Financial Statement Analysis
Intercorporate investments
Below 20% ownership with no significant influence: fair value through profit or loss, or through OCI. At 20-50% with significant influence: the equity method, a one-line consolidation carrying the investment at cost plus share of earnings less dividends. Above 50%: full consolidation with a noncontrolling interest. Parent net income is the same under equity method and consolidation, but assets, liabilities, and margins differ.
Pensions and share-based compensation
Funded status = fair value of plan assets minus the present value of the obligation. Periodic pension cost includes service cost, interest cost, and (under IFRS) net interest on the net defined benefit liability; US GAAP uses the expected return on plan assets. Share-based compensation is expensed at grant-date fair value and allocated over the vesting period.
Multinational operations
If the functional currency is the subsidiary's local currency, use the current rate method: assets and liabilities at the current rate, equity at historical, revenues and expenses at the average; the translation adjustment goes to OCI. If the functional currency is the parent's, use the temporal method: monetary items at the current rate, non-monetary items and related expenses at historical rates; remeasurement gains and losses go to income.
Traps
- Under the temporal method, inventory and COGS use historical rates.
- A depreciating foreign currency creates a remeasurement loss when monetary assets exceed monetary liabilities.
- Equity-method income equals consolidated income, so adjustments often target ratios rather than earnings.
Worked example
A US parent's subsidiary holds net monetary assets of EUR 100 million when the euro weakens from 1.10 to 1.05 USD/EUR. The functional currency is the parent's, so the temporal method applies: remeasurement loss = 100 x (1.10 - 1.05) = $5 million, reported in income, not OCI.
Rule of thumb: current rate method routes the adjustment to OCI; temporal method routes it to income, with the sign set by the net monetary position.