FR&A - Study Session 5

Loans and Receivables

- =non-derivative financial assets with fixed or determinable payments - Loans and receivables that meet the more specific IFRS definition in the current standard are carried at amortized cost unless designated as either FVPI or AFS IFRS - does not rely on a legal form GAAP - relies on the legal form for debt securities - L&R debt securities typically classified as HFT, AFS, or HTM - HFT and AFS = measured at fair value

Equity Method p2

- includes its share of investee's profit/losses on I/S -Equity investment is carried at: [Cost + Share of Post-acquisition income - DIV] - reflects strength of the relationship between investor and its associates - more objective for reporting invest. income than accounting treatment of inv. in financial assets where investors may influence dividend distribution timing - used when significant influence over operating/financial policies (eg. representation via BoD) If the investee subsequently reports profits, equity method is resumed after investors share of the profits = share of losses not recognized during the suspension of the equity method.

To address the accounting issues arising from the misuse and abuse of SPEs,

...Special purpose entities involved in a structured financial transaction will require an evaluation of the purpose, design, and risks.

Reporting the Periodic Pension Cost

As noted above, some amounts of pension costs may qualify for capitalisation as part of the costs of self-constructed assets, such as inventories. Pension costs included in inventories would thus be recognised in P&L as part of cost of goods sold when those inventories are sold. For pension costs that are not capitalised, IFRS do not specify where companies present the various components of periodic pension cost beyond differentiating between components included in P&L and in OCI. In contrast, for pension costs that are not capitalised, US GAAP require all components of periodic pension cost that are recognised in P&L to be aggregated and presented as a net amount within the same line item on the I/S. Both IFRS and US GAAP require total periodic pension cost to be disclosed in the notes to the financial statements.

Illustration of an SPE for a Leased Asset

Because the asset is pledged as collateral, risk is reduced and a lower interest rate may be offered by the financing organization. In addition, because equity investors are not exposed to all the business risks of the sponsoring company but only those of the restricted SPE, they may be more willing to invest in this relatively safe investment. The sponsor retains the risk of default and receives the benefits of ownership of the leased asset through a residual value guarantee. Under these conditions, the sponsor is the primary beneficiary and consolidates the SPE.

Issues for Analysts

First, question whether equity method is appropriate (eg. 19% of associate held may in fact exert influence significantly but may attempt avoiding equity method to avoid reporting associate losses). On the other hand, 25% held may not extert influence, but may prefer the equity method to capture associate income. Second, investment account represents % ownership. Net margins may be overstated ebcause associate income is include, but is not included in sales. Finally, quality of equity method earnings considered; eq. method assumes % of $s is earned by investor, even if cash is not received.

disclosure

For practical reasons, associated companies' results are sometimes included in the investor's accounts with a certain time lag, normally not more than one quarter. Dividends from associated companies are not included in investor income because it would be a double counting. Applying the equity method recognizes the investor's full share of the associate's income. Dividends received involve exchanging a portion of equity interest for cash. In the consolidated B/S, the book value of shareholdings in associated companies is increased by the investor's share of the company's net income and reduced by amortization of surplus values and the amount of dividends received.

Fair Value Through Profit or Loss

GAAP: classification is based on legal form Type 1: HFT: = debt/equity securities acquired with intent to sell soon = reported at fair value; at each report date, remeasured/recognized at fair value with any unrealized G/L from changes in fair value are reported in profit or loss. Also in profit or loss: - interest received on debt securities - dividends received Type 2: Designated at Fair Value (DFV): Both IFRS/GAAP allow entities to initially designate investments at fair value may otherwise be classified as AFS or HTM. Accounting treatment for "designated at fair value" similar to HFT: initially recognized at fair value; at all subsequent reporting dates, remeasured at fair value with the following included in profit or loss: - unrealized G/L from changes in fair value - interest and dividends received

Invest in Fin Assets; Associates; JV - Intro

Investments in financial assets: - investor has no significant influence - can be measured and reported as: - - FVPL - - FVOCI - - Amortized cost Investments in associates and JVs: - investor has significant influence, but not control, over the investee's business activities. Because investors can exert significant influence over financial and operating policy decisions, IFRS and GAAP require equity method because it provides a more objective basis for reporting investment income.

