Abstract
The purpose of this chapter is to introduce the accounting methods used in transactions where one company invests in the debt and equity securities of another company. We focus our attention on investments in the voting shares of another company. In particular, we present the accounting method used to account for passive investments without significant influence over the investee (Cost or Fair Value), investments where the investor has significant influence over the investee (Equity method), and investments where the investor controls the investee (Purchase method). We also discuss the measurement of goodwill and non-controlling interests. Finally, we introduce two additional methods for inter-corporate investments: the Pooling of Interests method and Proportionate Consolidation; which are less frequently applied in practice.
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Notes
- 1.
Under US GAAP, the accounting rules for trading securities are substantially the same as those described for IFRS. Notwithstanding, in case of equity securities with easily determinable market values, they must be classified at FVPL.
- 2.
See IFRS 10, IFRS 3, ASC 810, and ASC 805.
- 3.
Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements.
References
Financial Accounting Standards Board (FASB), ASC 320 Investments—Debt and Equity Securities, as updated lastly in 2018.
Financial Accounting Standards Board (FASB), ASC 321 Investments—Equity Securities, as updated lastly in 2020.
Financial Accounting Standards Board (FASB), ASC 323 Investments—Equity Method and Joint Ventures, as updated lastly in 2020.
Financial Accounting Standards Board (FASB), ASC 805 Business Combinations, as updated lastly in 2019.
Financial Accounting Standards Board (FASB), ASC 810 Consolidation, as updated lastly in 2018.
International Accounting Standards Board (IASB), IAS 12 Income Taxes, as amended lastly in 2017.
International Accounting Standards Board (IASB), IAS 28 Investment in Associates and Joint Ventures, as amended lastly in 2017.
International Accounting Standards Board (IASB), IFRS 3 Business Combinations, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS 9 Financial Instruments, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS 10 Consolidated Financial Statements, as amended lastly in 2015.
International Accounting Standards Board (IASB), IFRS 11 Joint Arrangements, as amended lastly in 2017.
International Accounting Standards Board (IASB), IFRS 12 Disclosure of Interests in Other Entities, as amended lastly in 2016.
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Amir, E., Ghitti, M. (2020). Introduction to Accounting for Inter-corporate Investments. In: Financial Analysis of Mergers and Acquisitions . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-61769-1_1
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DOI: https://doi.org/10.1007/978-3-030-61769-1_1
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