Greg Fannerson (ACI) Case Scenario
Greg Fannerson, CFA, is a financial analyst with Alchemy Consolidated Industries, Inc. (ACI).
ACI is a U.S. corporation involved in several industry sectors and, in addition, has a significant portfolio of intercorporate investments. ACI follows U.S. GAAP when preparing its financial statements. Fannerson’s supervisor, Charles Wilmington, has requested that Fannerson provide an update on ACI’s existing equity investments. Fannerson has developed Exhibit 1, containing information about the companies.
In addition to the equity investments in Exhibit 1, Fannerson was asked to evaluate two recently acquired debt holdings, which have been classified as held-to-maturity. Information about these securities is shown in Exhibit 2.
Wilmington mentions that the economic circumstances regarding the two debt securities has deteriorated significantly and asked Fannerson’s opinion on how the way in which these securities had been classified affected ACI’s performance.
Fannerson has gathered the following additional information:
? At time of purchase the market value of the net assets of Columbus were equal to
their book values.
? The number of seats that ACI holds on the respective Boards of its’ equity investments is shown in Exhibit 3.
? De Soto is a joint venture between ACI and two other partners.
? Marco has a majority holder that exercises control over Marco’s operations.
? ACI has been unhappy with the performance of the Le Vaca investment for some
time and has been attempting to divest its holding with no success.
? ACI does not classify equity securities as held-for-trading securities.
13. The incremental effect on ACI’s net income ($ millions) from its investment in Columbus is closest to:
A. 39.
B. 45.
C. 65.
Answer: A
“Intercorporate Investments,” Susan Perry Williams 2009 Modular Level II, Volume 2, pp. 9, 36-39 Study Session 5-21-b, d Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill.
Explain the implications on performance ratios of the different accounting methods used for intercorporate investments.
ACI would use consolidation for Columbus. 100% of all of the Columbus’ revenues and expenses are included, but the 40% not owned by ACI would be deducted as a minority (noncontrolling) interest expense in determining consolidated net income. $65 -.40(65) = $39.
14. If ACI were to use the IFRS (International Financial Reporting Standards) recommended method to account for De Soto instead of U.S. GAAP, which of the following will be the item most likely to increase for ACI?
A. Net income.
B. Total revenues.
C. Return on assets.
Answer: B
“Intercorporate Investments,” Susan Perry Williams 2009 Modular Level II, Volume 2, pp. 25-27 Study Session 5-21-b, d Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill. Explain the implications on performance ratios of the different accounting methods used for intercorporate investments.
De Soto is a joint venture. The recommended method of accounting for a joint venture under IFRS is proportionate consolidation, while U.S. GAAP uses the equity method. Under the equity method a single line item representing ACI’s share of net income is presented on the income statement and a single line item representing the share of net assets is included on the balance sheet. Under proportionate consolidation ACI would include its proportionate share of revenues and expenses, and assets and liabilities on a line-by-line basis. The net effect on net income is the same under both methods, but the addition of the venture’s revenues to ACI’s revenues would increase total revenues.
15. The year-end 2008 balance sheet carrying value (in $ millions) of De Soto was closest to:
A. 125.
B. 150.
C. 155.
Answer: B
“Intercorporate Investments,” Susan Perry Williams 2009 Modular Level II, Volume 2, pp. 15-17, 25 Study Session 5-21-b, d Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill. Explain the implications on performance ratios of the different accounting methods used for intercorporate investments.
De Soto is a joint venture and under U.S. GAAP would be accounted for using the equity method. According to the equity method, securities are carried on the balance sheet at cost plus an adjustment for the investor’s share of the investee’s income (.33 x 90 = 30), less an adjustment for cash dividends received (5) by the investor. Thus, $125.0 million cost + (30million income share – 5.0 dividends received) = $150.0 million.
16. The equity income from investments that should be reported on ACI’s 2008 income statement (in $-millions) is closest to:
A. 18.
B. 30.
C. 33.
Answer: B
“Intercorporate Investments,” Susan Perry Williams 2009 Modular Level II, Volume 2, pp. 15-18, 25 Study Session 5-21-b, d Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill. Explain the implications on performance ratios of the different accounting methods used for intercorporate investments.
Only those investments in which ACI can exercise significant influence or are joint ventures, should be included in determining equity income (amounts in $-millions), as follows:
Investment Method of Accounting Amount Included in ACI’s Equity Income
De Soto Equity Method (0.33 x 90) = 29.7
Total $29.7 ≈ $30
Note 1: With a majority owner controlling Marco and no representation on the Board of Directors, there is no indication that ACI exhibits the degree of influence consistent with a 25 percent stake; the Marco investment should be accounted for as an available-for-sale security.
Note 2: Although ACI holds a 30% stake in Le Vaca, the investment value has already been written down to zero: the equity method is suspended and no further losses are recorded
(although they are accumulated), and the equity method reinstituted if the share of equity income equals the accumulated losses. (pp.16-17)
17. ACI’s investment income will include dividends from which of the following investments?
A. Viking only.
B. Marco and Viking.
C. De Soto, Marco and Viking.
Answer: B
“Intercorporate Investments,” Susan Perry Williams 2009 Modular Level II, Volume 2, pp. 9-18 Study Session 5-21-b Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill. Only equity investments classified as available-for-sale will have their dividends included in dividend income: this applies to Marco and Viking only. With a majority owner controlling Marco, and no seats on the Board of Directors, there is no indication that ACI exhibits the degree of influence consistent with a 25 percent stake; the Marco investment should be accounted for as an available-for-sale security; dividends from it will be included in dividend income. De Soto is a joint venture, accounted for using the equity method.
18. If ACI had classified the debt securities in Portfolio B as available-for-sale securities, its pretax income ($-millions) for 2008 would have most likely been:
A. 9 lower.
B. 4 lower.
C. unchanged.
Answer: C
“Intercorporate Investments,” Susan Perry Williams
2009 Modular Level II, Volume 2, pp. 10-15 Study Session 5-21-b, d Describe the reporting under IFRS and U.S. GAAP of the four categories of intercorporate investments including the use of different accounting methods: equity, proportionate consolidation and consolidation; and including the treatment of goodwill. Explain the implications on performance ratios of the different accounting methods used for intercorporate investments.
Classification of the debt investments as held-to-maturity or available-for-sale would not have changed the 2008 pre-tax income for ACI. The difference between the two methods lies in the treatment of unrealized gains, (recognized in other comprehensive income under available for sale, but not recognized under held-to-maturity.) In either case net income is not affected so there would have been no change in net income.
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发表于 2009-7-1 14:35
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