares
are being purchased
Accounting for investments depends on the degree

of influence or control that the investor company can
exert over the investee company.
Financial Investment Diagram

Financial Investment Diagram
<
<
>
>
3 levels of influence/control
Passive Influence
Investor cannot exert influence over the investee
company
Generally less than 20% of the outstanding
voting stock of the investee is owned by investor
Can be investments in stock, bonds or notes of
other companies
Significant Influence
Investor can exert influence over, but not control,
the investee company
Level of influence can result from
Percentage of voting stock owned
Legal agreements
Result of being a sole supplier or customer
Influence generally assumed if ownership is

between 20% to 50% of the outstanding voting
stock
Controlling Influence
Investor has control over investee
Ability to elect a majority of the board of directors
Ability to affect the strategic corporate direction
Can affect hiring of executive management
Control presumed when ownership is 50% or more

of the outstanding voting stock
However, can occur at less than 50% through
Legal agreements
Technology licensing
IFRS Insight
GAAP uses equity or affiliate to describe an
investment involving significant influence
Usually between 20% and 50%
IFRS uses associate to describe the same
10
Investment Treatment and Effects

The level of influence/control determines the proper
accounting procedures.
Investment Type, Accounting Treatment, and Financial Statement Effects
* AOCI is defined on page 528 of your text.
Continued on following slide
11
Investment Treatment and Effects

The level of influence/control determines the proper
accounting procedures.
Exhibit continued from previous slide
Investment Type, Accounting Treatment, and Financial Statement Effects
12
Describe the term fair value

and the fair value hierarchy.
13
Fair Value
U.S. GAAP defines fair value as the amount that
an independent buyer would be willing to pay for an
asset.
For an asset that is actively traded on financial markets,
Fair value is the amount that we would receive by selling that
asset.
This is referred to as mark-to-market.
Fair value is also used when there is no active market for

the asset.
This is referred to as mark-to-model.
Regarded as more subjective than mark-to-market values
U.S. GAAP requires that firms use the fair value hierarchy
to disclose the methods used to determine fair value.
14
Fair Value Heirarchy

Level 1
Values based on quoted prices in active markets for identical
assets/liabilities
Example: A common share of a company traded on an active exchange.
Level 2
Values based observable inputs other than Level 1
(e.g., quoted prices for similar assets/liabilities, or interest rates, or yield
curves)
Example: A bond that is infrequently traded, but similar to actively traded bonds.
Level 3
Values based inputs observable only to the reporting entity
(e.g., management estimates or assumptions)
Example: An operating asset that is judged to be impaired.
15
Describe and analyze

accounting for passive investments.
Acquisition and Sale

of Passive Investments
16
Investor does not possess sufficient ownership to

enable it to influence or control the investee company.
When Acquired
Recorded at cost of acquisition on the purchase date
When Sold (Usually)
Gain or loss
Proceeds
Book value of
=
on sale
from sale
investment sold
Reported as a component of other income
on the income statement
17
Purchase of Passive Investment

WebPros purchased 1,000 shares of Technix stock for
$14 cash per share, with no ability to influence Technix.
Cost = 1000 $14 = $14,000
Transaction
Purchase 800
shares of Technix
for $14 per share
Cash
Asset
14,000
Cash
Balance Sheet
Noncash
+
= Liabilities +
Asset
+14,000
Invest=
ments
Investment in Technix (+A)
Income Statement
Contrib.
Capital
Earned
Capital
Revenues Expenses =
14,000
Cash (A)
Investment in Technix (A)

14,000
14,000
Cash (A)
14,000
Net
Income
18
Sale of Passive Investment

WebPros sold 200 of the 1,000 Technix shares for $18
per share. The original cost was $14 per share.
Proceeds = 200 $18 = $3,600
Cost of shares sold = 200 $14 = $2,800
Balance Sheet
Transaction
Sales of 200
shares of Technix
for $18 per share
Cash
Asset
+3,600
Cash
Noncash
=
Asset
-2,800
Invest=
ments
Liabilities +
Income Statement
Contrib.
Capital
Earned
Capital
+800
Retained
Earnings
Revenues Expenses =
+800
Gain on
Sale
Net
Income
+800
$3,600 $2,800 = $800
Cash (+A)
3,600
2,800
Gain on sale of investment (+R, +SE)
Cash (A)
3,600
800

