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12-40 Intermediate Accounting, 8/e
REPORTING AN EQUITY-METHOD INVESTMENT
ON THE BALANCE SHEET
The investment account represents the investor’s share of the
investee's net assets initially acquired, adjusted for the investor’s
share of the subsequent increase in the investee's net assets (net
assets earned and not yet distributed as dividends).
Investment in Equity Securities
_____________________________________________
($ in millions)
Cost 1500
T12-24
A CHANGE FROM THE EQUITY METHOD
TO ANOTHER METHOD
A CHANGE FROM ANOTHER METHOD
TO THE EQUITY METHOD
T12-25
12-42 Intermediate Accounting, 8/e
Comparison of Fair Value and Equity Methods
Fair Value Method
Equity Method
Purchase equity
investment
Investment asset 1,500,000
Cash 1,500,000
Same as TS
Recognize
Adjust
investment to
Net unreal.
Recognize gain or loss:
Cash 1,446,000
Loss (to balance) 54,000
Cash 1,446,000
Loss (to balance) 99,000
Illustration 12-17
T12-26
Fair Value Option
Established by SFAS No. 159.
A choice is made when security acquired or becomes eligible for the fair
value option. The choice is made on an instrument-by-instrument basis,
T12-27
12-44 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Fair Value Option
IFRS are more restrictive than U.S. standards for determining when firms are allowed to
elect the fair value option. Companies can elect the fair value option only in specific
circumstances. For example:
• A company could elect the fair value option for an asset or liability in order to
T12-28
Variation in Earnings by Method
Used to Account for Investments
Situation: Investor Company owns 20% of Investee Company. Investee’s net
income is $1 million. Investee distributes one-half its earnings as
Which accounting method causes reported income to be highest?
Accounting Method Used:
Trading Security available- Equity
security for-sale method
T12-29
12-46 Intermediate Accounting, 8/e
CASH SURRENDER VALUE
Several years ago, American Capital acquired a $1 million insurance policy
on the life of its Chief Executive Officer, naming American Capital as
To record insurance expense and the increase in the investment:
Insurance expense (difference) .................................................... 16,000
T12-30
OTT IMPAIRMENTS
Investment in
Equity Security
Investment in
Debt Security
Is the
Yes, if the fair value
Same (yes, if the fair value is less than
Is the
Yes, if the investor
Yes, if the investor (a) intends to sell
Where is the
loss
reported?
In net income
In net income, if the investor intends to
Otherwise:
T12-31
12-48 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Other-Than-Temporary Impairments
• Under IAS No. 39:
o Companies recognize OTT impairments if there exists objective evidence
of impairment. Objective evidence must relate to one or more events
occurring after initial recognition of the asset that affect the future cash
• Under IFRS No. 9:
o Impairment of debt investments is calculated using the expected credit
loss (ECL) model. Under that approach,
▪ If the credit risk of a debt investment has not increased, the estimate
o OTT impairments of equity investments are not recognized.
▪ If the investment is classified as FVPL, unrealized losses are
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1. Real World Scenario
EchoStar Communications operates through two business units, the DISH Network and EchoStar
January 10, 2002
ITEM 5. OTHER EVENTS
Effective September 27, 2001, EchoStar Communications Corporation ("EchoStar" or "the Company")
invested an additional $50 million in StarBand Communications, Inc. ("StarBand"), increasing its
Suggestions:
Have the class discuss the manner in which EchoStar would have accounted for the change it
described.
Points to note:
2. Real World Scenario
Media General, Inc. is an independent, publicly owned communications company with interests in
metropolitan newspapers, broadcast television, cable television, newsprint production, and diversified
information services located primarily in the Southeast United States. Its 1998 annual report reported
the following as a portion of its disclosure note related to investments:
Note 3: Investments in Unconsolidated Affiliates
--------------------------------------------------------------------------------
Summarized financial information for these investments accounted for by the equity method
follows:
Southeast Paper Manufacturing Company:
(In thousands) 1998 1997
Suggestions:
Without access to other information reported by Media General in the annual report, have the class
estimate Media General’s percentage ownership interest in Southeast Paper Manufacturing Company.
Assuming Southeast Paper Manufacturing Company declared no cash dividends during 1998, what
was the change in Media General’s investment account related to Southeast Paper Manufacturing
Company?
Points to note:
3. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. Research Case 12-5, Real World Cases 12-6 and 12-7, and Problem 12-13
are suitable for student presentation(s). Real World Case 12-1 does well as group assignments.
Questions 12-7, 12-9 and 12-10 create good class discussions.
