WEEK 3

• Equity investments

  Ownership interest, such as ordinary, preference, or other capital shares
• Equity investments

  Rights to acquire or dispose of ownership interests at an agreed-upon or determinable price (e.g., warrants and rights)
• Initial recognition of equity investments

  1. Recognized at cost using the purchase price

  2. Broker's commissions and fees are recorded as expenses
• Equity investments

  • The degree to which one company (investor) acquires an interest in ordinary shares of another company (investee) generally determines the accounting treatment for the investment after the acquisition
• Equity investment classifications based on percentage of voting shares held

  • Holdings of Less Than 20%
  • Holdings of 20% - 50%
  • Holdings of > 50%
• Holdings of Less Than 20%


  Under IFRS, the presumption is that equity investments are held for trading (i.e., to profit from price changes)
• Accounting for equity investments held for trading (FVPL)

  1. Investments are valued at fair value

  2. Record unrealized gains and losses in net income (FVPL), using Fair Value Adjustment as a valuation account

  3. Gains and losses are reported as part of other income and expenses on the income statement

  4. Cash dividends are recorded as dividend revenue
• Accounting for equity investments - held for trading (FVPL)

  1. Record decrease in fair value and loss as an adjusting entry

  2. Record sale of investment and gain/loss on sale
• Equity investments (FVOCI)

  • IFRS allows companies to classify some (strategic) equity investments < 20% as non-trading
  • The decision is irrevocable
  • Unrealized gains and losses are recorded in other comprehensive income (FVOCI)
• Consolidated financial statements

  • Most (large) companies do not operate as single legal entities
  • Instead, there are strong economic and legal interrelationships between otherwise legally independent companies (a group)
  • Consolidated statements provide aggregated information about the parents and its subsidiaries as if they were one company
• Preparing consolidated financial statements

  1. The carrying amount of the parent's equity investment is offset against the parent's portion of the share capital in the subsidiary

  2. Goodwill (IFRS 3) and non-controlling interests are recognized

  3. Assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries are added up, with the subsidiaries' assets and liabilities measured at fair value

  4. Intragroup transactions are eliminated (single entity concept)
• Goodwill (IFRS 3)

  Recognized in the subsidiary
• Non-controlling interests

  Recognized in the subsidiary
• Consolidation of a fully-owned subsidiary

  1. Assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries are added up, with the subsidiaries' assets and liabilities measured at fair value

  2. Intragroup transactions are eliminated (single entity concept)
• Goodwill


  Arises if the parent pays the subsidiary shareholders more than the fair value of the identifiable net assets (assets less liabilities) to acquire control over those net assets
• Consolidation of a fully-owned subsidiary - Step 1

  Offset equity investment against subsidiary's equity and calculate potential goodwill
• Consolidation of a fully-owned subsidiary - Step 2

  Aggregate all assets and liabilities
• Consolidation of a fully-owned subsidiary - Step 3

  Determine the consolidated equity
• Non-controlling interest


  Recognized as a separate item in the equity of the group, as the non-controlling shareholders are part of the ownership of the group rather than a liability
• Consolidation of a partly owned subsidiary - Step 1

  Cancel investment/subsidiary's equity and calculate goodwill
• Consolidation of a partly owned subsidiary - Step 2

  Calculate the non-controlling interest in the subsidiary
• Consolidation of a partly owned subsidiary - Step 3

  Aggregate all assets and liabilities of the parent and subsidiary
• Consolidation of a partly owned subsidiary - Step 4

  Determine consolidated equity
• The parent company's assets and liabilities remain unchanged at book value. It is only the subsidiary's values that are adjusted for the purpose of the consolidated accounts.
• Consolidated Financial Statements - Step 1

  Goodwill is adjusted when fair value exceeds book value
• Consolidated Financial Statements - partly owned - Step 2

  Non-controlling interest adjusted for fair value in excess of book value
• Consolidated Financial Statements - Step 3

  Aggregate the parent's non-current assets which remain at book value and subsidiary's which have been restated to fair value
• Further Steps in the Consolidation Process

  1. Eliminate receivables and liabilities and other inter-company transactions between the parent and its subsidiaries

  2. Eliminate inter-company sales and expenses, unrealized gains and losses, dividends, and interest to prepare the consolidated statement of income and consolidated statement of cash flows
• Accounting for equity investments : held for trading (FVPL)

  1. Investments are valued at fair value
  2. Record unrealized gains and losses in net income (FVPL), using Fair Value Adjustment as a valuation account
  3. Gains and losses are reported as part of other income and expenses on the income statement
  4. Cash dividends are recorded as dividend revenue
• Consolidation of a fully-owned subsidiary

  Acquisition of 100% of the ordinary voting shares
• Equity investments (Holdings: > 50%)

  • When one company acquires a voting interest of more than 50% in another company, it usually has control over the acquired company
  • The investor is then referred to as the parent
  • The investee is then referred to as the subsidiary
  • Investment in the subsidiary is reported on the parent's books as equity investment
  • Parent generally has to prepare consolidated financial statements
• Equity investments (Holdings: 20% - 50%)


  • An investment (direct or indirect) of 20% or more of the voting shares of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence, but not control, over an investee
  • The investor must account for the investment using the equity method
• Equity investments (Holdings: 20% - 50%)

  • An investment (direct or indirect) of 20% or more of the voting shares of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence, but not control, over an investee
  • The investor must account for the investment using the equity method