2,800
Gain on Sale (R)
800
19
Investments Marked to Fair Value

Two types of securities must be reported on the
balance sheet at current fair value
Available-for-sale (AFS) securities
Management intends to hold for capital gains and interest or
dividend revenue; may sell if the price is right or if cash is
needed.
Trading (T) securities

Management intends to actively buy and sell for trading profits
as market prices fluctuate
Marked to fair value

To increase (mark up) or decrease (mark down) the
investments value to fair value as of the date of the
balance sheet
Accounting for Trading (T) and

Available-for-Sale (AFS) Investments
Accounting Treatment for Trading and AFS Investments
20
21
Fair Value Adjustment

of Trading Investment
WebPros now has 800 shares of Technix recorded at
$14 per share and classified as trading. The fair value at
year-end is $16.50 per share.
Fair value increase = 800 ($16.50 $14) = $2,000
Balance Sheet
Cash
Asset
Transaction
Increase in
market value of
Technix stock
Noncash
=
Asset
+2,000
Invest- =
ments
Liabilities +
Contrib.
Capital
Earned
Capital
Income Statement
Expense
Net
Revenues
=
s
Income
+2,000
Retained
Earnings
+2,000
Unrealized
Gain
2,000
Unrealized gain (+R, +SE)

2,000
+2,000
=
2,000
Unrealized Gain(R)
2,000
22
Fair Value Adjustment of AFS

WebPros now has 800 shares of Technix recorded at
$14 per share and classified as AFS. The fair value at
year-end is $16.50 per share.
Fair value increase = 800 ($16.50 $14) = $2,000
Balance Sheet
Cash
Asset
Transaction
Increase in
market value of
Technix stock
Noncash
=
Asset
+2,000
Invest- =
ments
Liabilities +
Contrib.
Capital
Income Statement
Earned
Expense
Net
+ Revenues
=
Capital
s
Income
+2,000
AOCI
2,000
Unrealized gain (+SE)

2,000
2,000
Unrealized Gain (AOCI)

2,000
23
Financial Statement Disclosures

Companies are required to disclose accounting policies
relating to investment portfolios.
Following are excerpts from Apples accounting policies for
investments in its Sept. 26, 2015 annual report:
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified
as cash equivalents. The Companys marketable debt and equity securities have been classified and
accounted for as available-for-sale. Management determines the appropriate classification of its
investments at the time of purchase and reevaluates the classifications at each balance sheet date. The
Company classifies its marketable debt securities as either short-term or long-term based on each
instruments underlying contractual maturity date. Marketable debt securities with maturities of 12
months or less are classified as short-term and marketable debt securities with maturities greater than
12 months are classified as long-term. Marketable equity securities, including mutual funds, are
classified as either short-term or long-term based on the nature of each security and its availability for
use in current operations. The Companys marketable debt and equity securities are carried at fair value,
with unrealized gains and losses, net of taxes, reported as a component of accumulated other
comprehensive income (AOCI) in shareholders equity, with the exception of unrealized losses believed
to be other than-temporary which are reported in earnings in the current period. The cost of securities
sold is based upon the specific identification method.
24

Excerpts of Apple Inc.s note disclosure as it relates to its
investments from its 2015 annual report is shown.
Short-Term Investments
Level 1:
The following table summarizes

the fair value of the Company's
available-for-sale securities held
in its short-term investment
portfolio as short-term
investments (in millions):
Money market funds
1,798
Mutual funds
1,628
Level 2:
U.S. Treasury securities
U.S. agency securities
5,878
Non-U.S. government securities
6,234
Certificates of deposit and time deposits
4,347
Commercial paper
6,016
Corporate securities
116,165
Municipal securities
952
Mortgage-and asset-backed securities

