Damodaran on Valuation

10.3. HOLDINGS IN OTHER FIRMS

In this category, we consider a broader category of nonoperating assets, which include holdings in other companies, public as well as private. We begin by looking at the differences in accounting treatment of different holdings and how this treatment can affect the way they are reported in financial statements.

10.3.1. Accounting Treatment

The way in which cross holdings are valued depends on the way the investment is categorized and the motive behind the investment. In general, an investment in another firm can be categorized as a minority passive investment, a minority, active investment; or a majority active investment, and the accounting rules vary depending on the categorization.

10.3.1.1. Minority Passive Investments

If the securities or assets owned in another firm represent less than 20 percent of the overall ownership of that firm, an investment is treated as a minority passive investment. These investments have an acquisition value, which represents what the firm originally paid for the securities, and often a market value. Accounting principles require that these assets be subcategorized into one of three groups—investments that will be held to maturity, investments that are available for sale, and trading investments. The valuation principles vary for each.

1. For investments that will be held to maturity, the valuation is at historical cost or book value, and interest or dividends from this investment are shown in the income statement. ...