Rules for the Translation of a Foreign Subsidiary's Foreign Currency Financial Statements into the Parent's Presentation Currency under IFRS and US GAAP P1

P1

Rules for the Translation of a Foreign Subsidiary's Foreign Currency Financial Statements into the Parent's Presentation Currency under IFRS and US GAAP P2

P2

Treatment of unrealized holding gains and losses

The treatment of unrealized holding gains and losses on the transfer date depends on the initial classification of the security. If a security initially classified as HFT is reclassified as AFS, any unrealized gains and losses (arising from the difference between its carrying value and current fair value) are recognized in profit and loss. If a security is reclassified as HFT, the unrealized gains or losses are recognized immediately in profit and loss. In the case of reclassification from AFS, the cumulative amount of gains and losses previously recognized in other comprehensive income is recognized in profit and loss on the date of transfer. If debt security reclassified HTM --> AFS, the unrealized holding G/L at the date of the reclassification (= [fair value] - [amortized cost]) is reported in OCI If a debt security is reclassified as held-to-maturity from AFS, the cumulative amount of gains or losses previously reported in other comprehensive income will be amortized over the remaining life of the security as an adjustment of yield (interest income) in the same manner as a premium or discount.

Business Combos

both GAAP and IFRS account for business combos with acquisitions method. Merger: A + B = A Acqusitiion: A + B = (A + B) Consolidation A + B = C

Goodwill acq. v. Investment Goodwill

Purchase price may be > BVPS because: - many of investee's assets/liabilities reflect historical cost rather than fair value Example with PP&E: IFRS - may use historical cost or Fair Value (Less acc. depr). GAAP - Must use historical cost (less acc. depr) When investment cost > proportionate share of BV of investee's (associate's) net identifiable tangible and intangible assets (e.g., inventory, PP&E, trademarks, patents) The difference is allocated to: 1. First specific assets (or categories of assets) using fair values 2. Differences are then amortized to the investor's proportionate share of the investee's profit/loss over economic lives of assets whose fair values > book values. - allocation not recorded formally - what appears initially in the investment account on the B/S of the investor is the cost 3. Over time, as the differences are amortized, the balance in the investment account will come closer to representing the ownership % of BV of associate's net assets IFRS and GAAP: [acquisition cost] - [investor's share of fair value of net identifiable assets] = goodwill Thus, [acquisition cost] - [fair value of net identifiable assets that cannot be allocated to specific assets] = goodwill Goodwill - reviewed for impairment on a regular basis, and written down for any identified impairment - included in the carrying amount of the investment, because investment is reported as a single line item on the investor's B/S Amounts allocated to assets and liabilities that are expensed (such as inventory) or periodically depreciated or amortized (plant, property, and intangible assets) must be treated in a similar manner. These allocated amounts are not reflected on the financial statements of the investee (associate), and the investee's I/S will not reflect the necessary periodic adjustments. Therefore, the investor must directly record these adjustment effects by reducing the carrying amount of the investment on its B/S and by reducing the investee's profit recognized on its I/S. Amounts allocated to assets or liabilities that are not systematically amortized (e.g., land) will continue to be reported at their fair value as of the date the investment was acquired. Annual amortization would reduce the investor's share of the investee's reported income (equity income) and the balance in the investment account by €900 for each year over the 10-year period.

