Abbott Laboratories—Equity Method Investments
Teaching Notes: This case shows students how the equity method of accounting works. Abbott Lab’s footnote disclosure includes simple financial statement and income statement information for the joint venture. This provides a textbook example of the equity method. The case asks students to consider the effect on Abbott’s financial statements had the company reported under IFRS, which allows firms to select between equity method and proportionate consolidation when accounting for joint ventures (entities with joint control). Creating pro forma financials is a useful skill not only to reflect potential IFRS conversion but to enable meaningful comparisons across reporting jurisdictions. Thus, even if the SEC does not require IFRS for domestic registrants, students will benefit from studying non-GAAP reporting requirements. The case starts with the economic and business reasons behind joint ventures. Our teaching philosophy is that accounting does not happen in a vacuum – it is the language of business. We take every opportunity to have students consider the economics of the transaction first and then apply accounting rules. This is good practice for students who will have to make increasingly many judgments with the coming of principles-based accounting. Students have little trouble determining how Abbott Laboratories accounts for its 20-50% owned subsidiaries. They find it much more challenging to trace the effects thereof through the financial statements. Our use of two Taccounts – one for Abbott’s asset account and one for the Joint Venture’s equity account – visually demonstrates the obvious and not-so-obvious relationships in detail. The analysis section of the case has students create pro forma numbers that reflect the proportionate consolidation method. The differences are not particularly significant but the exercise