Intercorporate Investments Accounting - Ownership Categories
Companies commonly make equity or debt investments in other companies. Ownership can be minority (less than 50%) or majority (greater than 50%) and the degree of operational influence can be passive or active. Naturally, these differences lead to differences in accounting treatments for which the well-trained financial analyst must be prepared to interpret.
The following table shows the categories of ownership recognized by U.S. GAAP and IFRS for the purposes of public financial reporting.
INVESTMENT CATEGORY | LEVEL OF INVESTOR INFLUENCE | INVESTOR OWNERSHIP LEVEL | ACCOUNTING METHOD |
---|---|---|---|
Minority Passive | Not material. | Less than 20% | Four classes of accounting treatment: |
1) held to maturity (HTM) 2) available for sale (AFS) 3) held for trading (HFT) 4) designated fair value instruments | |||
Minority Active | Significant. | 20% - 50% | Equity Method |
Joint Venture | Joint control. | Joint venture | US: Equity Method IFRS: Equity Method (proportionate consolidation previously allowed) |
Controlling Interest | Control. | More than 50% | Consolidation |
LESSONS
- CFA Level 2: Financial Reporting Part 2 – Introduction
- Intercorporate Investments Accounting - Ownership Categories
- Minority Passive Investments – Accounting Classes
- Minority Active Investments and the Equity Method for Financial Reporting
- Joint Venture Investments
- Controlling Interest Investments: Accounting for Business Combinations
- Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
- Pooling of Interests Method to Account for Controlling Interest Investments
- Purchase Method vs. Pooling of Interest Method
- Acquisition Method to Account for Controlling Interest Investments
- GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
- Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
- Defined Benefits Plans vs. Defined Contribution Plans
- Measuring the Defined Benefit Obligation
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet
- The Role of Actuarial Assumptions in DB Plan Accounting
- Economic Pension Expense
- Pensions and the Statement of Cash Flows
- Accounting for Stock (or Share) Based Compensation
- Financial Statement Consolidation of Multinational Operations
- Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
- Foreign Currency Translation
- Temporal Method for Translation of Foreign Statements
- Current Rate Method for Translation of Foreign Statements
- Consolidating Financial Statements: Determining the Functional Currency
- Translation Methods and Financial Statement Effects
- Accounting for Subsidiaries in Hyperinflationary Economies
- CFA Level 2: Financial Reporting 2 - Recommendations
- MBS Weighted Average Life
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