Financial Reporting and Analysis

ownership interest of less than 20%

passive investment

no significant influence

amortized cost, fair value through OCI, fair value through profit or loss

ownership interest between 20-50%, typically non controlling but can have significant influence

equity method

ownership interest of more than 50%

when the investor can control the investee the acquisition method is used

acquisition method

entity whereby control is shared by two or more investors

both IFRS and US GAAP require the equity method for joint ventures

acquiring firm absorbs all the assets and liabilities of the acquired firm which ceases to exist, the acquiring firm is the surviving entity

both entities continue to exist in a parent subsidiary relationship recall that when less than 100% of the subsidiary is owned by the parent the parent prepares consolidated financial statements but reports the unowned (minority or noncontrolling) interest on its financial statements

a new entity is formed that absorbs both of the combining companies

amortized costs (for debt securities only)

fair value through profit or loss (for debt and equity securities)

fair value through OCI (for debt and equity securities)

only for debt w/ two criteria

debt securities are being held to collect contractual cash flows
contractual cash flows are either principal or interest on principal only

debt reported on BS at amortized cost (includes discount/premium difference)
interest income is recognized on IS but changes in fair value are ignored

for debt and equity securities
report them at fair value through profit or loss (FVPL) on balance sheet at fair value, changes in that both realized and unrealized are recognized on IS along with any dividend or interest income
once choice is made it's irrevocable

securities classified as this are carried on BS at fair value and any unrealized gain or loss is reported in OCI

realized gain or loss, dividends, and interest income are reported in the income statement

for investments in associates (20-50% ownership)

initial investment is recorded at cost and reported on the balance sheet as a noncurrent asset

earnings increases investment account on BS and is recognized in the investors IS, dividends reduce item on BS but don't show up on IS

if fair value of the investment falls below the carrying value and the decline is other-than-temporary the investment is written down to fair value and loss is recognized on IS

assets can't be written-up

example: company acquired 80% of another company

equity = one line item on IS and BS for this

acqusition = combine the companies financial statements, and have a line to bring it down to 80% (called minority interest)

IFRS and GAAP require equity method

differ between contingent asset and liability recognition under the acquisition method

ifrs allows partial or full goodwill methods gaap just full

retirement plan wherby the firm contirbues a certain sum each period to the employee's retirmenet account

investment decisions are left to the employee who assumes all the investment risk

firm promises to make periodic payments to the employee after retirement

difference between the benefit obligation and plan assets

primarily health care benefits for retired employees

just other shit essentially

present value of benefits earned by employees during the current period

reduce (projected benefit obligation)

present value of benefits earned by employees during current pierod

currency of the country being referred to

determined by management, is the currency of primary economic environment in which the entity operates, usually the currency in which the entity generates and expends cash, functional currency can be the local currency or some other currency

currency in which the parent company prepares its financial statements

involves converting the local currency into functional currency using the temporal method

involves converting the functional currency into the parne'ts presentation (reporting) currency using the current rate method