Financial Accounting: A User Perspective 6th Canadian Edition

appendix B

ACCOUNTING FOR INTERCOMPANY INVESTMENTS

Throughout this text we have shown you excerpts of financial statements from various Canadian and international companies. Without exception, all of those financial statements were consolidated financial statements. Consolidated financial statements become necessary when one company buys a controlling ownership interest in another company, thus creating a more complex organization and the need for more complete financial reporting than for an individual company. Before we end this text, we want to provide you with a broad understanding of how financial statements become consolidated, and the implications of using consolidated statements for decision-making.

Because an investment in a company's common shares carries with it a right to vote, one company can influence and, under the right circumstances, control the activities of another company. As a result of this, some important financial reporting issues arise for organizations that are considered complex due to intercompany investments. We start with a brief discussion of the purpose of such intercompany investments, and then turn to aspects of their accounting and analysis.

PURPOSE OF INTERCOMPANY INVESTMENTS

A company may have many reasons for acquiring an ownership interest in another company. Buying the shares of another company may be viewed as a good short-term or long-term investment, with such investments broadly classified into two types: non-strategic and strategic. ...