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Line item |
Carrying value (CV) of Investee |
Fair value (FV) of Investee |
Investor share of Investee CV |
Investor share of Investee FV |
Current assets |
$50 |
$50 |
$20 |
$20 |
Fixed assets |
50 |
90 |
20 |
36 |
Net assets |
$100 |
$140 |
$40 |
$56 |
Line item |
Carrying value (CV) of Investee |
Fair value (FV) of Investee |
Investor share of Investee CV |
Investor share of Investee FV |
Current assets |
$50 |
$50 |
$20 |
$20 |
Fixed assets |
50 |
30 |
20 |
12 |
Net assets |
$100 |
$80 |
$40 |
$32 |
Line Item |
Balance |
|
Cash |
$175 |
|
Other net current assets |
125 |
|
Fixed assets |
1,200 |
|
Net assets |
$1,500 |
|
Investor’s 25% share |
$375 |
Line item |
Carrying value (CV) |
Fair value (FV) |
Excess of FV over CV |
Investor’s interest in CV |
Investor’s basis difference |
Cash |
$175 |
$175 |
$0 |
$44 |
$0 |
Other net current assets |
125 |
125 |
0 |
31 |
0 |
Fixed assets |
1,200 |
2,400 |
1,200 |
300 |
300 |
Patents |
0 |
400 |
400 |
0 |
100 |
Deferred tax liability |
0 |
(400) A |
(400) |
0 |
(100) |
Goodwill |
0 |
1,300 |
1,300 |
0 |
325 C |
Total |
1,500 |
4,000 B |
2,500 |
375 |
625 |
A – The deferred tax liabilities relate to the difference between the underlying fair values and the carrying values of the investee’s assets and liabilities. The deferred tax liability of $400 is calculated as the product of total taxable temporary differences, excluding goodwill ($1,200 basis difference of fixed assets + $400 basis difference of patents), and the Investee’s applicable tax rate (25%). It is assumed for simplicity that at the date of investment there is no difference between the investor’s book and tax bases in the investment. If there were such a difference, the deferred tax effects might have to be considered in allocating the investor’s excess cost of its investment. See TX 11 for further information.
B – Investor purchased a 25% interest in the voting common stock for $1,000. Therefore, for illustrative purposes, the fair value of 100% of the Investee is assumed to be $4,000.
C – Equity method goodwill is calculated as the excess of Investor’s purchase price paid to acquire the investment over the fair value amounts assigned to the identified tangible and intangible assets and liabilities (fair value of Investor’s share of Investee’s net assets).
|
Line item |
Carrying value |
Fair value |
Investor's share of carrying value |
Investor’s share of preliminary fair value |
|
Cash |
$800 |
$800 |
$200 |
$200 |
A |
Accounts receivable |
1,000 |
1,000 |
$250 |
$250 |
A |
Fixed assets |
2,000 |
3,700 |
$500 |
925 |
B |
Patent (noncurrent) |
0 |
220 |
0 |
55 |
C |
Deferred tax liability |
0 |
(480) |
0 |
(120) |
D |
Accounts payable |
(800) |
(800) |
(200) |
(200) |
A |
Total |
$3,000 |
$4,440 |
$750 |
$1,110 |
E |
A – Investor concluded that Investee’s carrying value was representative of fair value.
B – Investor determined that its share of the fair value of Investee’s fixed assets was $925.
C – Investor determined that its share of the fair value of Investee’s patent was $55.
D – The preliminary deferred tax liability ($120) is calculated as the product of total taxable temporary differences, excluding goodwill. That includes the sum of the basis difference for fixed assets ($925‑$500 = $425) and the basis difference of the patent ($55) multiplied by the Investee’s applicable tax rate (25%). It is assumed for simplicity that there is not any difference at the date of investment between the investor’s book and tax bases in the investment. If there were such a difference, the deferred tax effects might have to be considered in allocating the investor’s excess cost of its investment. See TX 11 for further information.
E – Investor’s proportionate share of the fair value of Investee’s net assets of $1,110 exceeds the cost of its investment of $1,000, resulting in residual excess of $110.
|
Preliminary fair value |
% of total |
|
Fixed assets |
$925 |
94.4% |
Patent (noncurrent) |
55 |
5.6% |
Total |
$980 |
Line item |
Carrying value |
Preliminary fair value |
Final fair value |
Basis difference (Final fair value less Carrying value) |
Cash |
$200 |
$200 |
$200 |
$0 |
Accounts receivable |
250 |
250 |
250 |
0 |
Fixed assets |
500 |
925 |
786 |
286 |
Patent (noncurrent) |
0 |
55 |
47 |
47 |
Deferred tax liability |
0 |
(120) |
(83) |
(83) |
Accounts payable |
(200) |
(200) |
(200) |
0 |
Share of net assets |
$750 |
$1,110 |
$1,000 |
$250 |
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