Intercorporate Investments

Passive - debt or non-voting stock or less than 20% of voting stock

Strategic
Significant - 20-50% of voting stock
Controlling - >50% of voting stock

Passive -> fair-value accounting

Significant -> equity method
Controlling -> consolidate - purchase method

Passive Investments
Fair Value Method
All passive investments are reported at fair value (recorded in BS at
fair value).
As the market value of security changes, the changes are reflected on
BS and IS.
Changes in fair value flow into the current period's net income, and
therefore, retained earnings.
Dividends and Capital Gains/Losses included in income.

What is fair value?

Level 1 -> Quoted market price, if the security is traded in active
markets
Level 2 -> Quoted market price in active markets for similar securities
and model-based valuation techniques, if all significant inputs are observable in
the market
Level 3 -> Unobservable inputs that are not supported by any market
activities.

Issue with fair value

Unrealized gains cause fluctuations in balance sheet and net income
Alternative
Instead of recording in net income, record it in a separate place AOCI
(Accumulated Other Comprehensive Income), till shares are sold
Under US GAAP - Not available for equity investments since 2019
Under IFRS/Ind AS - allowed if security is classified as FVTOCI (i.e
security was not brought for speculative purpose)

What happens to AOCI once gains are realized?

Under IFRS, amount remains in AOCI even if realized
Under Ind AS, amount can be transferred from AOCI to Retained Earnings
(Net Income)

Types of equity securities

Trading
held for a short period of time and has to be actively traded
Investment value is fair value
Recognized in net income
causes change in interest income
classified as FVTPL
Available for sale
may be sold prior to their maturity to meet liquidity needs
Investment value is fair value
Recognized in AOCI component of equity
In IndAS, causes change in interest income
classified as FVTOCI (held for collection and selling)
Held to Maturity
intent and ability to hold their maturity
Investment value is amortized cost
 Not recognized
causes change in interest income

Significant Investments
use equity method
fluctuations in stock prices are not affected in IS and BS
investee's dividend payments are not recognized as income in IS or BS
investee's share of net income increases our assets
Look at Operating Performance of company and increase your investment
by (Net Income - Dividends paid out, if any)

Controlling Investments
Use consolidation method
Patents and Brand Name can be added to parent company's BS when consolidating

goodwill - represents that assets together could be valued more than the sum
of their parts
If it is not a 100% acquisition
Split net income into two parts
Share of net income attributable to controlling interest (i.e.
you) -> CI
Share of net income attributable to non-controlling interest (i.e
not you) -> NCI