高级财务会计陈信元chapter2.pptxVIP

Chapter 2 Accounting for Stock Investment additional readings: CAS No.2 1. Fair Value/Cost Method and Equity Method 11. Fair value/Cost method 1) characteristics ? records an investment at cost ? recognizes dividend in excess of earnings are considered as a return of investment (reduction of investment) 2) conditions for cost method ? no ability to influence: 20% ownership test If the stock is marketable, the investment should be accounted for at fair value;12. Equity method 1) characteristics ? initially records an investment at cost ? recognizes the share of the investee’s earnings as income ? dividends received reduce the carrying amount of the investment ? adjusts the investment account to recognize the share of the investee’s earnings after the date of acquisition, by * eliminating unrealized gains and losses * amortizing the FMV-BV differential incomplete equity method vs. equity method note: equity method goodwill shall not be tested for impairment. ;2) conditions for equity method ? significant influence over the financial and operating policies of the investee, indicated by * representation on the board of directors * participation in policy making processes * material intercompany transaction * interchange of managerial personnel * technological dependency 20~50% ownership (US) ? control the financial and operating policies of the investee: over 50% ownership if no influence or control, even more than 20% or 50% ownership interest held, only cost method is used 13. Comparison of cost method to equity method ; percentage of outstanding voting stock acquired 0% 20% 50% 100% 1. level of economic influence |← nominal →|←sig. influence→| ← control → | 2. valuation basis |← cost m. → |← equity method → | 3. balance sheet presentation |← investment account → |← CFS → | illustration (P46-47) 2. Equity Method (One-line Consolidation)