Original information for discussion:
- Why is amount of control the deciding factor in determining the accounting for debt and equity investments?
Did the FASB changes to goodwill accounting help improve reporting?
1)
Companies invest in shares of other companies as a strategy to diversify their portfolios. Shares of companies are marketable securities that can be bought from a private or public company through the stock exchange (Thakkar & Chaudhari, 2021). The investing company purchases the shares to earn dividends or capital gain when the shares are sold (Thakkar & Chaudhari, 2021). However, there is the intention to acquire shares of other companies to gain control over them. Shares are considered a powerful tool through which the investing entity would have the privileges of voting rights on critical matters such as the election of the board of directors of the company from which the shares are acquired. Furthermore, if a company buys over 50% of another company, it gains significantly over its management and critical decision-making (Thakkar & Chaudhari, 2021).
The changes in FASB regarding goodwill accounting will improve financial reporting. This is because the financial statements of companies that acquire goodwill and other intangible assets will reflect the economics of those assets (FASB, n/d). The financial statement users would be able to understand the investments made in the goodwill and other intangible assets. The disclosures made on the goodwill and intangible assets will provide financial statement users with a better understanding of expectations about changes in those assets with time FASB, n/d).
2)
Outside the realm of entrepreneurship, I find solace in the fantastical worlds of anime and manga, often sharing these adventures with my husband. It’s a delightful escape from the hustle and bustle of business life.
Now, let’s delve into the intriguing world of accounting. The amount of control indeed serves as a pivotal factor when determining the accounting treatment for debt and equity investments. Control dictates the level of influence an investor holds over the investee, influencing how financial statements reflect these investments. For instance, when an investor has significant control, generally recognized accounting principles (GAAP) necessitate the use of equity method accounting, reflecting the investor’s influence and rights in the investee’s financials. Conversely, lack of control may lead to the employment of fair value or cost methods, where the investor’s sway is minimal.
Moving on to the FASB’s recent changes in goodwill accounting, it’s a topic that holds significant weight in financial reporting circles. While I believe the changes were intended to enhance reporting accuracy and transparency, the effectiveness may vary based on individual perspectives and industry nuances. From my professional experience, these adjustments aimed to simplify the accounting process and align reporting standards across different entities. However, assessing their true impact requires a nuanced examination of financial statements and stakeholders’ feedback.
I look forward to engaging in insightful discussions with all of you on these topics and beyond.
3)Amount of Control for Determining Accounting
Amount of control is a deciding factor in determining the accounting for debt and equity investments. Companies often buy shares of other companies, and depending on the number of shares or voting rights the purchasing company has will determine the level of control they have over the invested company. “Generally accepted accounting principles (GAAP) recognize four different approaches to the financial reporting of investments in corporate equity securities: 1. Fair-value method. 2. Cost method for equity securities without readily determinable fair values. 3. Consolidation of financial statements. 4 Equity method” (Hoyle et al., 2024, p. 15).
When a company has neither significant influence, nor control, over another company, they will record their investments at cost, and adjust to fair value. Generally, the stock market price represents the fair-value.
If a company holds a small share in another company, the investment is initially recorded at cost and subsequently adjusted for dividends received and impairment losses. “When the fair value of an investment in equity securities in not readily determinable, and the investment provides neither significant influence nor control, the investment may be measured at cost” (Hoyle et al., 2024, p. 15).
When a company doesn’t have control over another entity but does have significant influence (generally between 20-50%), the investing company accounts for its investment using the equity method.
A company assuming more than 50% of another company’s voting stock will gain control and direct the decisions of the company. When a company owns more than 50% of the voting stock of another entity, they are required to consolidate the financial statements of the subsidiary with its own.
Goodwill FASB Changes
Goodwill is reported when one company acquires another, above fair market value. Goodwill represents the price over fair value for the company’s reputation, brand, or other intangible assets. The changes that FASB introduced to goodwill accounting will help improve reporting. Accounting Standards Update 2017-04 simplifies the measurement of goodwill and eliminated the goodwill impairment test. (FASB Accounting Standards Update, 2017). Since these changes simplify the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of the goodwill, then changes will reduce complexity and reduce accounting costs to the organization.
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