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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
passive investment vs. active investment
passive: when the company is really small
active: majority voting rule you have the power to dictate
table: intercorporate Equity Investments
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.
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.
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
Under IFRS, the presumption is that equity investments less than 20% are held for trading?
Investments valued at fair value.
Record unrealized gains and losses in net income.
IFRS allows companies to classify some equity investments less than 20% as non-trading?
• Investments valued at fair value.• Record unrealized gains and losses in other comprehensive income.
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