Impairment 2

For equity securities, objective evidence of a loss event includes: Significant changes in the technological, market, economic, and/or legal environments that adversely affect the investee and indicate that the initial cost of the equity investment may not be recovered. A significant or prolonged decline in the fair value of an equity investment below its cost. For held-to-maturity (debt) investments and loans and receivables that have become impaired, the amount of the loss is measured as the difference between the security's carrying value and the present value of its estimated future cash flows discounted at the security's original effective interest rate (the effective interest rate computed at initial recognition). The carrying amount of the investment is reduced either directly or through the use of an allowance account, and the amount of the loss is recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized (for example, the debtor's credit rating improves), the previously recognized impairment loss can be reversed either directly (by increasing the carrying value of the security) or by adjusting the allowance account. The amount of this reversal is then recognized in profit or loss. For impaired AFS securities, the cumulative loss recognized in OCI is reclassified from equity to profit or loss as a reclassification adjustment. The amount of the cumulative loss to be reclassified = [acquisition cost (net of any principal repayment and amortization)] - [current fair value] - [any impairment loss previously recognized in profit/loss] Impairment losses on AFS *equity* securities cannot be reversed through profit or loss. However, impairment losses on AFS *debt* securities can be reversed if a subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognized in profit or loss. In this case, the impairment loss is reversed with the amount of the reversal recognized in profit or loss.

Held-To-Maturity

HTM= the exceptions to financial assets valued at fair value by GAAP and IFRS, thus under strict requirements Required: - positive intent - ability to hold to maturity IFRS: may not classify any financial assets as HTM if it has, in the past 0-2 financial reporting years, sold/reclassified significant amount of HTM investments pre-maturity unless the sale or reclassification meets certain criteria GAAP: a sale (and by inference a reclassification) is taken as an indication that intent was not truly present and use of HTM category may be precluded in the future IFRS require HTM securities be initially recognized at fair value GAAP require HTM securities be initially recognized at cost. In most cases, initial fair value = initial price paid IFRS and US GAAP - HTM are reported at amortized cost using effective interest rate method, unless objective evidence of impairment exists at reporting date (subsequent to initial recognition). Any discount/premium between par/fair at purchase is amortized over security life stated interest rate < effective rate --> a discount (par>fair value) Amortization impacts the carrying value. Interest payments received: - adjusted for amortization - reported as interest income Sold pre-maturity (with potential consequences): - realized G/L from the sale are recognized in profit or loss of the period - transaction costs are included in initial fair value for investments that are not classified as FVPL Effective interest method: calculate carrying value of debt security and allocating the interest income to the period in which it is earned.

Up-/Downstream transactions with associates

Transactions between the two affiliates may be upstream (associate to investor) or downstream (investor to associate). In an upstream sale, the profit on the intercompany transaction is recorded on the associate's income (profit or loss) statement. The investor's share of the unrealized profit is thus included in equity income on the investor's I/S. In a downstream sale, the profit is recorded on the investor's I/S. Both IFRS and US GAAP require that the unearned profits be eliminated to the extent of the investor's interest in the associate.19 The result is an adjustment to equity income on the investor's I/S.

Additional Issues in Business Combinations That Impair Comparability

Under IFRS, the cost of an acquisition is allocated to the fair value of assets, liabilities, and contingent liabilities. Contingent liabilities are recorded separately as part of the cost allocation process, provided that their fair values can be measured reliably. Subsequently, the contingent liability is measured at the higher of the amount initially recognized or the best estimate of the amount required to settle. Contingent assets are not recognized under IFRS. Under US GAAP, contractual contingent assets and liabilities are recognized and recorded at their fair values at the time of acquisition. Non-contractual contingent assets and liabilities must also be recognized and recorded only if it is "more likely than not" they meet the definition of an asset or a liability at the acquisition date. Subsequently, a contingent liability is measured at the higher of the amount initially recognized or the best estimate of the amount of the loss. A contingent asset, however, is measured at the lower of the acquisition date fair value or the best estimate of the future settlement amount. Contingent consideration may be negotiated as part of the acquisition price. For example, the acquiring company (parent) may agree to pay additional money to the acquiree's (subsidiary's) former shareholders if certain agreed upon events occur. These can include achieving specified sales or profit levels for the acquiree and/or the combined entity. Under both IFRS and US GAAP, contingent consideration is initially measured at fair value. IFRS and US GAAP classify contingent consideration as an asset, liability or equity. In subsequent periods, changes in the fair value of liabilities (and assets, in the case of US GAAP) are recognized in the consolidated I/S. Both IFRS and US GAAP do not remeasure equity classified contingent consideration; instead, settlement is accounted for within equity. IFRS and US GAAP recognize in-process research and development acquired in a business combination as a separate intangible asset and measure it at fair value (if it can be measured reliably). In subsequent periods, this research and development is subject to amortization if successfully completed (a marketable product results) or to impairment if no product results or if the product is not technically and/or financially viable.

