Business Combination

Question 1

Investor controls an investee if and only if the investor has all the following:

Answer 1

1. Power over the investee
2. Exposure or rights to variable return from its involvement with the investee
3. The ability to use its power over the investee to affect the amount of the investor’s return

Question 2

Power over the investee means?

Answer 2

Has power to direct RELEVANT ACTIVITIES (activities that can affect investee’s return)

Question 3

Company may have power/control without a majority voting rights if

Answer 3

The company has potential voting rights (such as convertible instruments or options or contracts)

Question 4

Factor to consider if the potential rights are substantive

Answer 4

1. Whether there are any barriers to exercise the rights
2. When exercising the right requires the agreement of other party
3. Whether the rights owner would benefit exercise those rights

Question 5

Two method to calculate NCI

Answer 5

1. % NCI x identifiable net asset (FV ASSET - FV LIABILITIES)
2. % NCI x Fair Value Enterprise (100% value of the company)

Question 6

Step to consolidate balance sheet at acquisition:

Answer 6

1. Prepare the acquisition differential schedule [ consideration paid - net book value of subsidiary]
2. Prepare elimination entry:
   -set up goodwill
   - set up NCI
   -record FV differentials
   -eliminate subsidiary common shares
   -eliminate subsidiary RE
   -eliminate partner investment on subs
3. Prepare consolidation bs