英文台湾中兴大学金融系王之彦老师的财务报表分析chap005

Equitymethodaccounting—reportstheparent’sinvestmentinthesubsidiary,andtheparent’sshareofthesubsidiary’sresults,aslineitemsintheparent’sfinancialstatements(referredtoasone-lineconsolidation)Note:Generallyusedforinvestmentsrepresenting20to50percentofthevotingstockofacompany’sequitysecurities--maindifferencebetweenconsolidationandequitymethodaccountingrestsinthelevelofdetailreportedinfinancialstatementsIntercorporateInvestmentsEquityMethodAccountingInvestmentaccount:InitiallyrecordedatacquisitioncostIncreasedby%shareofinvesteeearningsDecreasedbydividendsreceivedIntercorporateInvestmentsEquityMethodAccountingIncome:Investorreports%shareofinvesteecompanyearningsas“equityearnings”initsincomestatementDividendsarereportedasareductionoftheinvestmentaccount,notasincomeIntercorporateInvestmentsEquityMethodAccountingEquityMethodMechanicsAssumethatGlobalCorp.acquiresforcasha25%interestinSynergy,Inc.for$500,000,representingone-fourthofSynergy’sstockholders’equityasoftheacquisitiondate.Acquisitionentry:Investment500,000Cash500,000Synergy,Inc.Currentassets700,000PP&E5,600,000Totalassets6,300,000Currentliabilities300,000Long-termdebt4,000,000Stockholders’Equity2,000,000Totalliabsandequity6,300,000EquityMethodMechanicsSubsequenttotheacquisitiondate,Synergyreportsnetincomeof$100,000andpaysdividendsof$20,000.GlobalrecordsitsproportionateshareofSynergy’searningsandthereceiptofdividendsasfollows:Investment25,000Equityearnings25,000(torecordproportionateshareofinvesteecompanyearnings)Cash5,000Investment5,000(torecordreceiptofdividends)Investmentbalance=%ShareofInvesteeEquityGlobalCorp.InvestmentAccountSynergy,Inc.Stockholders’equityBeg.500,0002,000,000Beg.Inc.25,0005,000Div.Div.20,000100,000Inc.End520,0002,080,000End.Theinvestmentaccountrepresentstheproportionateshareofthestockholders’equityoftheinvesteecompany.Substantialassetsandliabilitiesmay,therefore,notberecordedonbalancesheetunlesstheinvesteeisconsolidated.Thiscanhaveimportantimplicationsfortheanalysisoftheinvestorcompany.Investmentearnings(theproportionateshareoftheearningsoftheinvesteecompany)shouldbedistinguishedfromcoreoperatingearningsintheanalysisoftheearningsoftheinvestorcompany.Investmentsaccountedforundertheequitymethodarereportedatadjustedcost,notatmarketvalue.Substantialunrealizedgainsmay,therefore,notbereflectedinassetsorstockholders’equity.EquityInvestmentsImportantPointsinEquityMethodAccountingAninvestorshoulddiscontinueequitymethodaccountingwhentheinvestmentisreducedtozero(suchasduetoinvesteelosses),andshouldnotprovideforadditionallossesunlesstheinvestorhasguaranteedtheobligationsoftheinvesteeorisotherwisecommittedtoprovidingfurtherfinancialsupporttotheinvestee.Equitymethodaccountingonlyresumesonceallcumulativedeficitshavebeenrecoveredviainvesteeearnings.Iftheamountoftheinitialinvestmentexceedstheproportionateshareofthebookvalueoftheinvesteecompany,theexcessisallocatedtoidentifiabletangibleandintangibleassetsthataredepreciated/amortizedovertheirrespectiveusefullives.Investmentincomeisreducedbythisadditionalexpense.Theexcessnotallocatedinthismanneristreatedasgoodwillandisnolongeramortized.EquityInvestmentsImportantPointsinEquityMethodAccountingIntercorporateinvestments—investmentsbyonecorporationintheequitysecuritiesofanothercorporationParent—corporationwhocontrols,generallythroughownershipofequitysecurities,theactivitiesofanotherseparatelegalentityknownasasubsidiaryParent-subsidiaryrelation—whenonecorporationownsalloramajorityofthevotingequitysecuritiesofanothercorporationIntercorporateInvestmentsConsolidationBusinessCombinationsDefinitionsBusinesscombinations—refertothemerger,acquisition,reorganization,orrestructuringoftwoormorebusinessestoformanotherbusinessentityMotivations•enhancecompanyimageandgrowthpotential•acquiringvaluablematerialsandfacilities•acquiringtechnologyandmarketingchannels•securingfinancialresources•strengtheningmanagement•enhancingoperatingefficiency•encouragingdiversification•rapidityinmarketentry•achievingeconomiesofscale•acquiringtaxadvantages•managementprestigeandperquisites•managementcompensationBusinessCombinationsSource:AccountingTrends&TechniquesCompaniesReportingBusinessCombinationsNoCombinations40%Combinations60%BusinessCombinationsAccountingGAAPonlyallowsonemethodofaccountingforbusinesscombinations:•Purchaseaccounting—reflectsacquisitionofoneormorecompaniesbyanothercompany;acquirorcontinuesoperating,whiletheacquiredcompanydisappears;acquirorrecordstheacquiredassets(includinggoodwill)andliabilitiesatfairvaluesatdateofacquisitionPreviously,thePooling-of-interestmethodwasallowed.Althoughprioracquisitionsaccountedforaspoolingsareallowedtocontinue,acquisitionsafter6/30/01mustusePurchaseMethod.DebtDebtDebtDebtConsolidatedfinancialstatementsreporttheresultsofoperationsandfinancialconditionofaparentcorporationanditssubsidiariesinonesetofstatementsConsolidationinvolvestwosteps:aggregationandeliminationAggregationofassets,liabilities,revenues,andexpensesofsubsidiarieswiththeparentEliminationofintercompanytransactions(andacc