Acquisitions Method

3 Accounting Issues addressed: 1/ Recognition and measurement of assets and liabilities of the combined entity 2. initial recognition and subsequent accounting for goodwill 3. the recognition and measurement of any non-controlling interest - Recognition and Measurement of Identifiable Assets and Liabilities IFRS and US GAAP require that the acquirer measure the identifiable tangible and intangible assets and liabilities of the acquiree (acquired entity) at fair value as of the date of the acquisition. The acquirer must also recognize any assets and liabilities that the acquiree had not previously recognized as assets and liabilities in its financial statements. For example, identifiable intangible assets (for example, brand names, patents, technology) that the acquiree developed internally would be recognized by the acquirer. - Recognition and Measurement of Contingent Liabilities On the acquisition date, the acquirer must recognize any contingent liability assumed in the acquisition if 1) it is a present obligation that arises from past events, and 2) it can be measured reliably. Costs that the acquirer expects (but is not obliged) to incur, however, are not recognized as liabilities as of the acquisition date. Instead, the acquirer recognizes these costs in future periods as they are incurred. For example, expected restructuring costs arising from exiting an acquiree's business will be recognized in the period in which they are incurred. There is a difference between IFRS and US GAAP in their inclusion of contingent liabilities. IFRS include contingent liabilities if their fair values can be reliably measured. US GAAP includes only those contingent liabilities that are probable and can be reasonably estimated. - Recognition and Measurement of Indemnification Assets On the acquisition date, the acquirer must recognize an indemnification asset if the seller (acquiree) contractually indemnifies the acquirer for the outcome of a contingency or an uncertainty related to all or part of a specific asset or liability of the acquiree. The seller may also indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency. For example, the seller guarantees that an acquired contingent liability will not exceed a specified amount. In this situation, the acquirer recognizes an indemnification asset at the same time it recognizes the indemnified liability, with both measured on the same basis. If the indemnification relates to an asset or a liability that is recognized at the acquisition date and measured at its acquisition date fair value, the acquirer will also recognize the indemnification asset at the acquisition date at its acquisition date fair value. - Recognition and Measurement of Financial Assets and Liabilities At the acquisition date, identifiable assets and liabilities acquired are classified in accordance with IASB (or US GAAP) standards. The acquirer reclassifies the financial assets and liabilities of the acquiree based on the contractual terms, economic conditions, and the acquirer's operating or accounting policies, as they exist at the acquisition date. - Recognition and Measurement of Goodwill - Recognition and Measurement when Acquisition Price Is Less than Fair Value IFRS allows two options for recognizing goodwill at the transaction date. The goodwill option is on a transaction-by-transaction basis. "Partial goodwill" is measured as the fair value of the acquisition (fair value of consideration given) less the acquirer's share of the fair value of all identifiable tangible and intangible assets, liabilities, and contingent liabilities acquired. "Full goodwill" is measured as the fair value of the entity as a whole less the fair value of all identifiable tangible and intangible assets, liabilities, and contingent liabilities. US GAAP views the entity as a whole and requires full goodwill. - Impact of the Acquisition Method on Financial Statements, Post-Acquisition Purchase price less than fair value of target's net assets, considered to be a bargain acquisitions. immediately recognize any contingent consideration as a gani in P&L. any subsequent changes recognized in P&L

