Equity Method Investment

In: Business and Management

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Abbot laboratories’
a. In general, why do firms enter into joint-venture agreements?
A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. It involves coming together of different business entities, which contributes a combination of subsets of assets for a specific business purpose and a limited duration. It is essentially a medium to long-term contract which is specific and flexible. Joint Venture is all about combining of strengths of different business concerns into one organization. Though the joint venture represents a newly created business enterprise, its participants continue to exist as separate firms. A joint venture can be formed as a partnership firm, limited liability partnership or a company or any other form of business organization which the participating firms choose to select. It generally has the following characteristics: * Right of mutual control or management of the enterprise. * Right to share in the property. * Joint property interest in the subject matter of the venture. * Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking
b. Consistent with U.S. GAAP, Abbott uses the equity method to account for its joint venture in TAP Pharmaceutical Products (TAP). Briefly explain this accounting method.
An accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement and the reported value is based on the firm's share of the company assets. The reported profit is proportional to the size of the equity investment. This is the standard technique used when one company has significant influence over another.
International…...

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