35,082
16,177
25

Excerpts of Apple Inc.s note disclosure as it relates to
its unrealized gains and losses in its 2015 annual report
follow (in $ millions):
The net unrealized gains as of September 26, 2015 are related primarily to long-term marketable
securities. The Company may sell certain of its marketable securities prior to their stated maturities for
strategic reasons including, but not limited to, anticipation of credit deterioration and duration
management.
26
Potential For Earnings Management

Potential due to the difference in reporting the
changes in fair market value
To report higher income
Management can sell investments to recognize a gain
(or loss) and buy back later
Management can reclassify the investments as trading
from available-for-sale
Allows unrealized gains to be reported on the income
statement
Preventive GAAP requirement

Realized gains and losses on AFS securities must be
reported in the footnotes
27
The Cost Method for Investments

Applicable for investments with no current fair
value
Used for debt securities that management
intends to hold to maturity
Called held-to-maturity (HTM) securities
Accounting treatment
Accounting Treatment for Held-to-Maturity Investments
28
IFRS Insight
International Financial Reporting Standards for
trading, available-for-sale, and held-to-maturity
investments are similar to US GAAP, including the
reporting of the fair value hierarchy.
29
Explain and analyze

accounting for investments
with significant influence.
30
Investments With Significant Influence

Significant influence exists when the investor is
able to affect the financing or operating policies of
the investee.
Reasons for making this type of investment
Prelude to acquisition
May allow an investor to gain a seat on the board to learn inside
information
Strategic alliance
For purposes of expanding to a new location
Such as a company that provides inputs for the investors
production process
Pursuit of research and development

Joint efforts can reduce risk or amount of capital invested
31
Equity Method
Used when significant influence by the investor
over the investee exists
Not reported at fair value
+
Investment Account
Investment
purchase cost
% share of
investees dividends
Recognized
as income by
the investor
% share of
investee's income
Treated as recovery of
investment; Not part of
investors income.
32
Acquisition of Investment
Using the Equity Method
WebPros purchased a 40% interest in Technix for
$60,000. At the acquisition date, Technix has $150,000
of stockholders equity.
Balance Sheet
Transaction
Purchase 40%
interest in
Technix
Cash
Asset
60,000
Cash
Noncash
= Liabilities +
Asset
+60,000
Investment =
in Technix
Contrib.
Capital
Earned
Capital
Income Statement
Expense
Net
Revenues
=
s
Income
60,000
Cash (A)

60,000
60,000
Cash (A)
60,000
33
Investee Income and Dividend

Technix reported $8,000 of net income.
WebPros income share = $8,000 40% = $3,200
Balance Sheet
Cash
Asset
Transaction
Technix reports
$8,000 of net
income
Noncash
Asset
Liabilities +
+3,200
Investment =
in Technix
Income Statement
Contrib.
Capital
Earned
Capital
Revenues
Expense
Net
=
s
Income
+3,200
Retained
Earnings
+3,200
Investmen
t Income
3,200
Investment income (+R, +SE)

60,000
3,200
+3,200
3,200
Investment Income (R)

3,200
34
Investee Income and Dividend

Technix paid $6,000 of dividends for the year.
WebPros dividend share = $6,000 40% = $2,400
Transaction
Technix reports
$6,000 of
dividends
Balance Sheet
Cash
Noncash
+
= Liabilities +
Asset
Asset
+2,400
2,400
Cash
Investment =
in Technix
Cash (+A)
Income Statement
Earned
Expense
Net
+ Revenues
=
Capital
s
Income
2,400
Cash (A)
2,400
Contrib.
Capital
Year end
balance of
Investment
2,400