Available-For-Sale

AFS investments are debt/equity securities not classified as HTM or FVPL. Under IFRS and GAAP, AFS investments are initially measured at fair value. At each subsequent reporting date, investments are remeasured /recognized at fair value. IFRS for recognizing FX G/L, a debt security is treated as if it were carried at amortized cost in the foreign currency. FX differences arising from changes in amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in OCI. The FX G/L in fair value of an AFS debt security has 2 components.: 1. FX G/L is on I/S (in profit or loss) 2. remainder in OCI GAAP,: Full change in fair value of AFS debt securities (including FX G/L) is included in OCI IFRS and US GAAP equity securities: G/L in OCI from changes in fair value includes any related FX component No separate recognition of FX G/L

Changes in any of the assumptions will increase or decrease the pension obligation

First, the service cost component of annual pension cost is essentially the amount by which the pension liability increases as a result of the employees' service during the year. Second, the interest expense component of annual pension cost is based on the amount of the liability. Third, the past service cost component of annual pension cost is the amount by which the pension liability increases because of changes to the plan. Estimates related to plan assets can also affect annual pension cost reported in P&L (pension expense), primarily under US GAAP. Because a company's periodic pension cost reported in P&L under US GAAP includes the expected return on pension assets rather than the actual return, the assumptions about the expected return on plan assets can have a significant impact. Also, the expected return on plan assets requires estimating in which future period the benefits will be paid. Estimates related to plan assets can also affect annual pension cost reported in P&L (pension expense), primarily under US GAAP. Because a company's periodic pension cost reported in P&L under US GAAP includes the expected return on pension assets rather than the actual return, the assumptions about the expected return on plan assets can have a significant impact. Also, the expected return on plan assets requires estimating in which future period the benefits will be paid. The projected unit credit method is the IFRS approach to measuring the DB obligation. Under the projected unit credit method, each period of service (e.g., year of employment) gives rise to an additional unit of benefit to which the employee is entitled at retirement. In other words, for each period in which an employee provides service, they earn a portion of the post-employment benefits

Impairments

= When carry amount expected to permanently exceed recoverable amount. IFRS: - at the end of each reporting period, financial assets not carried at fair value (individually or as a group) need to be reviewed for objective evidence of assets impairment. Any current impairment recognized in profit or loss immediately - For investments measured and reported at FVPL (designated as FVPL, and HFT), prior impairment losses will have already been recognized in profit or loss. Debt security impairment: - occurs if one or more events (loss events) occur that have a reliably estimated impact on its future cash flows. Although it may not be possible to identify a single specific event that caused the impairment, the combined effect of several events may cause the impairment. *Losses expected as a result of future (anticipated) events, no matter how likely, are not recognized. Examples of loss events causing impairment:* - The issuer experiences significant financial difficulty - Default or delinquency in interest or principal payments - The borrower encounters financial difficulty and receives a concession from the lender as a result - It becomes probable that the borrower will enter bankruptcy or other financial reorganization Not Impairment - the disappearance of an active market because an entity's financial instruments are no longer publicly traded - A downgrade of an entity's credit rating or a decline in fair value of a security below its cost or amortized cost. However, may be evidence of impairment when considered with other information

Disclosures of Pension and Other Post-Employment Benefits

Differences in key assumptions can affect comparisons across companies. Amounts disclosed in the B/S are net amounts (plan liabilities minus plan assets). Adjustments to incorporate gross amounts would change certain financial ratios. Periodic pension costs recognized in P&L (pension expense) may not be comparable. IFRS and US GAAP differ in their provisions about costs recognised in P&L versus in OCI. Reporting of periodic pension costs in P&L may not be comparable. Under US GAAP, all of the components of pension costs in P&L are reported in operating expense on the I/S even though some of the components are of a financial nature (specifically, interest expense and the expected return on assets). However, under IFRS, the components of periodic pension costs in P&L can be included in various line items. Cash flow information may not be comparable. Under IFRS, some portion of the amount of contributions might be treated as a financing activity rather than an operating activity; under US GAAP, the contribution is treated as an operating activity.

