Question

Discuss the motivations a company has to acquire the debt of one of its affiliates. Does the motivation differ in the situation in which the consolidated entity would report a loss on the constructive retirement instead of a gain?

Answer 1

The reasons why one company would invest in another are many but could include the desire to gain access to another market, increase its asset base, gain a competitive advantage, or simply increase profitability through an ownership (or creditor) stake in another company.

An investment in an associate is typically an ownership interest of between 20% and 50%. Although the investment would generally be regarded as non-controlling, such an ownership stake would be considered influential, due to the investor's ability to influence the investee's managerial team, corporate plan, and policies along with the possibility of representation on the investee's board of directors.

A major factor that must also be considered for the purpose of investments in associates is intercorporate transactions. Since such an investment is accounted for under the equity method, transactions between the investor and the investee can have a significant impact on both companies' financials. For both, upstream (investee to investor) and downstream (investor to investee), the investor must account for its proportionate share of the investee's profits from any intercorporate transactions.