60,000
3,200
2,400
60,800
35
Equity Method Disclosures

eBays 2015 annual report contained the following
excerpts from its note disclosure pertaining to its
equity method investments:
Equity method investments
Our equity method investments are primarily investments in
privately held companies. Our consolidated results of operations
include, as a component of interest and other, net, our share of
the net income or loss of the equity method investments. Our
share of investees' results of operations is not significant for any
period presented.
Equity Method Accounting

and Effects on Ratios
Net Operating Profit Margin
Equity income included in NOPAT because it relates to operating
investments
Investees sales omitted from investors sales
RESULT: NOPM is overstated
Asset Turnover Ratios

Investees sales and assets omitted from investors financial
statements
RESULT: Asset turnover ratios are misstated
Financial Leverage
Liabilities of investee are omitted from numerator of debt-to-equity
ratio
RESULT: Financial leverage is understated
36
37
Describe and analyze

accounting for investments
with control.
38
Accounting for Investments

With Control
Applicable when an investor owns more than 50%
of the voting common stock of the investee
Consolidation accounting method
Replaces the investment balance with the investees
assets and liabilities
Replaces the equity income reported by the investor
with the investees sales and expenses
Equity method plus one additional step
39
Consolidation Disclosure
Excerpt from Apples accounting policies on its
consolidated subsidiaries from its 2015 annual report:
Basis of Presentation and Preparation
The accompanying consolidated financial statements include
the accounts of the Company. Intercompany accounts and
transactions have been eliminated. In the opinion of the
Companys management, the consolidated financial
statements reflect all adjustments, which are normal and
recurring in nature, necessary for fair financial statement
presentation.
40
Consolidation Accounting
Three core items
Consolidated balance sheet
Account for large premiums paid in mergers/acquisitions
Goodwill and potential impairment of value
GAAP requires consolidation of the two balance

sheets (parent/subsidiary)
Requires summing individual lines for each balance
sheet line, and
Eliminating intercompany transactions
Investments and loans
Sales and purchases within the consolidated group
41
Consolidation Accounting Example

Purchase at Book Value
WebPros acquires all of the common stock of Technix by
exchanging its newly issued shares for all of Technixs stock.
The purchase price is $100,000. Technixs contributed capital
is $40,000 and retained earnings is $60,000.
Balance sheets
just after purchase
WebPros
Technix
Current assets
Investment in Technix
PPE, net
Total assets
$29,000
100,000
116,000
$245,000
$36,000
-70,000
$106,000
Liabilities
Contributed capital
Retained earnings
Total liabilities and equity
$32,000
88,000
125,000
$245,000
$6,000
40,000
60,000
$106,000
42

Purchase at Book Value
WebPros
Technix
Adjustments Consolidated
Current assets
$29,000
100,000
$36,000
--
PPE, net
116,000
70,000
186,000
$245,000
$106,000
$251,000
$32,000
88,000
125,000
$6,000
40,000
60,000
$38,000
88,000
125,000
$245,000
$106,000
Total assets
Liabilities
Contributed capital
Retained earnings
Eliminating adjustments:
(100,000)
(40,000)
(60,000)
$65,000
--
$251,000
Eliminate WebPros investment in Technix

Eliminate Technixs equity
The remaining assets and liabilities are combined.

43
Consolidation Accounting
Purchase Above Book Value
Process to consolidate when purchase price

exceeds book value
Adjustments made in WebPros/Technix example:
Eliminate WebPros investment in Technix
Eliminate Technixs equity
The newly acquired assets and liabilities are increased
to fair value
A new account, Goodwill, is increased
Goodwill is an intangible asset that is only recognized by the investor
when a company is acquired for a purchase price above book value.
44

