8.3: Strategic Investments
- Page ID
- 100470
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)In the previous categories, investments in other companies' debt or shares were acquired in order to make a return on idle cash. Investing in other companies can also be for strategic purposes, such as to acquire the power to influence the board of directors and company policies, or to take over control of the company outright. This is done by acquiring various amounts of another company's voting common shares. The degree of ownership (number of votes) defines the level of influence.
Guidelines have been developed to help determine the classification of the investment based on the degree of influence. For example, the previous three categories of investments (FVNI, FVOCI, and AC) each assumed that the investor's ownership in shares were less than 20%, therefore having no influence on the investee company.
For ownership in shares greater than 20% but less than 50%, it is assumed that significant influence exists. IFRS calls this category investment in associates. However, if an investing company owns between 20% and 50% of another company's shares, significant influence is by no means assured and can be refuted, if there is evidence to the contrary. For example, if an investor acquires 40% of the outstanding common shares of a company but the remaining 60% of the shares are held by one other investor, then significant influence will not exist. A general assumption is that the greater the number of investors, the more likely that investment holdings of greater than 20% will result in significant influence.
If an investor holds greater than 50% of the common shares, then it has the majority of the votes at the board of directors' meetings, thereby having control of the investee company's operations, decisions and policies.
Joint arrangements is another type of strategic investment that involves the contractually-agreed sharing of control by two or more investors. There are two types of joint arrangements, namely; joint operations and joint ventures. A joint operation exists if the investor has rights to the assets and unlimited liability obligations of the joint entity and a joint venture exists if the investor has rights to net assets (assets and limited liability obligations of the joint entity.
Regarding strategic investments—why would an investor want to influence or control another company? If the investee company has resources that would enhance the operations of the investor, then acquiring sufficient voting shares to significantly influence or control the investee's board of directors would be a prime motivator to do so. Acquiring an interest in another company could secure a guaranteed source of materials and products, open up new markets, or broaden existing ones for the investor company. It could also expand an investor company's range of products and services available for sale as was the case with Hewlett Packard's acquisition of 87% of Autonomy Corporation's shares resulting in control of the company.
The accounting treatments for these classifications are complex and will be covered in more detail in the advanced accounting courses. The rest of this chapter will focus on an introduction to the three strategic investment classifications.