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice or to
Analysis Skills. Accountants routinely are required to gather, assemble, organize, process, or
interpret data to provide options for making business and investment decisions. Real World Case
12-1, and International Case 12-3, and Trueblood Case 12-8 provide opportunities to develop
analysis skills.
12-52 Intermediate Accounting, 8/e
4. Internet Activities
I. Cisco Systems is the world's leading supplier of internetworking solutions targeted at corporate
enterprise intranets and the internet. Have students, individually or in groups:
A. Go to Cisco’s web site at: www.cisco.com/. Ask them to:
1. Access the company’s corporate profile.
2. Determine its primary products and activities.
B. Access Cisco’s most recent annual report from EDGAR on the web.
1. Identify any amounts that Cisco reports as short-term investments; as long-term investments.
What changes have occurred in investments during the most recent year?
2. From disclosure notes determine the types of securities held in each category.
3. Does the statement of cash flows offer any useful information about Cisco’s investing
activities?
II. SFAS 115 requires companies to report fair values for trading securities and securities available-
for-sale. The internet greatly facilitates that process.
Suggestion:
Give students the names of three or four nationally traded public companies. Ask students to
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Learning Est. time
Questions Objective(s) Topic (min.)
12-1
12-01
Classification categories
5
12-2
12-01
Price changes for a held-to-maturity security
5
12-3
12-02, 12-03
Determining fair value
5
12-4
12-02, 12-03
Why fair value?
5
12-5
12-02, 12-03
Unrealized holding gains and losses
5
12-6
12-03
Comprehensive income
5
12-7
12-02, 12-03
Unrealized holding gains and losses
5
12-8
12-01, 12-02,
12-03
Reclassification of an investment
5
12-9
12-01, 12-02,
12-03
Investment disclosures
5
12-10
12-01, 12-02,
12-03, 12-08
12-08
12-12
12-01, 12-03,
12-07
Fair value option
5
12-13
12-01, 12-03,
12-07, 12-08
IFRS, fair value option
5
12-14
12-04
Criteria for the equity method
5
12-15
12-04
Equity method, concepts
5
12-16
12-05
Equity method, dividends
5
12-17
12-06
Equity method, depreciation
5
12-19
12-06
Change from the equity method to another method
5
12-20
12-04, 12-05,
12-08
IFRS, equity method
5
12-21
12-04, 12-07
Fair value option (equity method)
5
12-22
12-01
Define a financial instrument. [based on appendix]
5
12-23
12-01
Derivatives [based on appendix]
5
12-24
App 12A
Special purpose fund [based on appendix]
5
12-25
App 12A
Life insurance policies [based on appendix]
5
12-26
App 12B
OTT impairment, debt investments [based on appendix]
5
12-27
App 12B, 12-03
OTT impairment, AFS investments [based on appendix]
5
12-28
App 12B, 12-03
OTT impairment, AFS investments [based on appendix]
5
12-29
App 12B, 12-08
IFRS, OTT impairment, [based on appendix]
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
12-54 Intermediate Accounting, 8/e
12-1
12-01
Securities held-to-maturity; bond investment;
effective interest
5
12-2
12-02
Trading securities
5
12-3
12-03
Available-for-sale securities
5
12-4
12-03
Securities available-for-sale; adjusting entries
5
12-6
12-07
Fair value option; available-for-sale securities
5
12-7
12-02, 12-03
Trading securities, securities available-for-sale and
dividends
5
12-8
12-2, 12-8
Accounting for fair value changes in debt investments
10
12-9
12-1, 12-8
Accounting for fair value changes in debt investments
10
12-10
12-05
Equity method and dividends
5
12-11
12-06, 12-07
Equity method
5
12-12
12-06, 12-08
Equity method investments
10
12-14
12-07
Fair value option; equity method investments
5
12-15
12-03
Available-for-sale securities and impairment
(Appendix 12B)
10
12-16
12-03
Available-for-sale securities and impairment
(Appendix 12B)
10
Available for sale securities and impairment
12-18
12-03, 12-08
Recovery of impairment under IFRS (Appendix 12B)
10
Learning Est. time
Exercises Objective(s) Topic (min.)