Purchase Above Book Value
WebPros acquires all of the common stock of Technix by
exchanging its newly issued shares for all of Technixs stock.
The purchase price is $112,000, with PPE worth $8,000 more
than book value, and $4,000 due to additional value from
corporate synergies. Technixs contributed capital is $40,000
and retained earnins is $60,000.
WebPros
Current assets
PPE, net
Technix Adjustments
Consolidated
Goodwill
$ 29,000 $ 36,000
112,000
0
116,000
70,000
0
0
(112,000)
8,000.
$ 65,000
0
194,000
4,000.
4,000
Total assets
$257,000 $106,000
$263,000
Liabilities
$ 32,000 $ 6,000
Contributed capital
100,000
40,000
Retained earnings
125,000
60,000
$ 38,000
100,000
125,000
(40,000)
(60,000)
$8,000 added
to PPE
because it was
valued less
than market
$4,000
allocated to the
intangible
asset, goodwill
45
Valuing Assets and Liabilities Acquired

When one company acquires another, the fair value
of the acquired companys individually identifiable
assets an liabilities must be determined.
Step 1
Adjust the book value of all tangible assets and liabilities to
fair value.
Step 2
Assign a fair value to any identifiable intangible assets.
Step 3
Assign the residual amount to goodwill.
46
Disclosure of Acquisitions
eBays 2014 annual report contained the following
excerpts from its note disclosure pertaining to its
acquisition activity:
2014 Acquisition Activity
During 2014, we completed three acquisitions, all of which are
included in our Marketplaces segment, for aggregate purchase
consideration of approximately $58 million, consisting primarily of
cash. The allocation of the purchase consideration resulted in net
liabilities of approximately $1 million, purchased intangible assets of
$29 million and goodwill of $30 million. The consolidated financial
statements include the operating results of the acquired businesses
since the respective dates of the acquisitions. Pro forma results of
operations have not been presented because the effect of the
acquisitions was not material to our financial results.
47
Goodwill Impairment
An intangible asset with an indefinite life
GAAP requires annual testing for impairment
Impairment test
Step 1
The fair value of the investee company is compared with
the current book value of that company,
including the revaluations made at acquisition.
Step 2
If the fair value is less this book value, the investment is
impaired.
Must be written down to market value
Impairment loss recognized on the income statement
48
Goodwill Impairment Example

Joe-to-Go Coffees current balance for its Snacks, Inc.
subsidiarys net assets is $370,000, with goodwill at
$35,000. The Snacks, Inc. subsidiary has a fair value of
$362,000, so an impairment has occurred. The fair
value of Snacks, Inc.s net assets without goodwill is
$350,000.
Fair market value of the investee, Snacks, Inc.
Fair market value of net assets (without
goodwill)
Implied goodwill
Current goodwill balance
Impairment loss
Impairment loss = $23,000
$362,000.
(350,000)
12,000.
(35,000)
($23,000)
49
Recording Goodwill Impairment

An impairment loss of $23,000 must be recognized on
goodwill.
Balance Sheet
Transaction
Cash
Asset
Impairment
adjustment to
Goodwill
Noncash
=
Asset
23,000
Goodwill =
Liabilities +
Goodwill impairment loss (+E, SE)
Contrib.
Capital
Earned
Capital
23,000
Retained
Earnings
Income Statement
Expense
Net
Revenues
=
s
Income
23,000
23,000
Goodwill =
Impairment
Loss
23,000
Goodwill (A)
Goodwill Impairment Loss (E)

23,000
23,000
Goodwill (A)
23,000
50
Limitations of Consolidation Reporting

Consolidated income does not imply that cash is
received by the parent company.
Consolidated financial statements are a mix of
subsidiaries, often from different industries.
Segment disclosures of individual subsidiaries are
affected by intercorporate transfer-pricing policies
that can artificially inflate the profitability of one
segment at the expense of another.
51
Financial Analysis Issues

Accounting for financial investments have
quantum shifts that affect transactions
Passive versus equity
Equity versus consolidation
Acquisitions disrupt analysis

Time-series analysis
Ratio comparisons
52
Appendix 12A
Illustrate and analyze

accounting mechanics for
equity method investments.
53
Equity Method Mechanics

Acquisition
Reported at cost of acquisition
Dividends received
Treated as a return of the investment
Investee earns income

