chap005-Analyzing-Investing-Activities-Special-Topics(财务报表分析-台湾中兴大学)

5CHAPTERAnalyzingInvestingActivities:SpecialTopicsMcGraw-Hill/Irwin©2004TheMcGraw-HillCompanies,Inc.,AllRightsReserved.Equitymethodaccounting—reportstheparent’sinvestmentinthesubsidiary,andthe

parent’sshareofthesubsidiary’sresults,asline itemsintheparent’sfinancial statements(referredtoas

one-lineconsolidation)

Note:Generallyusedfor investmentsrepresenting 20to50percentofthevotingstock ofacompany’sequitysecurities--maindifferencebetweenconsolidationandequitymethodaccountingrestsinthelevelofdetailreportedinfinancialstatementsIntercorporateInvestments

EquityMethodAccountingInvestmentaccount:InitiallyrecordedatacquisitioncostIncreasedby%shareofinvesteeearningsDecreasedbydividendsreceivedIntercorporateInvestments

EquityMethodAccountingIncome:Investorreports%shareofinvesteecompanyearningsas“equityearnings”initsincomestatementDividendsarereportedasareductionoftheinvestmentaccount,notasincomeIntercorporateInvestments

EquityMethodAccountingEquityMethodMechanicsAssumethatGlobalCorp.acquiresforcasha25%interestinSynergy,Inc.for$500,000,representingone-fourthofSynergy’sstockholders’equityasoftheacquisitiondate.Acquisitionentry:Investment 500,000 Cash 500,000

Synergy,Inc.Currentassets 700,000PP&E 5,600,000Totalassets 6,300,000Currentliabilities 300,000Long-termdebt 4,000,000Stockholders’Equity2,000,000Totalliabsandequity6,300,000EquityMethodMechanicsSubsequenttotheacquisitiondate,Synergyreportsnetincomeof$100,000andpaysdividendsof$20,000.GlobalrecordsitsproportionateshareofSynergy’searningsandthereceiptofdividendsasfollows:Investment 25,000 Equityearnings 25,000(torecordproportionateshareofinvesteecompanyearnings)

Cash 5,000 Investment 5,000(torecordreceiptofdividends)

Investmentbalance=

%ShareofInvesteeEquityGlobalCorp.InvestmentAccountSynergy,Inc.Stockholders’equityBeg.500,0002,000,000Beg.Inc.25,0005,000Div.Div.20,000100,000Inc.End520,0002,080,000End.Theinvestmentaccountrepresentstheproportionateshareofthestockholders’equityoftheinvesteecompany.Substantialassetsandliabilitiesmay,therefore,notberecordedonbalancesheetunlesstheinvesteeisconsolidated.Thiscanhaveimportantimplicationsfortheanalysisoftheinvestorcompany.Investmentearnings(theproportionateshareoftheearningsoftheinvesteecompany)shouldbedistinguishedfromcoreoperatingearningsintheanalysisoftheearningsoftheinvestorcompany.Investmentsaccountedforundertheequitymethodarereportedatadjustedcost,notatmarketvalue.Substantialunrealizedgainsmay,therefore,notbereflectedinassetsorstockholders’equity.EquityInvestments

ImportantPointsinEquityMethodAccountingAninvestorshoulddiscontinueequitymethodaccountingwhentheinvestmentisreducedtozero(suchasduetoinvesteelosses),andshouldnotprovideforadditionallossesunlesstheinvestorhasguaranteedtheobligationsoftheinvesteeorisotherwisecommittedtoprovidingfurtherfinancialsupporttotheinvestee.Equitymethodaccountingonlyresumesonceallcumulativedeficitshavebeenrecoveredviainvesteeearnings.Iftheamountoftheinitialinvestmentexceedstheproportionateshareofthebookvalueoftheinvesteecompany,theexcessisallocatedtoidentifiabletangibleandintangibleassetsthataredepreciated/amortizedovertheirrespectiveusefullives.Investmentincomeisreducedbythisadditionalexpense.Theexcessnotallocatedinthismanneristreatedasgoodwillandisnolongeramortized.EquityInvestments

ImportantPointsinEquityMethodAccountingIntercorporateinvestments—investmentsbyonecorporationintheequitysecuritiesofanothercorporation

Parent—corporationwhocontrols,generallythroughownershipofequitysecurities,theactivitiesofanotherseparatelegalentityknownasasubsidiary

