8.5 Investments Analysis

Access to the information contained in financial statements and required disclosures is vital to sound investment analysis. This information will assist management to separate the assets, liabilities, and income components of the investment portfolios from the company’s core operations to accurately assess performance of the company and of the investment itself. As well, creditors and potential investors will have to keep in mind the impact that certain accounting treatments would have on existing financial data.

The equity method was referred to earlier as the one-line consolidation method for a reason: some of the key data using this method is not separately identifiable. As well, the accounting treatment chosen could affect the amounts and timing of net income and assets balances reported by the investor company. Some of these differences are identified in the chapter highlights below. Decisions regarding when to purchase or sell are in part determined by analysis of the investee company’s operating results, earnings prospects, and earnings ratios. For this reason, care must be taken to clearly be aware of any obscured data and to understand the differences in data created by the choice of accounting treatments for each investment portfolio.

Proper access to information and a thorough understanding of the various accounting treatments will reduce the possibility that management will make sub-optimal business investment decisions due to misinterpretation of analysis results.