• Global Frameworks: IFRS 9 (Financial Instruments), IFRS 10 / 11 / 12, US GAAP ASC 323 / 805.

1. Financial Asset Classifications (Ownership < 20%)
When a company buys passive equity shares in another business, accounting treatment depends on the asset’s classification under IFRS 9 and ASC 321:
  • FVTPL (Fair Value through Profit or Loss): Default treatment. Equity investments are remeasured to fair value at each reporting date, and any unrealized gains or losses are recognized directly on the income statement.
  • FVOCI (Fair Value through Other Comprehensive Income): An irrevocable option at purchase for non-trading equity. Unrealized value shifts are recorded in OCI and bypass the income statement completely.

2. The Equity Method of Accounting (Ownership 20% to 50%)
When an investor exerts significant influence over an investee, the investment is accounted for using the Equity Method:
  • The investment is initially recorded on the balance sheet at historical cost.
  • The carrying value increases proportionally by the investor’s share of the investee’s post-acquisition net income.
  • Dividends paid by the investee reduce the investment’s carrying value (treated as a return of capital, not income).

3. Acquisition and Consolidation Protocol (Ownership > 50%)
When an investor establishes control, full financial statement consolidation is required under IFRS 10 and ASC 805.
  • The parent combines 100% of the subsidiary’s assets, liabilities, revenues, and expenses directly into its own financial statements.
  • Non-Controlling Interest (NCI): The portion of equity ownership in a subsidiary not attributable to the parent company must be reported as a separate component of equity on the consolidated balance sheet.
  • Goodwill Calculation:

    Goodwill = Purchase Consideration Paid − Fair Value of Net Identifiable Assets Acquired
    Goodwill is capitalized as an asset. It is not amortized, but must be tested for impairment at least annually.

 
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