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Erstellt / Aktualisiert 03.04.2020 / 14.04.2020
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Fenster schliessen

Why do companies invest in other companies?

  • To earn a high rate of return (earn in the stock market to earn)

  • To secure certain operating or financing arrangements with another company

it means--> when you invest in another company you can actually control that company

Fenster schliessen

passive investment vs. active investment

passive: when the company is really small

active: majority voting rule you have the power to dictate 

Fenster schliessen

table: intercorporate Equity Investments

Lizenzierung: Keine Angabe
Fenster schliessen

Fair value method is used when...

  • investor holds a small percentage (usually less than 20%) of equity securities of investee

  • Investor cannot significantly affect investee’s operations

  • Investment is made in anticipation of dividends or market appreciation.

  • Investments are recorded at cost and subsequently adjusted to fair value, if determinable, otherwise they remain at cost.

Fenster schliessen

Equity Method is used when...

  • Investor has the ability to exercise significant influence on investee operations (whether influence is applied or not)

  • Generally used when ownership is between 20% and 50%.

  • Significant Influence might be present with much lower ownership percentages.

  • Under the equity method, investor’s share of investee dividends declared are recorded as decreases in the investment account, not income.

Fenster schliessen

consolidation of Financial Statements is used when...

  • Investor’s ownership exceeds 50% of an organization’s outstanding voting stock

  • Control exists through legal or contractual arrangement, even when the ownership is less than 50%.

  • Special purpose entities must also be consolidated (intended to combat misuse of SPEs to keep large amounts of assets and liabilities off the balance sheet known as “off balance sheet financing”)

  • One set of financial statements prepared to consolidate all accounts of the parent company and all of its controlled subsidiaries as a single entity

Fenster schliessen

Under IFRS, the presumption is that equity investments less than 20% are held for trading?

correct:

  • Investments valued at fair value.

  • Record unrealized gains and losses in net income.

Fenster schliessen

IFRS allows companies to classify some equity investments less than 20% as non-trading?

correct:

• Investments valued at fair value.
• Record unrealized gains and losses in other comprehensive income.