GSBA 510 Lecture Deck Class 13 14 and 15 F24 V1 (3)

Page 1: Course Overview

• Course Name: Accounting Concepts and Financial Reporting GSBA 510

• Classes Covered: 13, 14, and 15

• Focus: Accounting for Investments and Consolidated Financial Statements (Reference: DeFond, Appendix D)

Page 2: Recording Notice

• Session Recording: The class will be recorded via Zoom and potentially using Panopto.

• Participant Awareness: Be aware that everything said during the class will be recorded, even during breaks.

Page 3: Class Topics

• Key Focus: Accounting for Investments and Consolidated Financial Statements (DeFond, Appendix D)

Page 4: Course Institution

• Institution: USC Leventhal School of Accounting, University of Southern California

Page 5: Learning Objective 1

• Objective: Describe debt and equity securities and methods of acquisition.

Page 6: Debt Securities

• Definition: Financial instruments establishing a creditor relationship.

  • Examples:

    • U.S. Treasury bills

    • Notes

    • Bonds

    • Commercial Paper

Page 7: Equity Securities

• Definition: Financial instruments representing an ownership interest in a company.

  • Example: Shares of stock

Page 8: Acquisition of Securities

• Acquisition Methods:

  • Direct acquisition from issuing entity:

    • Initial Public Offering (IPO)

    • Secondary Public Offerings

  • Secondary Capital Market: Involves buying or selling securities by individual and institutional investors.

  • Market Types:

    • Organized exchanges (e.g., New York Stock Exchange)

    • Over-the-counter market (less formal)

Page 9: Learning Objective 2

• Objective: Describe accounting for various types of debt security investments.

Page 10: Investments in Debt Securities

• Categories of Debt Securities:

  • Trading securities

  • Available-for-sale securities

  • Held-to-maturity securities

• Key Accounting Events:

  • Purchase

  • Interest income recognition

  • Balance sheet valuation

  • Sale or redemption

Page 11: Key Accounting for Investments

1. Purchase: Record at cost (including broker's fees).

2. Interest Income Recognition:

   • Interest accrues daily and is recorded when payment is received.

   • Premium or discount on purchase price:

     • Not amortized for interest receipt;

     • Amortized for adjustments to interest income.

Page 12: Balance Sheet Valuation

• Fair Value Measurements:

  • Categories:

    1. Trading securities: Measured at fair value, gains/losses in income statement.

    2. Available-for-sale: Fair value used with changes in stockholders' equity.

    3. Held-to-maturity: Measured at amortized cost.

Page 13: Sale or Redemption

• Accounting Treatment: Sale proceeds less book value = Realized gain/loss.

• Maturity: Book value equals redemption proceeds.

Page 14: Learning Objective 3

• Objective: Describe accounting for various types of equity security investments.

Page 15: Investments in Equity Securities

• Classification:

  • Little or no influence (Passive)

  • Significant influence

  • Controlling

• Key Accounting Events:

  • Purchase

  • Investment income recognition

  • Balance sheet valuation

  • Sale

Page 16: Guidelines for Equity Security Investments

Page 17: Purchase Example

• Scenario: Warner Company purchases 1,500 shares each in Ark, Inc. (10%), Barcal, Inc. (25%), Call, Inc. (60%), at $15,000 each.

Page 18: Recognition of Investment Income

• Assumption: Each investment company earns net income of $10,000 and declares $0.50 per share in cash dividends.

• Accounting for Dividends:

  • Cash dividends for passive securities = income on income statement.

  • For significant influence & controlling investments, dividends reduce investment account.

Page 19: Income Recognition Example

• Ark, Inc. (Passive Investment): Receipt of cash dividend recorded.

• Barcal, Inc. (Significant Influence): Record 25% of net income.

Page 20: Income Recognition for Call, Inc.

• Controlling Equity Securities: Record 60% of net income and cash dividend.

Page 21: Balance Sheet Valuation for Equity Securities

• Passive equity securities: Adjust to fair value with offsetting gain/loss in income statement.

• No adjustments for significant influence or controlling securities.

Page 22: Year-End Fair Value

• Ark Stock Example: Fair value of 1,500 shares increases to $23,000.

Page 23: Sale of Investments

• Scenario: Investments sold for $22,000 in July of the following year.