Parent-subsidiaryrelation—whenonecorporationownsalloramajorityofthevotingequitysecuritiesofanothercorporation

IntercorporateInvestments

ConsolidationBusinessCombinations

DefinitionsBusinesscombinations—refertothemerger,acquisition,reorganization,orrestructuringoftwoormorebusinessestoformanotherbusinessentity

Motivations

enhancecompanyimageandgrowthpotentialacquiringvaluablematerialsandfacilitiesacquiringtechnologyandmarketingchannelssecuringfinancialresourcesstrengtheningmanagementenhancingoperatingefficiencyencouragingdiversificationrapidityinmarketentryachievingeconomiesofscaleacquiringtaxadvantagesmanagementprestigeandperquisitesmanagementcompensation

BusinessCombinations

Source:AccountingTrends&TechniquesNoCombinations40%Combinations60%BusinessCombinations

AccountingGAAPonlyallowsonemethodofaccountingforbusinesscombinations: • Purchaseaccounting—reflectsacquisitionofoneormore companiesbyanothercompany;acquirorcontinuesoperating, whiletheacquiredcompanydisappears;acquirorrecordsthe acquiredassets(includinggoodwill)andliabilitiesatfairvalues atdateofacquisitionPreviously,thePooling-of-interestmethodwasallowed.Althoughprioracquisitionsaccountedforaspoolingsareallowedtocontinue,acquisitionsafter6/30/01mustusePurchaseMethod.DebtDebtDebtDebtConsolidatedfinancialstatements

reporttheresultsofoperationsandfinancialconditionofaparentcorporationanditssubsidiariesinonesetofstatements

Consolidationinvolvestwosteps:aggregationandelimination

Aggregationofassets,liabilities,revenues,andexpensesofsubsidiarieswiththeparent

Eliminationofintercompanytransactions(andaccounts)betweensubsidiariesandtheparent

Note:

Minorityinterest

representstheportionofasubsidiary’sequitysecuritiesownedbyotherthantheparentcompanyIntercorporateInvestments

ConsolidatedFinancialStatements

BasicTechniqueofConsolidationOnDecember31,Year1,SynergyCorp.purchases100%ofMicronCompanybyexchanging10,000sharesofitscommonstock($5parvalue,$77marketvalue)forallofthecommonstockofMicron.

Onthedateoftheacquisition,thebookvalueofMicronis$620,000.Synergyiswillingtopaythemarketpriceof$770,000becauseitfeelsthatMicron’sproperty,plant,andequipment(PP&E)isundervaluedby$20,000,ithasanunrecordedtrademarkworth$30,000andintangiblebenefitsofthebusinesscombination(corporatesynergies,marketposition,andthelike)arevaluedat$100,000.IntercorporateInvestments

ConsolidationIllustrationThepurchasepriceis,therefore,allocatedasfollows:Purchaseprice 770,000BookvalueofMicron 620,000Excess 150,000

Excessallocatedto– Usefullife

Annual ------------------------------ deprec/amort.UndervaluedPP&E 20,00010 2,000Trademark 30,0005 6,000Goodwill 100,000Indefinite -0- 150,000IntercorporateInvestments

ConsolidationIllustrationIntercorporateInvestments• IncomestatementofSynergySuppliesiscombined withthatofMicronCorp.Depreciation/amortizationofexcessofpurchaseprice overthebookvalueofMicron’sassetsisrecordedas anadditionalexpenseinthecoinsolidatedincome statement• Anyintercompanyprofitsonsalesofinventoriesheld bytheconsolidatedentityatyear‑end,alongwithany intercompanyprofitsonotherassettransactions,are eliminated

SynergyCorpandMicronCompanyConsolidatedIncomeStatementStepsIntercorporateInvestments

• TheequityinvestmentaccountonSynergy’sbalancesheet isreplacedwiththeMicronassets/liabilitiestowhichit relates.Consolidatedassets/liabilitiesreflectthebookvalueof SynergyplusthebookvalueofMicron,plustheremaining undepreciatedexcessofpurchasepriceoverthebookvalue ofMicronassets.Goodwill,whichwaspreviouslyincludedintheinvestment accountbalance,isnowbrokenoutasaseparately identifiableassetontheconsolidatedbalancesheetSynergyCorpandMicronCompanyConsolidatedBalanceSheetStepsIntercorporateInvestments

