01.07 Consolidated Financial Statements Flashcards
When are consolidated financial statements required?
Consolidated FS are required when one entity has effective control over another entity.
When is effective control present?
Effective control is usually present when on the following conditions applies:
1. one entity has a controlling interest over another. Here, and entity has a greater than 50% ownership of another entity and, therefore, can direct the activities of the investee/subsidiary/acquiree.
2. an entity (variable interest holder) is the principal beneficiary of the variable-interest entity.
What do consolidated financial statements represent?
Consolidated FS present the financial information of two or more separate legal entities as though they were a single economic entity.
When will an investor who has majority ownership of an investee (greater than 50%) not consolidate the sub?
When the investor is prevented from exercising that majority ownership to control the financial and operating policies or activities of the sub.
When can effective control be lacking?
Effective control may be lacking (even for a majority owned sub) if one of the following conditions applies:
1. A foreign sub is largely controlled by the foreign government through prohibition on paying dividends, control of day-to-day operations, or other impediments to control.
2. A domestic sub is in bankruptcy and under the control of the courts.
True or false: it does not matter which method the parent uses to carry its investment in a sub.
True. A parent may carry its investment in a sub that will be consolidated on its books using the cost method, equity method, or any other method it chooses. Because the investment in sub accounts will be eliminated in the consolidation, it does not matter which method is used for internal reporting.
What accounts are eliminated in the consolidation process?
The investment account (parent) and the sub’s equity accounts.
What happens when the parent company uses the equity method?
If the equity method is used to carry the investment in the sub, the parent will adjust on its books the carrying value (CV) of its investment in the sub to reflect the following:
1. the parent’s share on the sub’s income or loss
2. the parent’s share of dividends declared by the sub
3. the amortization of any difference between the fair value of identifiable assets and the CV of those assets.
What happens when the parent company uses the cost method?
If the cost method is used to carry the investment in the sub, the parent will not adjust on its books the carrying value of its investment in the sub to reflect to the following:
1. the parent’s share of the sub’s income or loss
2. the parent’s share of dividends declared by the sub
3. the amortization of any difference between the fair value of identifiable assets and the CV of those assets.
However, the parent will recognize its share of dividends declared by the sub as dividend income.
What must be recorded by the parent if they do not own 100% of the sub?
Non-controlling interest
Where is the non-controlling interest presented on the consolidated balance sheet?
NCI will be recognized as a separate line item in the equity section.
True or false: the consolidated balance sheet will include 100% of the sub’s assets and liabilities, regardless of the parent’s ownership percentage.
True.
True or false: the consolidated income statement will include 100% of the sub’s revenues and expenses.
True.
What is the most common intercompany transaction?
Intercompany sales of inventory.
What effects on the financial statements that may need to be eliminated do intercompany sales of inventory have?
Sales vs purchase
Receivable vs payable
Profit in ending inventory
