International Financial Statement Analysis, 3rd Edition

CHAPTER 15

INTERCORPORATE INVESTMENTS

Susan Perry Williams

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;
• distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;
• analyze how different methods used to account for intercorporate investments affect financial statements and ratios.

1. INTRODUCTION

Intercorporate investments (investments in other companies) can have a significant impact on an investing company's financial performance and position. Companies invest in the debt and equity securities of other companies to diversify their asset base, enter new markets, obtain competitive advantages, and achieve additional profitability. Debt securities include commercial paper, corporate and government bonds and notes, redeemable preferred stock, and asset-backed securities. Equity securities include common stock and non-redeemable preferred stock. The percentage of equity ownership a company acquires in an investee depends on the resources available, the ability to acquire the shares, ...