B4-M4 - Business Combi and consolidation

Question 1

When does a company need to consolidate? When also not required to consolidate?

Answer 1

When the a company (parent) owns OVER 50% ownership/voting interest.

If 50% or less ownership:

a. 0%-20% - Use fair value method to value investment (Ex. Trading stock or AFS)
b. 21%-50% - with significant influence - Use Equity method to value investment
c. Over 50% - Consolidate (Acquisition method)

Question 2

What happens when you don’t have 100% ownership but you have more than 50% voting interest?

Answer 2

You have controlling interest and still need to consolidate BUT you need to show the non-controlling interest in the consolidated FS.

Question 3

What is a Variable interest Entity (VIE)?

Answer 3

Even without 50% ownership, one must consolidate its VIE if:

1. Financial stake at that company (ex. you are a guarantor of their loan, you’ve committed to provide financing)
2. That Company lack basic characteristics of equity owners (insufficient level of equity investment at risk and can’t operate on its own w/o additional subordinated financial support)
3. Your company is the primary beneficiary (biggest winner or loser)

If not primary beneficiary, your company should use voting interest model

Question 4

What are entities not ordinarily subject to consolidation as VIEs

Answer 4

1. Nonprofit Org
2. EBPs
3. Registered investment companies
4. Separate accounts of life insurance
5. Government org or financing entities established by gov’t

Question 5

Exception to the rule that over 50% companies needed to be consolidated

Answer 5

A company will consolidate another entity in a parent-subsidiary relationship when the parent owns more than 50 percent of the voting stock of the investee. The only exceptions to consolidation occur when there is significant doubt about the parent’s ability to control the subsidiary. An example of significant doubt is the subsidiary operating under severe foreign restrictions.

Question 6

How to value investment in subsidiary?

Answer 6

The investment in a subsidiary by a parent company is valued at the fair value of consideration given (or received) on the acquisition date. The fair value includes cash, the stock at fair value, and the fair value of contingent consideration. Contingent consideration is an obligation of the parent to transfer additional assets or equity to former shareholders of the subsidiary if certain conditions are met. Direct costs of the acquisition are expensed, and stock issuance costs are a reduction to additional paid-in capital (APIC).

Question 7

What composes an acquisition cost?

Answer 7

The acquisition cost of the investment is the fair value of the consideration given or the fair value of the consideration received, whichever is the more clearly evident. The acquisition cost of the stock does not include any measure of the relocation costs

Question 8

How do you account for acquisition costs and registration and issuance costs in a business combination?

Answer 8

Acquisition Costs = EXPENSE!
Stock Registration & Issuance Costs = debit APIC (“cap”)
DEBT registration and issuance = Capitalize to debt and amortize