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Equipment Manufacturing Inc Case Solution

Solution Id Length Case Author Case Publisher
2309 1075 Words (4 Pages) Claude P Lanfranconi, Michele Stewart Ivey Publishing : 9A94B013
This solution includes: A Word File A Word File and An Excel File An Excel File

EMI Equipment had three alternatives to invest in Western Inc. The first alternative was to pay $ 20 million for a 15 percent interest in Western Inc, in which EMI would have little influence over operating and financing decisions of Western Inc. According to IFRS standard 9, this would be considered as an equity instrument investing and therefore, would be measured at fair value through equity. In the Balance sheet for the year ended 31 December 2009, an investment account for EMI would be created for $ 20 million of Investment in Western Inc and cash account would be deducted by $ 20 million. 

Following questions are answered in this case study solution

  1. Prepare EMI’s Financial Statements for the year ended December 31, 2009 reflecting the three alternative investment strategies. Assume that the amounts paid for Western would come out of EMI’s cash and marketable securities accounts. Explain and discuss how the accounting rules portray the underlying economics of the alternatives. What would be EMI’s Net Income in the third (80 per cent) scenario if its investment was accounted for by the cost method? Equity method? Compare your answer to the consolidated net income of EMI.

  2. Effective for year ends beginning on or after October 1, 2006 (with earlier adoption permitted only as of the beginning of a fiscal year ending on or after December 31, 2004), equity investments of less than 20 per cent or non-significant influence investments are to be classified as either “available for sale” or ”held for trading” and, if the investment is in a public company, must be accounted for using the fair value method (otherwise at cost). Fair value changes (i.e., unrealized gains or losses) on non-significant influence investments classified as available for sale are recognized on the income statement. On the other hand, fair value changes on non-significant influence investments classified as held for trading are recognized via “other comprehensive income” and are only included in net income when realized (i.e., when the investment is sold). Explain how this accounting change will impact the financial statements of EMI at the date of acquisition and for the year ended December 31, 2009.


Case Analysis for Equipment Manufacturing Inc

As the company owns 15 % of equity in Western Inc, dividends of 15 % from the net income of Western Inc would be added to the cash account of EMI and will also be added back to the equity section in retained earnings. In the Income Statement, dividends received would be added as Other Income, which would increase, EMI’s net income. The standard IAS 39 would be applied to equity instrument where if the intention for sale is within one year of an asset than it would be categorized as Held for Trading and any unrealized gain or loss would be charged in Profit and Loss statement. If an asset would be retained for more than a year, than it would be classified as “Available for Sale”, and any unrealized gain or loss would be charged in other comprehensive Income.

The second alternative is that EMI acquires 30 % of Western Inc, thus according to IFRS standards, this would mean that the parent company, EMI, is creating as its associate. EMI will have significant influence over Western Inc financial and operating policies. In the balance sheet, investment account of $ 55 million is created after adding post acquisition profit of $23.4 million and deducting the unrealized profit of $ 8.4 million. In the equity section, $ 55 million is added to retained earnings. In the Income statement, $ 15 million is added as Income from Associate which is calculated by deducting $ 23.4 million from $ 8.4 million. EMI has created Western as its associate, and it has significant control over its operating and financing decisions. Also, it has 30 % share in Western’s net income. The standard applied for the association will be IAS 28 and equity method would be applied where the parent takes the post acquisition profit share.

The third alternative is that EMI acquires 80% of Western Inc, which according to IFRS standards mean that it has created Western Inc as its subsidiary. EMI will have total control over Western Inc operating and financing activities and will earn 80% of Western’s profit. Goodwill is calculated as Non controlling interest, and other adjustments are deducted from initial investment. Original investment is deducted from cash and dividends received is added. In the equity section, dividends received are added, too. Business combination IFRS 3 would be applied where the company will be shown as a single economic entity and Western Inc as its subsidiary. Any barter transaction will not be accounted, and profit of the parent company in the subsidiary will be shown in profit and loss statement of the parent company.

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