Treated as investment earnings based on the
proportionate share of ownership
Fair value accounting

No subsequent adjustments to fair value unless there is
a significant and sustained decline in value
Investing company must conduct a fair value analysis at
the time of investment
54
Equity Method Mechanics Example

At the beginning of the year, Infusion, Inc. acquired 30% of
the voting stock of TechCo for $345,000, on which date the
book value of TechCos equity is $980,000.
Book value of TechCo's equity
Percentage acquired
Infusions share of equity
Undervalued PPE (30% $70,000)
Intangible assets (goodwill)
$980,000
30%
294,000
21,000
30,000
Infusions purchase price
$345,000
Infusion feels that TechCos plant assets (PPE) are

undervalued by $70,000, and the investment is expected to
yield intangible benefits to Infusion valued at $30,000.
The undervalued PPE has a remaining expected useful life of
20 years.
55
Equity Method Mechanics Example

During the year, TechCo reports net income of $88,000 and
pays $40,000 of dividends.
Infusion, Inc. will recognize investment income equal to
$25,350 $26,400 for 30% of TechCos $88,000 income,
minus $1,050 for the depreciation of the $21,000 PPE
valuation adjustment over 20 years.
Investment Account on Infusion's Balance Sheet
Acquisition cost
$345,000.
Net income share (30% $88,000)
26,400.
Depreciation of PPE adjustment ($21,00020)
Share of dividends (30% $40,000)
Ending balance
(1,050)
(12,000)
$358,350.
56
Appendix 12B
Apply consolidation
accounting mechanics.
Consolidation Accounting Mechanics

Example
Now assume Infusion, Inc. acquired 100% of the shares of
TechCo at the beginning of the year, for $638,000 cash and
32,000 shares of its own stock selling for $16 per share
($512,000). Infusion estimates that TechCos PPE is
undervalued by $70,000, with $100,000 considered to be
goodwill.
Cash
Stock
Cost
$ 638,000
512,000
$1,150,000
Book value of TechCo's equity

Percentage acquired
Infusion's share of equity
Undervalued PPE
Intangible assets (goodwill)
Infusion's purchase price
$ 980,000
100%
980,000
70,000
100,000
$1,150,000
57
Consolidation Accounting Mechanics

Example
Balance sheets just after consolidation:
Elimination of the book
value of TechCos equity
Infusion
Current assets
Investment in TechCo
PPE, net
Goodwill
TechCo
$ 370,000 $ 260,000
1,150,000 -860,000
0
920,000
0
Total assets
$2,380,000
$1,180,000
Liabilities
Contributed capital
Retained earnings
$ 620,000
1,180,000
580,000
$ 200,000
450,000
530,000
$2,380,000
$1,180,000
Adjustments
Consolidated
$ 630,000
($980,000)
(170,000)
70,000.
100,000.
1,850,000
100,000
$2,580,000
$ 820,000
(450,000)
1,180,000
(530,000)
580,000
Elimination of$2,580,000
the excess of
purchase price over book value
58
59
Appendix 12C
Discuss the reporting of

derivative securities.
60
Accounting for Derivatives

Derivatives are financial instruments
Utilized by companies to reduce various kinds of
risk
Offset gain or loss for an asset or liability to which
they relate
Why Managers May Acquire Derivatives
1) To reduce risk that a purchase price of raw materials will
increase prior to purchase
2) To reduce the risk that exchange rates will move
unfavorably prior to collection of an account receivable
3) To convert funds borrowed on a floating rate of interest
to a fixed rate loan
61
Reporting of Derivatives
Derivative contract, and the asset or liability to
which it relates, are both reported on the balance
sheet at fair value
If the hedge is effective
The asset and liability are offsetting
So equity is unaffected
Related gains or losses are largely offsetting

So income is unaffected
62
Disclosure of Derivatives
Required note disclosure
Both qualitative and quantitative information about
derivatives
Potential risks underlying derivative securities
Also disclosed in the Management Discussion &