12-1
12-01
Securities held-to-maturity; bond investment;
effective interest
15
12-3
12-01
FASB codification research
15
12-4
12-02, 12-03
Purchase and sale of investment securities
15
12-5
12-02
Various transactions related to trading securities
15
12-6
12-02, 12-03,
12-05
FASB codification research
15
12-7
12-03
Securities available-for-sale; adjusting entries
15
12-8
12-03
Classification of securities; adjusting entries
20
Various transactions related to securities available-
12-10
12-03
Securities available-for-sale; journal entries
15
12-11
12-01, 12-02,
12-03
Various investment securities
10
12-12
12-03
Investment securities and equity method investments
compared
20
12-13
12-03
Securities available-for-sale; fair value adjustment
15
12-14
12-01, 12-08
Accounting for debt investments
12-15
12-02, 12-08
Accounting for debt investments
12-16
12-05
compared
15
12-17
12-04, 12-05
Equity method; purchase; investee income; dividends
20
12-18
12-05
Change in principle; change to the equity method
25
12-19
12-01, 12-02,
12-03
Error corrections; investment
25
12-20
12-05, 12-06
Equity method; adjustment for depreciation
25
12-21
12-05, 12-06
Equity method
25
12-23
12-01, 12-02,
12-07
Fair value option; held-to-maturity investments
25
12-24
12-02, 12-03,
12-07
Fair value option; held-to-maturity investments
10
12-25
12-07
Fair value option; held-to-maturity investments
10
12-26
App 12A
Life insurance policy
25
12-27
App 12A
Life insurance policy
25
12-28
12-01, App 12B
Held-to-maturity securities; impairments
25
12-29
12-03, App 12B
Available-for-sale debt securities; impairments
25
12-30
12-03, App 12B
Available-for-sale debt securities; impairments
25
12-31
12-01, 12-03,
12-08, App 12B
Accounting for impairments under IFRS
25
CPA Learning Est. time
Review Questions Objective(s) Topic (min.)
12-1
12-02
Trading securities
5
12-2
12-03
Available-for-sale securities
5
12-4
12-03
Available-for-sale securities
3
12-5
12-05
Equity method
3
12-6
12-05
Equity method
5
12-8
12-04, 12-05
Equity method
5
12-9
12-08
Debt investment categories under IFRS
5
12-10
12-08
Equity investment categories under IFRS
5
12-11
12-08
Transfers between investment categories under
IFRS
5
12-12
12-08
Equity method under IFRS
5
12-13
12-08
OTT impairments under IFRS
5
CMA
Review Questions
Learning
Objective(s)
Topic
Est. time
(min.)
12-2
12-03
Available-for-sale securities
5
12-3
12-01
Held-to-maturity investments
5
Learning Est. time
Problems Objective(s) Topic (min.)
12-1
12-01
Various transactions related to securities held-to-maturity
30
12-2
12-02
Various transactions relating to trading securities
35
12-56 Intermediate Accounting, 8/e
12-3
12-03
Various transactions related to securities available-for-
sale; bonds
30
12-03, 12-07
fair value option
12-5
12-03
Various transactions related to securities available-for-sale
35
12-6
12-02
Various transactions relating to trading securities
35
12-7
12-01, 12-02,
12-03
Securities held-to-maturity, securities available-for-sale,
and trading securities
30
12-8
12-03
Securities available-for-sale; fair value adjustment;
reclassification adjustment
35
12-9
12-01, 12-02,
12-04, 12-05,
12-06
Investment securities and equity method investments
compared
35
12-07
12-11
12-02, 12-04,
12-05, 12-07
Equity method, fair value option
35
12-12
12-05, 12-06
Equity method
35
12-13
12-05, 12-06
Equity method
25
12-14
12-01, 12-02,
12-03, 12-04,
12-05
Classifying investments
15
12-15
12-01, 12-07
Held-to-maturity investments, fair value option
30
12-16
12-01, 12-02,
12-08
Accounting for debt and equity investments
30
12-17
App 12B, 12-
02, 12-03
OTT impairments, HTM and AFS investments [based on
appendix12-B]
30
12-18
App 12B, 12-
02, 12-03, 12-
08
IFRS, OTT impairments, HTM and AFS investments
[based on appendix12-B]
30
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Real World Case 12-1
12-03
Securities available-for-sale; Intel
20
Research Case 12-2
12-02
Reporting securities available-for-sale; obtain and
critically evaluate an annual report
45
International Case 12-3
12-04, 12-05,
12-06, 12-08
IFRS comparison of equity method with U.S. GAAP;
Renault
20
12-06, 12-08
Research Case 12-5
12-01, 12-02,
12-03
Researching the way investments are reported; retrieving
information from the Internet
20
Real World Case 12-6
12-02
Researching the way investments are reported; retrieving
information from the Internet; Merck
45
Real World Case 12-7
12-02
Researching the way comprehensive income reported;
retrieving information from the Internet; Microsoft
20
Real World Case 12-8
App 12B
OTT impairments
20
Real World Case 12-9
App 12B
Researching rationale for approach used to account for
OTT impairments [based on appendix12-B]
20
Air France-KLM Case
12-08
IFRS; Air France-KLM, FVTPL, AFS, equity method
30
CPA Simulation 12-1 Held-to-maturity securities, trading securities, and
