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    Intermediate Financial Accounting Iii

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    intermediate 3 discussion

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    Intermediate Financial Accounting Iii

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    intermediate 3 discussion

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    intermediate 3 discussion

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    20 views3 pages

    Intermediate Financial Accounting Iii

    Uploaded by

    alexandershquonna
    intermediate 3 discussion

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Wk 1 Discussion - How to Classify Investments in Equity Securities [due Day

    3]

    Imagine you are the controller for the fictional company, International Inc.,
    which owns companies or the stock of companies in countries all over the
    world. The company is reviewing the methods of accounting for those
    investments, and your CFO has asked you for your counsel as to whether the
    investments should be accounted for as trading securities or investments
    using the equity method, or if the investment should be consolidated.

    All companies listed below are fictional. Any resemblance to actual


    companies is coincidental.

    Select 1 of these investment options:

     Investment #1: This subsidiary, ABCOil, is an oil company located in


    the Middle East. A growing anti-American sentiment in the country in
    which the company is located has led International Inc. to remove all
    non-native employees. There is a growing fear that the government
    may nationalize ABCOil. International Inc. owns 75% of the oil
    company.

     Investment #2: Ecological Inc., a company that produces


    environmentally safe products, has production facilities in more than
    10 states. The ownership of the company is widely held, with
    International Inc. holding the largest block of stock. International Inc.
    has succeeded in placing its president and vice president in two of the
    five board of directors’ seats of Ecological Inc. International Inc. owns
    15% of Ecological Inc.’s outstanding stock.

     Investment #3: International Inc. recently purchased 100% of the


    outstanding stock of ABC National Bank. This subsidiary represents
    International Inc.’s first purchase of a nonmanufacturing facility, and
    management has expressed concern about the comparability of the
    different accounting methods used by financial institutions.

     Investment #4: International Inc. has been involved in a takeover


    battle with Beatrix Inc. involving Campton Soups. Beatrix recently
    purchased 50% of the stock of Campton. International has owned 30%
    of Campton’s stock for five years.
    Respond to the following in a minimum of 175 words:

     How would you propose accounting for this investment as trading


    securities: using the equity method or consolidation? Provide
    justification for your suggestions.

     In general, name 1 instance when owning more than 50% of a


    company’s outstanding stock would not result in consolidation. In what
    instances would owning less than 20% result in using the equity
    method?

    ANSWER-

    Your proposal to account for Investment #1, ABCOil, using consolidation is


    well-articulated and aligns with the relevant accounting standards. Let’s
    delve deeper into your points and provide a clearer example.

    Since International Inc. owns 75% of ABCOil, it maintains a controlling


    interest. According to ASC 810, consolidation is required when a parent
    company has a controlling interest in a subsidiary, typically defined as
    owning more than 50% of the voting shares. This means that International
    Inc. will consolidate ABCOil's financial statements into its own, merging
    assets, liabilities, equity, revenue, and expenses into a single comprehensive
    set of financial reports.

    Let’s say that in the fiscal year, ABCOil generates $1 million in revenue and
    incurs $600,000 in expenses. International Inc. would consolidate these
    figures, presenting $1 million in revenue and $600,000 in expenses in its own
    financial statements. Thus, International Inc. accurately portrays the financial
    performance and position of both itself and its subsidiary, ABCOil, ensuring
    that stakeholders have a complete view of their corporate activities.

    You rightly pointed out that there can be exceptions to the consolidation
    requirement. For instance, if International Inc. anticipates losing control of
    ABCOil in the near future—say, due to an impending sale of a portion of its
    shares to another party or its inability to direct the financial and operational
    policies of ABCOil due to legal or regulatory restrictions—it may not
    consolidate ABCOil’s financials.

    If there’s a pending agreement that will reduce International Inc.’s ownership


    in ABCOil to 40% within the next year, it may choose not to consolidate.
    Instead, it would classify this investment under the equity method if it retains
    significant influence or as a financial investment if no influence is retained.

    For situations involving less than 20% ownership, the equity method typically
    applies only when the investor has significant influence. This influence can
    manifest through right to participate in decisions, board representation, or
    strategic relationships.

    Suppose International Inc. invests in another company, XYZ Corp., where it


    holds 15% of ownership. If it is granted a seat on the board of directors and
    actively participates in key policy decisions, it may be presumed to have
    significant influence, thus prompting the use of the equity method for
    accounting. This means that International Inc. would recognize its share of
    XYZ Corp.’s profits or losses in its income statement.

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