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
Purchase: Record at cost (including broker's fees).
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:
Trading securities: Measured at fair value, gains/losses in income statement.
Available-for-sale: Fair value used with changes in stockholders' equity.
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
Influence Level | Guidelines |
|---|---|
Little or No Influence | Record at cost |
Significant Influence | Record share of net income |
Controlling | Eliminate investment for consolidation |
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 companiesā 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.