Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Statement Analysis K R Subramanyam John J Wild 5-2 05 CHAPTER Analyzing Investing Activities: Intercorporate Investments 5-3 Investment Securities Investment (marketable) securities: Debt Securities • Government or corporate debt obligations Equity Securities • Corporate stock that is readily marketable Investment (marketable) securities: Debt Securities • Government or corporate debt obligations Equity Securities • Corporate stock that is readily marketable Composition 5-4 Investment Securities • SFAS 115. – Departure from the traditional lower-of-cost-or- market principle. – Prescribes that investment securities be reported on the balance sheet at cost or fair (market) value, depending on the type of security and the degree of influence or control that the investor company has over the investee company. – Accounting is determined by its classification. Accounting for Investment Securities 5-5 Investment Securities Accounting for Debt Securities 5-6 Investment Securities Accounting for Transfers between Security Classes 5-7 Investment Securities Classification and Accounting for Equity Securities 5-8 Investment Securities • Two main objectives: – To separate operating performance from investing (and financing) performance • Remove all gains (losses) relating to investing activities • Separate operating and nonoperating assets when determining RNOA – To analyze accounting distortions from securities • Opportunities for gains trading • Liabilities recognized at cost • Inconsistent definition of equity securities • Classification based on intent Analyzing Investment Securities 5-9 Equity Method Accounting • Required for intercorporate investments in which the investor company can exert significant influence over, but does not control, the investee. – Reports the parent’s investment in the subsidiary, and the parent’s share of the subsidiary’s results, as line items in the parent’s financial statements (one-line consolidation) Note: Generally used for investments representing 20 to 50 percent of the voting stock of a company’s equity securities main difference between consolidation and equity method accounting rests in the level of detail reported in financial statements 5-10 Equity Method Accounting • Investment account: – Initially recorded at acquisition cost – Increased by % share of investee earnings – Decreased by dividends received • Income: – Investor reports % share of investee company earnings as “equity earnings” in its income statement – Dividends are reported as a reduction of the investment account, not as income Equity Method Accounting [...]... Securities Derivative Securities Qualitative Disclosures Disclosures generally outline the types of hedging activities conducted by the company and the accounting methods employed Quantitative Disclosures Campbell Soup provides quantitative information relating to its interest rate and foreign exchange hedging activities in the MD&A section of the annual report These disclosures are provided in Exhibit 5.8 5-36... Substantial assets and liabilities may not be recorded on balance sheet unless the investee is consolidated – Investment earnings should be distinguished from core operating earnings (unless strategic) – Investments are reported at adjusted cost, not at market value – Should discontinue equity method when investment is reduced to zero and should not provide for additional losses unless the investor has . reserved. McGraw-Hill/Irwin Financial Statement Analysis K R Subramanyam John J Wild 5-2 05 CHAPTER Analyzing Investing Activities: Intercorporate Investments 5-3 Investment Securities Investment (marketable) securities: . objectives: – To separate operating performance from investing (and financing) performance • Remove all gains (losses) relating to investing activities • Separate operating and nonoperating assets. equity securities • Classification based on intent Analyzing Investment Securities 5-9 Equity Method Accounting • Required for intercorporate investments in which the investor company can exert