In page 18 of Edupristine CMA Part I study notes under section A2, the following is found, i.e.,
"Equity method for equity securities
[paragraph 3(f), numbering done by me, for precise reference, but not found in the study notes]
In the income statement, proportionate share of profits of the investee company AFTER ADJUSTING FOR ADDITIONAL DEPRECIATION
and inter-company transactions will be shown as income, but it will be shown separately below operating income, and this excluded from operating income."
For equity method, the applicable US GAAP appears to be APB Opinion 18. And, its paragraph 19(a) reads as below, i.e.,
"Intercompany profits and losses should be eliminated until realized by the investor or investee
as if a corporate joint venture or investee company were consolidated."
But, there seems to be no provision in APB Opinion 18,
relating to the additional depreciation referred to in the Edupristine Study Notes.
Also, paragraph 19(d) of APB Opinion 18 reads as below, i.e.,
"The investor's share of extraordinary items and its share of prior-period adjustments reported in the financial statements of the investee
in accordance with APB Opinion No. 30 should be classified in a similar manner unless they are immaterial in the income statement of the investor"
As per APB Opinion 30, paragraph 23, the following 2 sets of items, i.e.,
1) Write-down or write-off of receivables, inventories, equipment leased to others, deferred research and development costs, or other intangible assets.
2) Other gains or losses from sale or abandonment of property, plant, or equipment used in the business.
should be included in the extraordinary item if they are a direct result of a major casualty (such as an earthquake), an expropriation, or a prohibition under a newly enacted law or regulation that clearly meets both criteria specified in paragraph 20 (i.e., of unusual nature and of the nature of infrequent occurrence).
Also, there seems to be no reference to depreciation either APB Opinion 18 or 30.
What is the ADDITIONAL DEPRECIATION of investee company referred to ?
Since the investment here is in securities of the investee,
how are we to construe the depreciation as pertaining to the assets of the investee ?
Can you clarify this please ?
Ra K Sankar