DEFINITION of Intercorporate Investment
Intercorporate investment occurs when a company makes an investment in another company. It could be through the purchase of shares of a publicly traded company on a public exchange, or a privately negotiated deal for a share of a company that is not publicly traded. The investment may also involve buying the debt of another company, publicly traded or otherwise.
BREAKING DOWN Intercorporate Investment
Intercorporate investments fall into one of three categories which affect the accounting treatment of the investment: minority passive (less than 20% ownership), minority active (20%-50% ownership) and controlling interest (over 50%). The companies can also opt to call it a joint venture where decisions are made together. For minority active and joint venture investments, the equity method of accounting is used. For a controlling interest, the consolidation method is used. When a minority passive interest is taken, the investment is not treated much differently than other securities owned by the company for investment purposes. The security can be designated as held to maturity (bonds), held for trading (bonds and stocks), available for sale (bonds and stocks) or held on the balance sheet at its designated fair value as a long-term asset.
Accounting for Intercorporate Investments
Unless it is a minority passive interest, intercorporate investments are accounted for differently than other investments by a company. Investments a company makes where they have significant control over the actions and future direction of another company utilize methods of accounting that require the acquiring company to take on some of the target company's financial weight. In the equity method of accounting, which is used for joint venture or a minority active interest, the initial investment in the target company is recorded on the balance sheet and goodwill must be recognized. Earnings of the target company are added to the balance sheet of the acquirer per the proportion of ownership of the acquirer. Dividends are recorded on the income statement. For the acquisition method of accounting, the companies' assets, liabilities, revenues and expenses are combined on the financial statement of the acquirer, and an account for minority interest is created to represent the acquirer's non-controlling interest in the target.