Intercorporate Investment

What Is Intercorporate Investment?

Intercorporate investment can happen when a company makes any investment in another company. These types of investments can be accounted for in one or two ways relying upon the investment.

Generally, the broadest and most exhaustive method for accounting for these types of investments is by the percentage of ownership stake.

Figuring out Intercorporate Investments

Intercorporate investment happens when a company makes an investment in another company. Broadly, there can be three categories for characterizing an intercorporate investment, which can assist with directing and direct the accounting treatment utilized. The three categories generally include: minority passive (under 20% ownership), minority active (20%-half ownership), and controlling interest (more than half ownership). These arrangements are general divisions, yet companies ought to likewise counsel Accounting Standards Codification (ASC), explicitly ASC 805, which subtleties the Generally Accepted Accounting Principles for business mixes. Companies might have the option to go amiss from the three major groupings relying upon participation controls.

There can be different ways a company can decide to make an intercorporate investment. It very well may be through the purchase of shares of a publicly traded company on a public exchange or a privately negotiated deal for a share of a company that isn't publicly traded. The investment may likewise include buying the debt of another company, publicly traded etc. The controlling interest of a company will commonly come from a merger or acquisition.

Types of Intercorporate Investments

The following are a few extra subtleties on every one of the three groupings for intercorporate investments:

Minority passive: Minority passive incorporates investments that lead to under 20% ownership in a company. This can cover a broad scope of investments, including debt, since ownership and voting rights are not ordinarily offered with debt investments. At the point when a minority passive interest is taken, the investment is essentially regarded equivalent to different securities owned by the company for investment purposes.

Minority active: Minority active envelops investments that lead to 20%-half of ownership. In this segment companies for the most part utilize the equity method. This is an important segment on the grounds that many companies make a critical ownership investment in another company yet may not be guaranteed to need to consolidate the business with consolidated financial statements as is required with a controlling interest. Taking an ownership stake of 20%-half offers numerous opportunities for things like joint ventures as well as off-balance sheet reporting.

Controlling interest: Companies that have a 50% or more ownership stake in one more company are generally required to utilize the consolidation method. The consolidation method expects companies to join their financial reporting and report consolidated financial statements. At the high level, this requires an exhaustive balance sheet, income statement, and cash flow statement with integrated results.

Accounting for Intercorporate Investments

The ownership stake of an intercorporate investment assists with giving general guidance to the methodology utilized in accounting for the investment on a company's financials. Overall, there are three primary methodologies that related with the three broad investment arrangements. Keep as a top priority that debt investments normally don't accompany an ownership stake or voting rights.

Cost Method

The cost method can be widely utilized on the grounds that it includes a huge swath of investments that are tied to an ownership stake of under 20%. Intercorporate debt investments are regularly accounted for utilizing the cost method since debt doesn't frequently accompany ownership rights or voting power.

Inside the cost method, there can likewise be some further outline of investments. Generally, these investments will fundamentally be dealt with equivalent to different securities owned by the company for investment purposes. The securities might be designated as held to maturity (bonds), held for trading (bonds and stocks), available to be purchased (bonds and stocks), or rigorously held on the balance sheet at the designated fair value.

Equity Method

In the equity method of accounting, the initial investment in the target company is recorded on the balance sheet. The value of the investment is adjusted in view of the percentage of profit or loss for the owner. Dividends are not recorded as income. Rather, dividends increase cash and reduce the value of the investment for the investor.

Goodwill may likewise be associated with investments when the equity method is utilized. Assuming that the investor pays more than the carrying value of the investment, the target company might perceive goodwill for the difference.

Consolidation

Holding a half or more ownership stake in another company generally requires the consolidation method. With the consolidation method, companies must join their financials into consolidated financial statements. The consolidation method is common after a merger or acquisition.

Features

• Accounting for intercorporate investments is basically founded on the amount of ownership that accompanies the investment.
• Accounting by ownership is regularly segmented into three arrangements: minority passive, minority active, and controlling.
• Intercorporate investments allude to any investment a company makes in another company.