Financial Statement Analysis

Investment in Financial Assets

< 20% ownership, passive

either classified at amortized cost, FVOCI or FVPL

Investment in Associates

20-50% ownership including joint ventures, significant influence/ ability to influence

Equity Method

Investment in Business Combinations

>50% ownership, control

Acquisition Method

Amortized Cost

IS → interest income (coupon ± amortized discount /premium), realized G/L

BS → carried at amortized cost

changes in market value are not recognized unless impaired

US GAAP: “held -to-maturity” debt securities

Conditions:

1. Business Model Test

2. Cash Flow Characteristic test

Fair Value through OCI

IS → interest and dividend income, realized G/L

BS → carried at fair value, unrealized G/L (reported indirectly in equity)

US GAAP: “available for sale” or “not trading” debt and equity securities

Fair Value through PL

IS → interest and dividend income, realized G/L, unrealized G/L

BS → carried at fair value

US GAAP: “held for trading” or “trading” debt and equity securities

Business Flow Test

one of the conditions that needs to be met for a debt security to be classified at amortized cost; debt securities are held to maturity

Cash Flow Characteristic Test

one of the conditions that needs to be met for a debt security to be classified at amortized cost; payments are only interest and principal

Reclassification

• No reclassification of equities

• Reclassification of debt is only permitted if the business model has changed

• initial choice of FVPL / FVOCI is irrevocable

• unrealized G/L on debt carried at amortized cost and reclassified as FVPL is recognized in IS

• Debt reclassified out of FVPL to amortized cost are transferred at FV on transfer date and the FV will become the carrying value

Equity Method

BS → reported at cost + % earnings - % div; Goodwill included in carrying value, not separately shown

IS → % earnings (dividends not included)

Equity Method Impairment

IFRS: fair value < carrying value ; reversal allowed with significant evidence:

• loss event

• impact on future cash flows

• reliable measurement

GAAP: fair value < carrying value; reversal not allowed

Goodwill not separately tested

Upstream profit

investee selling to investors; profit on transaction in associate’s accounts

Downstream profit

investor selling to investee; profit on transaction in parent’s (investors) accounts

Acquisition Method → BS

1. Eliminate investment account (purchase price) of parent & equity accounts of subsidiary

2. Create minority interest within equity (share of equity not owned)

3. Calculate goodwill

4. Combine 100% of assets and liabilities for both firms

Acquisition Method → IS

1. Eliminate subsidiary earnings from parent (dividends)

2. Subtract minority share of earnings (shares not owned)

3. Combine revenues and expenses of both firms (net of inter-company transactions)

Identifiable Net Assets

include identifiable A/L acquiree has not previously recognized at acquistion; i.e. internally developed intangibles

Contingent Liabilities

costs that are expected but not contractually obliged to incur; recognize as expenses when incurred

Imdemnification Assets

assets that are contractually obliged to incur; recognize at acquisition date at fair value

Financial Assets & Liabilities

reclassify to acquirers accounting policy

Contingent Consideration

Earnouts:

• include fair value in purchase price

• include contingent liability (equity)

• subsequent change in value → through I/S