Page 24: Sale Accounting for Ark, Inc.

• Passive investment: Record sale loss when comparing sale amount to book value.

Page 25: Sale Accounting for Barcal, Inc.

• Significant Influence: Record gain when proceeds exceed book value.

Page 26: Learning Objective 4

• Objective: Define parent-subsidiary relationships and consolidate balance sheet data.

Page 27: Consolidated Statements

• Parent Company: Holds >50% voting stock in another company (subsidiary).

Page 28: Separate Accounting Records

• Parent and subsidiaries maintain separate records.

• Parent uses equity method for investments.

• Consolidated financial statements reflect combined data.

Page 29: Acquisition Method

• Financial statements combined using the acquisition method.

• Parent replaces subsidiary investment with assets and liabilities of the subsidiary.

Page 30: Economic Entity Concept

• Consolidated statements represent the parent-subsidiary group as a single economic entity.

Page 31: Benefits and Limitations of Consolidated Statements

• Benefits: More accurately represent financial position; improves management oversight.

• Limitations: Performance of weak subsidiaries may be hidden; ratio/trend analysis may be misleading.

Page 32: Enhanced Discussion

• Focus on Equity Method, Consolidation, and Equity Carve-Outs.

Page 33: Summary of Equity Method Investments

• Equity Method (ASC 323) Overview: Investments recorded at purchase cost, dividends reduce investment balance, income/loss increases/decreases investment balance.

Page 34: Equity Method Details

• Account for goodwill impairment and profits from intra-entity sales.

• Fair Value Option available under ASC 825.

Page 35: Consolidation Issues

• Models of Control: Voting Interest Model vs. Variable Interest Model.

Page 36: Consolidation Aspects

• Key considerations in applying the acquisition method, goodwill, intangible assets, consolidation of foreign entities, and disclosures.

Page 37: Types of Business Combinations

• Breakdown of statutory mergers, consolidations, acquisitions, and entity control.

Page 38: Day 1 Accounting

• On merger date, record any goodwill if consideration paid exceeds fair value of net assets.

Page 39: Informal Accounting Post-Acquisition

• Maintain subsidiary records, using informal entries for consolidated statements.

Page 40: Financial Statement Consolidation Purpose

• Combine both companies’ assets and liabilities for reporting.

Page 41: Income Statement Consolidation Purpose

• Consolidate revenues and expenses of both companies for reporting.

Page 42: Non-controlling Interest Reporting

• Reflect ownership interests of non-controlling shareholders in consolidated statements.

Page 43: Consolidation Process in Partial Acquisitions

• Valuation of the entire subsidiary during acquisition, considering controlling and non-controlling interest.

Page 44: Economic Control Philosophy

• Parent must account for controlling interest regardless of ownership percentage.

Page 45: Allocating Goodwill

• Goodwill allocation method between controlling and non-controlling interests outlined.

Page 46: Equity Carve-Outs

• Types of carve-outs: sell-offs, IPOs, spin-offs, and split-offs.

Page 47: Details of Various Carve-Outs

• Sell-offs: Partial or full sale to unrelated third parties.

Page 48: Additional Carve-Out Types

• IPOs: Public registration of subsidiary stock.

Page 49: Spin-offs and Split-offs

• Spin-off: Share distribution to stockholders.

• Split-off: Share buyback using subsidiary shares.

Page 50: Impact on Financial Reporting

• Carve-outs result in deconsolidation; may impact income statements.

Page 51: GAAP Changes Overview

• Focus on recent changes in GAAP regarding accounting for investments.

Page 52: FASB Accounting Standards Update 2016-01

• Key provisions affecting measurement and assessment of equity investments.

Page 53: Classification of Equity Securities Post-ASU

• Introduction of new categories and measurement attributes for equity securities.

Page 54: Ongoing Effects of ASU 2016-01

• No change to accounting for influential and controlling equity securities.

Page 55: Reaction from Registrants

• Real world implications discussed, including positions from corporate entities.

Page 56: Key Summary of ASU Changes

• Continued significance of debt securities accounting; updated categories for lower ownership equity investments.

Page 57: Upcoming Topics

• Topics for upcoming classes include Quiz 3 and discussions on Property, Plant, and Equipment as per DeFond, Chapter 8.