consolidation process

Consolidation combines assets, liabilities, revenues, and expenses of subsidiaries with parent. intercompany transactions are eliminated to avoid double counting (using consolidated statements). *Business Combination with Less than 100% Acquisition* For a transaction structured as an acquisition, however, the acquirer does not have to purchase 100% of the equity of the target in order to achieve control. The acquiring company may purchase less than 100% of the target because it may be constrained by resources or it may be unable to acquire all the outstanding shares. As a result, both the acquirer and the target remain separate legal entities. Both IFRS and US GAAP presume a company has control if it owns more than 50% of the voting shares of an entity. The consolidated financial statements are the primary source of information for investors and analysts. *Non-controlling (Minority) Interests: B/S* A non-controlling (minority) interest is the portion of the subsidiary's equity (residual interest) that is held by third parties (i.e., not owned by the parent). Non-controlling interests are created when the parent acquires less than a 100% controlling interest in a subsidiary. Non-controlling interests in consolidated subsidiaries are presented on the consolidated B/S as a separate component of stockholders' equity. IFRS and US GAAP differ, however, on the measurement of non-controlling interests. Under IFRS, the parent can measure the non-controlling interest at either its fair value (full goodwill method) or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets (partial goodwill method). Under US GAAP, the parent must use the full goodwill method and measure the non-controlling interest at fair value. - Non-controlling (Minority) Interests: I/S On the I/S, non-controlling (minority) interests are presented as a line item reflecting the allocation of profit or loss for the period. Intercompany transactions, if any, are eliminated in full. the fair value of the PP&E is allocated to non-controlling shareholders as well as to the controlling shareholders under the full goodwill and the partial goodwill methods. Because depreciation expense is the same under both methods, it results in identical net income to all shareholders, whichever method is used to recognize goodwill and to measure the non-controlling interest. (between full goodwill and partial goodwill)

Reclassification of Investments

IFRS and US GAAP: - permit entities to reclassify intercorporate investments IFRS: - generally prohibits reclassification of securities into/out of the "designated at fair value" category - reclassification out of the HFT category is severely restricted - HTM debt securities can be reclassified as AFS if a change in intent/ability to hold until maturity occurs - At time of reclassification to AFS, the security is remeasured at fair value with the difference between its carrying amount (amortized cost) and fair value recognized in OCI - Recall that the reclassification has implications for the use of the HTM category for existing debt securities and new purchases. A mandatory reclassification and a prohibition from future use may result from reclassification Debt securities initially designated as AFS may be reclassified to HTM if a change in intention or ability has occurred. The fair value carrying amount of the security at the time of reclassification becomes its new (amortized) cost. Any previous G/L recognized in OCI is then amortized to profit or loss over the remaining life of the security using the effective interest method. Differences between the new amortized cost of the security and its maturity value is amortized over the remaining life of the security using the effective interest method. If the definition is met, debt instruments may be reclassified from HFT or AFS to loans and receivables if the company expects to hold them for the foreseeable future. AFS securities: - may be measured at cost if there is no longer a reliable measure of fair value and no evidence of impairment. - if a reliable fair value measure becomes available, the financial asset must be remeasured at fair value with changes in value recognized in OCI US GAAP - allows reclassifications (transfers) of securities between all categories when justified - Fair value of the security is determined at the date of transfer. - recall that reclassification from HTM category has implications for using this category for other securities

