Question

MARZI AG CASE:

Marzi AG had the following investments in shares of other companies on December 31, Year 1:

COMPANY   STATUS         % VOTING RIGHTS                      COMMENTS

Ariya               Domestic                   100%                           Operations differ from those of

Marzi AG and other subsidiaries

Jighil               Domestic                    45%                             No other shareholder owns more

than 0.1% of the voting rights

Arina               Foreign                       30%                             Arina has incurred a net operating

loss three years in a row

Sophia             Domestic                    100%                           Sophia is under jurisdiction of

bankruptcy court

Kristen            Domestic                    100%                           Operations are immaterial to those of

Marzi AG

Layla               Domestic                    40%                             Management control contract

provides Marzi AG with effective control

Sara                 Domestic                    90%                             Marzi AG intends to sell one-half of

its investment in Sara but not yet actively seeking a buyer

Sahar               Foreign                       50%                             Sahar is jointly owned with another

company

Sepeed            Foreign                       15%                             No other shareholder owns more

than 10% of the voting shares

Shaghi             Foreign                       70%                             Marzi AG can no longer bring home

its dividends due to the host government passed a ban on repatriation of dividends

Zohreh            Domestic                    51%                             Remaining 49% is owned by another

company.

Determine the appropriate method for including each of these investments in Marzi AG’s consolidate financial statements in accordance with:

1. IFRS-
2. U.S. GAAP

Answer 1

Determine the appropriate method for including each of these investments in Marzi AG’s consolidate financial statements in accordance with:
I)IFRS
II)U.S. GAAP
a) Elena Domestic 100% Operations differ from those of Marzi AG and other subsidiaries
This is accounted for as a controlled subsidiary. According to the US GAAP and IFRS the consolidation method should be used to record this involvement.

b) Barbara Domestic 45% No other shareholder owns more than 0.1% of the voting rights
The applicable method in this case is the Equity method. Investments are recorded at cost then the value is adjusted periodically to changes as a result of investor’s shares in earnings, losses or changes in capital. This is because Marzi AG owns more than 20% but less than 50% of the voting stock.
c) Arina Foreign 30% Arina has incurred a net operating loss three years in a row
Cost/ market method of investment can be used for accounting. Although Marzi AG has more than 20% voting stock, he has insignificant influence in the company operations as can be seen from the income statement. The cost method is best suited for this case.
d) Sophia Domestic 100% Sophia is under jurisdiction of bankruptcy court
Marzi AG owns more than 50% of the voting stock but the company is in bankruptcy proceedings and the court has control. In this instance the Equity method applies.
e) Kristen Domestic 100% Operations are immaterial to those of Marzi AG
This is a Controlled subsidiary. Consolidation method can be used to include Kristen Domestic in the consolidated financial statements.
f) Sara Domestic 90% Marzi AG intends to sell one-half of its investment in Sara but not yet actively seeking a buyer
Consolidation method is to be used before the presumed sale but after the release of control the equity method should be used since Marzi AG will have 45% of the voting stock.

g) Sahar Foreign 50% Sahar is jointly owned with another company
ASC 323-10 applies to investments in common stock or in substance common stock including common stock of corporate joint venture, investments in partnerships and unincorporated joint ventures.
This is a joint venture with more than 25% controlling interest; therefore it can accounted for in the books of Marzi AG using the Equity method.


h)Sepeed Foreign 15% No other shareholder owns more than 10% of the voting shares
The investor has less than 20% voting stock but has considerable influence in the operations of sepeed foreign. According to IFRS and US GAAP equity method can be used to account for this transaction in the books
I) Shaghi Foreign 70% Marzi AG can no longer bring home its dividends due to the host government passed a ban on repatriation of dividends
Marzi AG has considerable voting stock but lacks the legal control of the subsidiary. In this case this will be accounted for as a simple financial investment using the fair value method. Income from the subsidiary is usually paid to the parent in form of payments for transfer pricing and other services.

J) Elizabeth Domestic 51% Remaining 49% is owned by another company.
A Joint venture where Marzi AG has controlling interest. Due to the (50+1) % this can be accounted for in the books as a controlled subsidiary. The consolidation method is used to prepare the financial statements as per the IFRS and the US GAAP.