F3 - Equity Method and Joint Ventures
equity method
BANK ACCOUNT -investment is originally recorded at the price paid to acquire the investment -the investment account is subsequently adjusted as the net assets of the investee change through the earning of income and payment of dividends -the investment account increases by the investor's share of the investee's net income with a corresponding credit to the investor's income statement account, Equity in Subsidiary/Investee income. -the distribution of dividends by the investee reduces the investment balance -continuing losses by an investee may result in decrease of the investment account to a zero balance
liquidating dividend...how is it reported?
reductions of INVESTMENT
what can cause significant influence besides having 20%-50% of voting stock
the CPA exam frequently presents questions where the ownership percentage is below 20%, but the "ability to exercise significant influence" exists -LARGEST SHAREHOLDER AND(?) -CONTROL MAJORITY OF THE BOARD
amortize asset fair value difference (premium) over related asset life
the excess of an asset's fair value over its book value is amortized over the life of the asset(excess caused by land is NOT amortized) -this additional amortization causes the investor's share of the investee's net income to decrease...LIKE A BANK SERVICE CHARGE ------------------- DR: equity in investee income CR: investment in investee
watch out for distractors - like dividends how could that be a distractor??
they could ask for income on an income statement and give you the total earnings and dividends paid by the sub...and you calculate the earnings minus the dividends when its just asking for income!! dividends doesn't go on income statement!
joint venture accounting---how is it accounted for?
under both US GAAP and IFRS, investors generally account for joint venture investments using the equity method
how to account for common stock dividends?
under the equity method, the common stock dividends are recorded as a reduction to the investment account
step-by-step acquisition- change from cost method to equity method
when significant influence is acquired, it is necessary to record a change from the cost/AFS classification to the equity method -the investment account and the RE account are adjusted retrospectively for the difference between the available-for-sale classification/cost method to the equity method
equity in investee income calculation
when the additional investment is made sometime during the year, the investor will calculate its share of the investee's income by multiplying the: 1. investee's income by the fraction of the year that the cost method(AFS) was used and the percentage ownership before the change 2. this will then be added to the investee's income multiplied by the fraction of the year remaining and the percentage of ownership after the change
exercises significant influence
-20-50% of voting stock of another "investee" company is able to exercise significant influence over the operating and financial policies of that investee
PASS KEY - BASE ACCOUNT ANALYSIS
-an easy way to remember all the GAAP accounting rules for the equity method is to think of it like a bank account and use your base account analysis B-Beginning balance A-Add: Investor's share of investee's earning(like bank interest; it is income when earned, not when taken out) S-Subtract: Investor's share of investee's dividends (like bank withdrawals; and it is not income) E-Ending balance (OF INVESTMENT ACCOUNT)
PASS KEY - key to applying equity method when previously had applied cost method
-apply the new method(equity) to the prior period's old percentage!! -do NOT apply the new percentage to the prior period---you did not know that percentage back then!!
Balance sheet - investment in investee - to record purchase
-journal entry to record at cost(FV of consideration plus legal fees) -DR: Investment in investee -CR: Cash or if purchased through a company's stock---> DR: Investment in investee CR: Common Stock of Parent CR: APIC of parent
to equity from cost
-the equity method should be used and the periods during which the cost method(fair value) was used are retrospectively adjusted----to see where you would have been -the year-end ownership percentage is used to make all equity entries
A STOCK DIVIDEND IS NOT REVENUE
A STOCK DIVIDEND IS NOT REVENUE
investments in investee common stock and preferred stock----what happens if an investor company owns both common and preferred stock of an investee company?
1. the "significant influence" test is generally met by the amount of common stock owned (which is usually the only voting stock) 2. the calculation of the net income from subsidiary (or investee) to be reported on the income statement includes: a. preferred stock dividends b. share of earnings available to common shareholders(net income reduced by preferred dividends)
when dividends are paid what goes down??
INV IN S----------- NOT INCOME
when fair values equaled carrying amounts except for certain assets....and those certain assets the FV exceeds the carrying amount...what do you generally have to do?
amortize the equipment that has a FV exceeding the carrying amount!!
common stock dividends
a reduction of the net investment account.
equity method vs acquisition method - original cost
acquisition method - FV of consideration given...DOES NOT INCLUDE...legal fees, finder's fee, stock registration/SEC filing fees and issuance costs/(APIC), indirect costs, bond issue costs(capitalized and amortized) ---------------------------------------------------------------------- equity method - FV of consideration plus legal fees.
differences between the purchase price and book value(NBV) of the investee's net assets
additional adjustments to the investment account under the equity method result from differences between the price paid for the investment and the book value of the investee's net assets---this difference is first attributable to: 1. **Asset Fair Value Differences**---differences between the book value and fair value of the net assets acquired 2. **Goodwill**---any remaining difference is goodwill
stock dividend received by P from S
dividend revenue is not recorded when a stock dividend of the same shares in the same company are received -memo entry that reduces the unit cost of all S stock owned -stock dividends and stock splits are NOT considered income to the recipient
preferred stock ownership---does not allow what?
does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the cost method and the preferred stock dividends are recorded as dividend revenue on the income statement
CASH DIVIDEND DOES NOT AFFECT REVENUE
it affects investment account
Balance sheet - investment in investee - dividends
journal entry to record decrease by the investor's/parent's ownership percentage of cash dividends from investee (stock dividends reduce unit cost of stock owned in investee): DR: Cash CR: Investment in investee
Balance sheet - investment in investee - increase in worth/NI/earnings
journal entry to record increase by the investor's/parent's ownership percentage of earnings of investee DR: investment in investee CR: Equity in earnings/investee income
Income statement - record the investor's/parent's ownership percentage of earnings as income - dividends
journal entry to record investee cash dividends(not income/lower investment like bank withdrawal) DR: Cash CR: Investment in investee
Income statement - record the investor's/parent's ownership percentage of earnings as income - earnings
journal entry to record investee earnings (investor's/parent's percentage ownership of earnings of investee): DR: investment in investee CR: Equity in earnings/investee income
stock dividend
just a memo entry! does that mean ignore??
goodwill difference---not amortized and no impairment test
the fair value excess attributable to goodwill is not amortized and is not subject to a separate impariment test -however, the total equity method investment(including goodwill) must be analyzed at least annually for impairment