Variable Interest and Special Purpose Entities

Special purpose entities (SPEs) are enterprises that are created to accommodate specific needs of the sponsoring entity.31 The sponsoring entity (on whose behalf the SPE is created) frequently transfers assets to the SPE, obtains the right to use assets held by the SPE, or performs services for the SPE, while other parties (capital providers) provide funding to the SPE. SPEs can be a legitimate financing mechanism for a company to segregate certain activities and thereby reduce risk. SPEs may take the form of a limited liability company (corporation), trust, partnership, or unincorporated entity. Beneficial interest in an SPE may take the form of a debt instrument, an equity instrument, a participation right, or a residual interest in a lease. Some beneficial interests may simply provide the holder with a fixed or stated rate of return, while beneficial interests give the holder the rights or the access to future economic benefits of the SPE's activities. In most cases, the creator/sponsor of the entity retains a significant beneficial interest in the SPE even though it may own little or none of the SPE's voting equity. In the past, sponsors were able to avoid consolidating SPEs on their financial statements because they did not have "control" These outside equity participants often funded their investments in the SPE with debt that was either directly or indirectly guaranteed by the sponsoring companies. The sponsoring companies, in turn, were able to avoid the disclosure of many of these guarantees as well as their economic significance. In addition, many sponsoring companies created SPEs to facilitate the transfer of assets and liabilities from their own B/Ss. As a result, they were able to recognize large amounts of revenue and gains, because these transactions were accounted for as sales. By avoiding consolidation, sponsoring companies did not have to report the assets and the liabilities of the SPE; financial performance as measured by the unconsolidated financial statements was potentially misleading. The benefit to the sponsoring company was improved asset turnover, lower operating and financial leverage metrics, and higher profitability.

Equity method

- requires the investor to recognize income (eg. dividends) when earned rather than received - Dividends/distributions received from investee are a "return of capital" and reduce the investment carrying amount and are not reported in the investor's profit or loss - AKA "one-line consolidation" because investor's proportionate ownership interest in assets /liabilities of investee is disclosed as single line item (net assets) on its B/S, and the investor's share of revenues/expenses of investee is disclosed as single line item on its I/S The equity investment: - carried at cost, plus its share of post-acquisition income (after adjustments) less dividends received - reported as a single line item on the B/S and on the I/S - classified as non-current assets on B/S - Initially recorded on B/S at cost. In subsequent periods, the carrying amount of the investment is adjusted to recognize the investor's proportionate share of the investee's earnings or losses, which are reported in income. - - The profit/loss of equity method investments, and the [carrying], must be separately disclosed on I/S and B/S

Goodwill Impairment

Writedowns of goodwill cannot later be restored. IFRS: at the time of acquisition, the total amount of goodwill recognized is allocated to each of the acquirer's cash-generating units that will benefit from the expected synergies resulting from the combination with the target. A cash-generating unit represents the lowest level within the combined entity at which goodwill is monitored for impairment purposes.28 Goodwill impairment testing is then conducted under a one-step approach. The recoverable amount of a cash-generating unit is calculated and compared with the carrying value of the cash-generating unit. US GAAP: at the time of acquisition, the total amount of goodwill recognized is allocated to each of the acquirer's reporting units. A reporting unit is an operating segment or component of an operating segment that is one level below the operating segment as a whole. Goodwill impairment testing is then conducted under a two-step approach: identification of impairment and then measurement of the loss. First, the carrying amount of the reporting unit (including goodwill) is compared to its fair value. If the carrying value of the reporting unit exceeds its fair value, potential impairment has been identified. The second step is then performed to measure the amount of the impairment loss. The amount of the impairment loss is the difference between the implied fair value of the reporting unit's goodwill and its carrying amount. The implied fair value of goodwill is determined in the same manner as in a business combination (it is the difference between the fair value of the reporting unit and the fair value of the reporting unit's assets and liabilities). The impairment loss is applied to the goodwill that has been allocated to the reporting unit. After the goodwill of the reporting unit has been eliminated, no other adjustments are made automatically to the carrying values of any of the reporting unit's other assets or liabilities. However, it may be prudent to test other asset values for recoverability and possible impairment.