Equity Accounting and Investment Value: Another View

References

• Ronald , Ma . 1972 . ‘Equity Accounting and Investment Value’ . Accounting and Business Research , No. 6 Spring : 151 – 155 .
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• Ibid., p. 155.
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• Ibid., p. 155.
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• In all situations, of course, dividends are a determinant of financial position and income.
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• (i) Australian Society of Accountants, ‘Accounting for material investments in other Companies by consolidation and by the equity method’. Exposure Draft, July 1971 and ‘The use of the equity method in accounting for investments in subsidiaries and associated companies.’ Exposure Draft, September 1973. (ii) Institute of Chartered Accountants in England and Wales, First statement of standard accounting practice, ‘Accounting for the results of associated companies.’ January 1971. (iii) American Institute of Certified Public Accountants, Accounting Principles Board Opinion No. 18: ‘The equity method of accounting for investments in common stock.’ June 1971.
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• Ma, op. cit., p. 151. This assumption in fact makes the equity method inappropriate in every situation unless, by coincidence rather than design, it produces a current market value. The qualifying assumptions in Ma's analysis mean that coincidence is unnecessary for a current market value to be obtained.
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• There may of course be other indirect benefits such as the effects of inter-company transactions, joint use of facilities and other forms of co-operation.
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• The reference to the two types of benefits is best expressed by the conceptual share valuation model. Where P0 is the market price of a share at time O, D represents the expected dividend at the end of period t, P., the market price of the share at the date of disposal n, and ke the market discount rate appropriate for the risk share involved.
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• It is not the purpose of this paper to debate the relative merits of various valuation bases. It should be pointed out however, that in the case of marketable securities held for speculative purposes, the limitations of historical cost are particularly apparent. Also the case for the application of a strict realisation test seems particularly weak when a current market value is easily obtainable and verifiable.
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• “Where the investor is in a position to control the investee, the assets underlying an investment are accounted for in consolidated statements but this is not as an alternative to some other type of valuation: it is accounting for a different entity, the group of companies.
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• F. L. Clarke has made the same point:? distinction should be drawn between—(a) the monetary measure of the entitlement to the rights, and (b) The monetary measure of the rights-conferred by the holding of shares. The monetary measure of the entitlement to the rights is represented by the price for which those shares may be exchanged in the market; the monetary measure of the rights is the aggregate of the monetary measures of what the rights represent. See ‘Equity Accounting—An Enigma,’ Chartered Accountant in Australia, July 1971, p. 7.
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• Ma, op. cit., p. 151.
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• A similar problem arises if it is desired to choose between current cost and net realisable value as a valuation basis in accounting—value to the firm can be shown to be either current cost or net realisable value depending on management's intention with respect to each asset.
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• The recommendations of three professional bodies have used the percentage ownership of shares in the investee as the primary criterion basing this largely on a notion of significant influence. The rationale for this criterion has been inadequately presented so far.
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• This point has been clearly made by Clarke, op. cit. p. 8.
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