高级财务会计 陈信元 chapter 2

21. Equity method and full consolidation
1) one-line consolidation
? investment account is reported in a single amount on one line of the investor's B/S
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
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
2. vaLeabharlann uation basis|← cost m. → |← equity method
→|
3. balance sheet presentation
|← investment account → |← CFS → |
illustration (P46-47)
2. Equity Method (One-line Consolidation)
* 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.
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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
accounted for at fair value
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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
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
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? investment income is reported in a single amount on
one line of the investor's I/S
2) exceptions for one-line consolidation
? extraordinary items
? cumulative effect of an accounting change
? effect of discontinued operations
? prior period adjustment
illustration: p.57-58
3) full consolidation
? investment account is replaced by investee's assets and
13. Comparison of cost method to equity method
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percentage of outstanding voting stock acquired
0%
20%
50%
100%
1. level of economic influence
|← nominal →|←sig. influence→| ← control → |
liabilities in consolidated B/S
? investment income is replaced by investee's revenue
and expenses in consolidated I/S
? P's income and owner's equity under equity method