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1、1,Accounting for Investments in Associates and Subsidiaries,Presented by: Amit Garg,2,Summary - Accounting for investments in US GAAP,3,Consolidation Associates - Definition,Associate: An enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture
2、 of the investor. Significant Influence: The power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Significant influence is presumed to exist If an investor holds, directly or indirectly (eg. through subsidiaries
3、), 20 per cent or more of the voting power of the investee unless it can be clearly demonstrated that this is not the case. Should Potential equity shares be taken into consideration for determining the 20% threshold? Under IFRS (IAS 28) Yes. US GAAP (APB18) and Indian GAAP (ASI 18) - No .,US GAAP d
4、oes not differentiate between Associate and JV,4,Indian GAAP Based on controlling interest, control directly or indirectly through subsidiary (ies), by the virtue of holding the majority of voting shares or control over the board of directors. IFRS Based on voting control or power to govern. The exi
5、stence of currently exercisable potential voting rights is also taken into consideration. SPEs also need to be consolidated. US GAAP Controlling interest through majority ownership of voting shares or by contract. Consolidate variable interest entities (VIEs) in which a parent does not have voting c
6、ontrol but absorbs the majority of losses or returns.,Consolidation Subsidiaries - Definition,5,Consolidation Accounting for Investments in Associates,US GAAP Equity Method,Discontinue using equity method only 3 possible circumstances,The associate has to be consolidated,The percentage of voting sto
7、ck in the investee falls below 20%,Investor loses its ability to exercise significant influence,6,Equity Method,APB Opinion Number 18 covers the accounting, reporting, and disclosures under the equity method to account for investments in other companies. The investor is the owner and the investee is
8、 the company owned. The equity method is used if An investor owns between 20 and 50% of the investees voting common stock. The investor owns less than 20% of the investees voting common stock but has effective control (significant influence). Significant influence may be indicated by a number of fac
9、tors, including substantial intercompany transactions, exchanges of executives between investor and investee, investors significant input in the investees decision-making process, investors representation on the investees board of directors, investees dependence on investor (e.g., operational, techn
10、ological, or financial support), and substantial ownership of the investee by investor relative to other widely disbursed shareholder interests.,7,Equity Method,Applicable to corporate joint ventures and to investments with less than majority ownership (20% - 50%) provided that: The investment is lo
11、ng-term. The investor has the ability to exercise significant influence over the investees operations and financial policies. The carrying amount of an investment under the equity method is initially recorded at cost and adjusted to recognize the investors share of the earnings or losses of the inve
12、stee subsequent to the date of investment. Dividends are applied as a reduction of the carrying amount of the investment.,8,Equity Method,Change in Ownership If ownership falls below 20%, or if the investor loses effective control over the investee, the investor should stop recording the investees e
13、arnings. the equity method is discontinued, but the balance in the investment account is retained. the market value method (under FASB 115) will then be applied in the future. If the investor increases its ownership in the investee to 20% or more (e.g., 30%), the equity method should be used for cur
14、rent and future years. the effect of using the equity method instead of the market value method on previous years at the old percentage (e.g., 10%) should be recognized as a retroactive adjustment to retained earnings and other affected accounts (e.g., investment in investee). the retroactive adjust
15、ment on the investment, earnings, and retained earnings should be applied in a similar way as a step by- step acquisition of a subsidiary.,9,Consolidation,FAS 94 requires all majority-owned subsidiaries (through direct or indirect ownership of a majority voting interest) to be consolidated unless: C
16、ontrol does not rest with majority owner Definition of control: the ability of an entity to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limit its losses from that other entitys activities” it is decision-making ability tha
17、t is not shared with others,10,Consolidation - Minority Rights,The issue of whether consolidation is appropriate when one shareholder has a controlling financial interest in another entity via a majority voting interest (over 50%), but the minority shareholder has certain veto rights. It defines two types of minority rights: Protective rights Substantive participating rights Protective rights do not overcome the presumption of control, whereas substantive participating rights do, and therefore they preclude consolidation,
