Accounting Terms and Definitions

ACCOUNTING TERMS AND DEFINITIONS

Summary of IAS 28

Scope

IAS 28 applies to all investments in which an investor has significant influence but not control or joint control except for investments held by a venture capital organisation, mutual fund, unit trust, and similar entity that (by election or requirement) are accounted for as under IAS 39 at fair value with fair value changes recognised in profit or loss. [IAS 28.1]

Key Definitions [IAS 28.2]

Associate: An enterprise in which an investor has significant influence but not control or joint control.

Significant influence: Power to participate in the financial and operating policy decisions but not control them.

Equity method: A method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net profit or loss of the associate (investee).

Identification of Associates

A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it can be clearly demonstrated otherwise. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence can be clearly demonstrated. [IAS 28.6]

The existence of significant influence by an investor is usually evidenced in one or more of the following ways: [IAS 28.7]

representation on the board of directors or equivalent governing body of the investee;
participation in the policy-making process;
material transactions between the investor and the investee;
interchange of managerial personnel; or
provision of essential technical information.

Potential voting rights are a factor to be considered in deciding whether significant influence exists. [IAS 28.9]

Accounting for Associates

In its consolidated financial statements, an investor should use the equity method of accounting for investments in associates, other than in the following three exceptional circumstances:

An investment in an associate that is acquired and held exclusively with a view to its disposal within 12 months from acquisition should be accounted for as held for trading under IAS 39. Under IAS 39, those investments are measured at fair value with fair value changes recognised in profit or loss. [IAS 28.13(a)]
A parent that is exempted from preparing consolidated financial statements by paragraph 10 of IAS 27 may prepare separate financial statements as its primary financial statements. In those separate statements, the investment in the associate may be accounted for by the cost method or under IAS 39. [IAS 28.13(b)]
An investor need not use the equity method if all of the following four conditions are met: [IAS 28.13(c)]
1. the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity method;
2. the investor's debt or equity instruments are not traded in a public market;
3. the investor did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
4. the ultimate or any intermediate parent of the investor produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

Source IAS Plus.com

Equity Accounting

A method of accounting whereby a corporation will document a portion of the undistributed profits for an affiliated company in which they own a position.

The amount of undistributed profits that the corporation decides to document is generally equal to the percentage of equityit controls. In many cases, the profits of the affiliated company are never distributed to the corporation.

Source Investopedia.com

A technique to account for a company's interest in an associated company, ie, a company over which the investing company can exert significant influence, but does not have control. (Usually the investing company would hold less than 50 per cent but more than 20 per cent of the shares of the associated company although significant influence is considered to be a matter of substance over form.) The assets of a company with an investment in another are set out so that they include the investor's ownership interest in the associated company. Under this method, a company with an investment in an associated company will include in its annual report a share of the profit (loss), adjusted for intercompany transactions, and reserves of the associated company. In the investing company's balance sheet this investment will be recorded at cost, plus the investor's share of any post-acquisition increases in the associated company's net assets. Equityaccounting is a specific accounting technique which contrasts with the traditional accounting method where holdings of 50 per cent or less in another company are shown at cost, and dividends received as the only recognition of the profits of the investment. The equity method is advocated by AAS14.

Source ANZ.com

Mark to market accounting

In finance and accounting, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently.

[edit]History and development

The practice of mark to market as an accounting device first developed among traders on futures exchanges in the 19th century. It wasn't until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals.

To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. As an example, the Chicago Mercantile Exchange, taking the process one step further, marks positions to market twice a day, at 10:00 am and 2:00 pm.[citation needed]

Over-the-counter (OTC) derivatives on the other hand are not traded on exchanges, so their market prices are not as readily available. During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently. Deals were monitored on a quarterly or annual basis, when gains or losses would be acknowledged or payments exchanged.

As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to dress up the books, especially when the market price could not be objectively determined (because there was no real day-to-day market available), so assets were being marked to model, and sometimes marked to fantasies. See Enron.

Internal Revenue Code Section 475 contains the mark to market accounting method rule. Section 475 provides that dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions).

[edit]Simple example

As an example, what if an investor owns 100 shares of a particular stock purchased originally for $40 per share, and that stock is currently trading at $60 per share, then the "mark to market" value of the investor's shares is equal to (100 shares × $60), or $6000, whereas the Book value might (depending on the accounting principles used) only equal $4000.

Source Wikipedia.

The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
2.In termsof mutual funds, a MTMiswhen the net asset value (NAV) of the fund is valued uponthe most current marketvalues.

This is done most often infutures accounts to make sure that margin requirements are being met. If the current market value causes the margin account to fall below its required level, the trader will be faced with a margin call.
2. Mutual funds are marked to market on a daily basis at the market close so that investors have an idea of the fund's NAV.

Source Investopedia