Replace$620,000oftheinvestmentaccountwiththebookvalueoftheassetsacquired.Iflessthan100%ofthesubsidiaryisowned,thecredittotheinvestmentaccountisequaltothepercentageofthebookvalueownedandtheremainingcreditistoaliabilityaccount,minorityinterest.Replace$150,000oftheinvestmentaccountwiththefairvalueadjustmentsrequiredtofullyrecordMicron’sassetsatfairmarketvalue,andEliminatetheinvestmentincomerecordedbySynergyandreplacethataccountwiththeincomestatementofMicron.Iflessthan100%ofthesubsidiaryisowned,theinvestmentincomereportedbytheSynergyisequaltoitsproportionateshareandanadditionalexpenseisreportedfortheminorityinterestinMicron’searnings.SynergyCorpandMicronCompanyConsolidatedBalanceSheetSteps-SummaryIntercorporateInvestments

Presumptionofcontrolifanentity:Hasamajorityvotinginterestinorarighttoappointamajorityofanentity’sgoverningbodyHasalargeminorityvotinginterestandnootherpartyororganizedgroupofpartieshasasignificantvotinginterestNootherpartnerororganizedgroupof partnershasthecurrentabilitytodissolvethe limitedpartnershiporotherwiseremove thegeneralpartner

andIntercorporateInvestments

ConceptofControl

Presumptionofcontrolifanentity(continued):Hasaunilateralabilityto(1)obtainamajorityvotinginterestinor(2)obtainarighttoappointamajorityofthecorporation’sgoverningbodythroughthepresentownershipofconvertiblesecuritiesorotherrightsthatarecurrentlyexercisableattheoptionoftheholderandtheexpectedbenefitfromconvertingthosesecuritiesorexercisingthatrightexceedsitsexpectedcostIntercorporateInvestments

Conceptofcontrol

BusinessCombinations

PurchaseAccountingConcernsValuingtheConsideration—aprobleminpurchaseaccountingisdeterminingthetotalcostoftheacquiredentityContingentConsideration—acompanyusuallyrecordstheamountofanycontingentconsiderationpayableinaccordancewithapurchaseagreementwhenthecontingencyisresolvedandtheconsiderationisissuedorissuableAllocatingTotalCost—onceacompanydeterminesthetotalcostofanacquiredentity,itisnecessarytoallocatethiscosttoindividualassetsreceived;theexcessoftotalcostovertheamountsassignedtoidentifiabletangibleandintangibleassetsacquired,lessliabilitiesassumed,isrecordedasgoodwill

In-ProcessResearch&Development(IPR&D)—somecompaniesarewritingoffalargeportionofanacquisition’scostsaspurchasedresearchanddevelopment.

BusinessCombinations

AnalysisImplicationsManagerialLatitudeinAccountingforCombinations—analysismustbealerttounderstatementofassetsandoverstatementofliabilitiesresultingfromprovisionsforfuturecostsandlossesConsequencesofAccountingforGoodwill—goodwillisnotpermanentandthepresentvalueofsuperearningsdeclinesastheyextendfurtherintothefuture–futureimpairmentlossesarelikely

Push‑DownAccounting—acontroversialissueishowtheacquiredcompany(fromapurchase)reportsassetsandliabilitiesinitsseparatefinancialstatements(ifthatcompanysurvivesasaseparateentity)IntercorporateInvestments

AnalysisImplicationsValidityofTakingUpEarnings—dollar‑for‑dollarequivalenceofearningscannotbetakenforgrantedbecause: Aregulatoryauthoritycansometimesinterveneinasubsidiary’s dividendpolicy Asubsidiarycanoperateinacountrywhererestrictionsexiston remittanceofearningsorwherethevalueofcurrencycan deterioraterapidly Dividendrestrictionsinloanagreementscanlimitearningsaccessibility Presenceofastableorpowerfulminorityinterestcanreduceaparent’sdiscretion insettingdividendorotherpoliciesIntercorporateInvestments

AnalysisImplicationsProvisionforTaxesonUndistributedSubsidiaryEarnings

Currentpracticeassumesallundistributedearningstransferto theparentandthataprovisionfortaxesismadebytheparent inthecurrentperiod Thedecisiononwhethertaxesareprovidedonundistributed earningsisthatofmanagement Managementmustreporttheamountof earningsforwhichnoincometaxesare providedbytheparent