Analysis section of the annual report
63
Derivative Disclosures
Companies are required to disclose accounting policies
relating to their derivatives. A portion of Pfizers, 2014 footnote
disclosure follows:
Foreign Exchange Risk
A significant portion of our revenues, earnings and net investments in foreign affiliates is
exposed to changes in foreign exchange rates.Depending on market conditions, foreign
exchange risk is managed through the use of derivative financial instruments and foreign
currency debt. These financial instruments serve to protect net income and net investments
against the impact of the translation into U.S. dollars of certain foreign exchange-denominated
transactions.
As of December 31, 2014, the aggregate notional amount of foreign exchange derivative
financial instruments hedging or offsetting foreign currency exposures was $36.6 billion. The
derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen,
U.K. pound and Swiss franc. The maximum length of time over which we are hedging future
foreign exchange cash flow relates to our $2.3 billion U.K. pound debt maturing in 2038.
All derivative contracts used to manage foreign currency risk are measured at fair value and
are reported as assets or liabilities on the consolidated balance sheet. Changes in fair value
are reported in earnings or in Other comprehensive income/(loss), depending on the nature
and purpose of the financial instrument (offset or hedge relationship) and the effectiveness of
the hedge relationships.
64
Summary
The following is an overview

of the chapter material.
65
Overview of Financial Investments

Financial investments are made for a variety of
reasons
Thus, accounting for financial investments reflects
that complexity
Survey of 500 large U.S. companies
More than half had some available-for-sale securities
One tenth had trading securities
One out of five had equity method investments
Corporate acquisitions are common enough that

consolidation reporting is widely used
66
Overview of Financial Investments

Financial statement readers must be aware of
quantum sifts in accounting occurring at 20% and
50% ownership
Most common accounting method for financial
investments affords management great flexibility
in timing gains/losses in the income statement
The End

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FINANCIAL ACCOUNTING

Reporting and Analyzing

Cambridge Business Publishers, 2017

Explain and interpret the

Cambridge Business Publishers, 2017

Accounting for investments depends on the degree

Financial Investment Diagram

Cambridge Business Publishers, 2017

Influence generally assumed if ownership is

Control presumed when ownership is 50% or more

IFRS uses associate to describe the same

Cambridge Business Publishers, 2017

Investment Treatment and Effects

* AOCI is defined on page 528 of your text.

Cambridge Business Publishers, 2017

Continued on following slide

Investment Treatment and Effects

Investment Type, Accounting Treatment, and Financial Statement Effects

Cambridge Business Publishers, 2017

Describe the term fair value

Cambridge Business Publishers, 2017

Fair value is also used when there is no active market for

Fair Value Heirarchy

Describe and analyze

Cambridge Business Publishers, 2017

Acquisition and Sale

Investor does not possess sufficient ownership to

Purchase of Passive Investment

Investment in Technix (+A)

Investment in Technix (A)

Sale of Passive Investment

$3,600 $2,800 = $800

Investment in Technix (A)

Gain on sale of investment (+R, +SE)

Investment in Technix (A)

Investments Marked to Fair Value

Trading (T) securities

Marked to fair value

Accounting for Trading (T) and

Cambridge Business Publishers, 2017

Fair Value Adjustment

Investment in Technix (+A)

Unrealized gain (+R, +SE)

Investment in Technix (A)

Fair Value Adjustment of AFS

Investment in Technix (+A)

Unrealized gain (+SE)

Investment in Technix (A)

Unrealized Gain (AOCI)

Financial Statement Disclosures

Financial Statement Disclosures

The following table summarizes

Money market funds

Non-U.S. government securities

Certificates of deposit and time deposits

Mortgage-and asset-backed securities

Financial Statement Disclosures

Cambridge Business Publishers, 2017

Potential For Earnings Management

Preventive GAAP requirement

The Cost Method for Investments

Cambridge Business Publishers, 2017

Cambridge Business Publishers, 2017