IntercorporateInvestments

AnalysisImplicationsDebtinConsolidatedFinancialStatements Liabilitiesinconsolidatedfinancialstatementsdonotoperate asalienuponacommonpoolofassets Creditors,whethersecuredorunsecured,haverecourseinthe eventofdefaultonlytoassetsownedbythespecific corporationthatincurredtheliability Ifaparentcompanyguaranteesaliabilityofasubsidiary,then thecreditorhastheguaranteeas additionalsecuritywithpotentialrecourse provisions Toassessthesecurityofliabilities,analysis mustexaminetheindividualfinancialstatementsofeach subsidiaryIntercorporateInvestments

AnalysisImplicationsAdditionalLimitationsofConsolidatedFinancialStatements Consolidatedretainedearningsactuallyavailablefor paymentofdividendsaredifficulttoestablishunless reported Compositionofminorityinterest(e.g.,betweencommon andpreferred)cannotbedeterminedfroma“combined” minorityinterestamountintheconsolidatedbalance sheet Aggregationofdissimilarenterprisescandistortratiosand otherrelations—forexample,currentassetsoffinance subsidiariesarenotgenerallyavailabletosatisfycurrent liabilitiesoftheparent;assetsandliabilitiesofseparate entitiesarenotinterchangeableIntercorporateInvestments

AnalysisImplicationsAdditionalLimitationsofConsolidatedFinancialStatements Financialstatementsoftheindividualcompaniescomprising thelargerentityarenotalwayspreparedonacomparable basis—thesedifferencescaninhibithomogeneityandimpair thevalidityofratios,trends,andotheranalyses Consolidatedfinancialstatementsdonotrevealrestrictionson useofcashforindividualcompanies--thesefactorsobscure analysisofliquidity Companiesinpoorfinancialconditionsometimescombinewith financiallystrongcompanies,thusobscuringanalysis Extentofintercompanytransactionsisunknownunlessthe proceduresunderlyingtheconsolidationprocessarereportedBusinessCombinations

AnalysisImplicationsofPoolingvs.Purchase

Assetsareacquiredandcarriedatbookvalueandnotmarket valueasreflectedinconsiderationgiven—totheextentgoodwill ispurchased,theacquiringcompanydoesnotreportitonits balancesheet• Understatementofassetsyieldsunderstatementincombined companyequity• Understatementofassets(includinginventory,property,plant, equipment,goodwill,andintangibles)yieldsunderstatementof expenses(suchascostofgoodssold,depreciation,amortization) andoverstatementofincome• Understatementofassetsyieldsnotonlyunderstatementof expensesbutpotentialoverstatementofgainsonasset disposition;thecombinedcompanyreportsinits incomeany gainsonsalesofassets,yetthesegainspotentiallyariseattimeof acquisitionandarecarriedforwardatunrealisticallylowamounts onlytoberecognizedatdispositionBusinessCombinations

AnalysisImplicationsofPoolingvs.Purchase

Understatementofinvestedequityoroverstatementof incomeyieldsoverstatementinreturnoninvestment• Retainedearningsoftheacquiredentityarecarried forwardtothecombinedcompany• Incomestatementsandbalancesheetsofthe combinedentityarerestatedforallperiods reported;underpurchaseaccountingtheyarecombined andreportedpostacquisition—althoughproforma statementsshowingpre-acquisitioncombinedresultsare typicallyfurnished

InternationalActivitiesReportingofInternationalActivitiesAnalysisobstacleswithcompaniesthatoperateinmorethanonecountrysubdivideintotwocategories:

• Obstaclesduetodifferencesin accountingpracticespeculiartoacountry whereoperationsexist

• Obstaclesarisingfromtranslationofassets,liabilities,and equitiesintothehome-countrymeasuringunitInternationalActivitiesTranslationofForeignCurrenciesCurrentratemethod—translatesallassetsandliabilitiesatcurrentrates

Temporalmethod—translatescash,receivables,payables,andotherassetsandliabilitiesmeasuredatpresentorfuturepricesatcurrentrates,andassetsandliabilitiesmeasuredatpastprices(historicalcosts)athistoricalratesInternationalActivitiesSource:AccountingTrends&TechniquesTranslations76%NoTranslations24%InternationalActivitiesAccountingusingtheCurrentRateMethodMajorprovisionsofaccountingforforeigncurrencytranslationusingatheCurrentRateMethodare:

• Translationrequiresidentifyingthefunctionalcurrencyoftheentity— generallythecurrencyofthecountryinwhichthesubsidiaryislocated;all financialstatementelementsoftheforeignentityaremeasuredusingthe functionalcurrency,butinconformitywiththeparent’saccountingpractices

• Translationfromthefunctionalcurrencyintothereportingcurrencyisrequired, iftheyaredifferent—thistranslationoccursatthecurrentexchangerate,except forrevenuesandexpensesthataretranslatedattheaveragecurrentexchange rateduringtheperiod

• Translationadjustmentsarenotincludedinincome—theyarereportedand accumulatedasaseparatecomponentofequityuntilsuchtimetheparentsells orcompletelyorsubstantiallyliquidatesthenetinvestmentintheforeignentity; translationadjustmentsareremovedfromequityandincludedasgainsorlosses indeterminingincomefortheperiodwhensuchsaleorliquidationoccurs

• Exchangegainsandlossesattributabletointercompanyforeigncurrency transactions,andbalancesthatareofatradingnature,areincludedinincome; butthoseattributabletolong‑termfinancingorcapitaltransactions,where settlementisnotexpectedfortheforeseeablefuture,arereportedasaseparate componentofequityInternationalActivitiesIllustrationofForeignCurrencyTranslationFacts• BritCo,awhollyownedU.K.subsidiaryofDollarCo,incorporateswhenexchangerateis£1=US$1.10; Otherexchangeratesare: January1,Year6 £1=US$1.20 December31,Year6 £1=US$1.40 AverageforYear6 £1=US$1.30• Receivables,payables,andnoncurrentliabilityamountsaredenominatedinlocalcurrency• DollarbalanceofRetainedEarningsatDecember31,Year5,is$60,000• CumulativeForeignExchangeTranslationAdjustmentatDecember31,Year5,is$30,000(Cr.)• BritCo’sDecember31,Year6,trialbalanceconformstoDollarCo’saccountingprinciples;thepound(£) isthefunctionalcurrencyofBritCo:

Debit

Credit Cash £0,100,000 Accountsreceivable 300,000 Inventories,atcost 500,000 Prepaidexpenses 25,000 Property,plant,andequipment(net) 1,000,000 Long-termnotereceivable 75,000 Accountspayable £0,500,000 Currentportionoflong-termdebt 100,000 Long-termdebt 900,000 Capitalstock 300,000 Retainedearnings,January1,Year6 50,000 Sales 5,000,000 Costofsales 4,000,000 Depreciation 300,000 Otherexpenses 550,000

£6,850,000 £6,850,000• Sales,purchases,andalloperatingexpensesoccurevenlythroughouttheyear—accordingly,costof salesisconvertiblebyuseoftheaveragerate• Incometaxconsequences,ifany,areignoredInternationalActivitiesIllustrationofForeignCurrencyTranslationBritCoTranslatedBalanceSheetandIncomeStatement

Exchange Codeor £ Rate Explanation* US$BalanceSheetCash 100,000 1.4 C 140,000Accountsreceivable 300,000 1.4 C 420,000Inventories,atcost 500,000 1.4 C 700,000Prepaidexpenses 25,000 1.4 C 35,000Property,plant,andequipment(net) 1,000,000 1.4 C 1,400,000Long-termnotereceivable 75,000 1.4 C 105,000Totalassets 2,000,000 2,800,000Accountspayable 500,000 1.4 C 700,000Currentportionoflong-termdebt 100,000 1.4 C 140,000Long-termdebt 900,000 1.4 C 1,260,000Totalliabilities 1,500,000

2,100,000Capitalstock 300,000 1.1 H 330,000Retainedearnings: Balance,1/1/Year6 50,000 B 60,000 Currentyearnetincome 150,000 F 195,000 Balance,12/31/Year6 200,000

255,000Cumulativeforeignexchange translationadjustment: Balance,1/1/Year6 B 30,000 Currentyeartranslationadjustment G 85,000 Balance,12/31/Year6 115,000Totalstockholders’equity 500,000

700,000Totalliabilitiesandequity 2,000,000 2,800,000IncomeStatementSales 5,000,000 1.3 A 6,500,000Costofsales (4,000,000) 1.3 A (5,200,000)Depreciation (300,000) 1.3 A (390,000)Otherexpenses (550,000) 1.3 A (715,000)Netincome 150,000 195,000*Translationcodeorexplanation:C=Currentrate