Business Combinations & Consolidations Flashcards
When using the equity method during the reporting of a Financial Statement for a parent company, how does the subsidies earnings and dividends reflects on the parent company’s F/S?
In most cases the subsidiaries earnings and dividends during the year are reflected in the parent company’s investment account on the balance sheet and equity earnings in subsidiary account (income statement). Typically the dividends would be recorded as a reduction in the investment account so it doesn’t impact the parent’s retained earnings.
What is a Noncontrolling Interest?
This is simply the percentage of a subsidiary corporation’s stock not owned by the parent corporation. For GAAP purposes, this percentage is less than 50%.For tax purposes, this percentage is less than 20%.
What does the existence of a noncontrolling interest indicates?
This indicates that the subsidiary has public shareholders. This is when the given scenario dos not states that the parent company owns 100% of the subsidiary. When the parent typically incurs costs on behalf of its publicly held subsidiary at no charge to the subsidiary, the FS must reflect the costs as if they incurred by the subsidiary; otherwise, net income will be misstated.
What should a parent do when reporting financial position for the consolidated F/S?
To accurately report the financial position, intercompany transactions such as sales, gross profit etc must be eliminated in the consolidation.
How are acquisition-related costs incurred in a business combination by the acquirer accounted for?
During the acquisition costs incurred by the acquirer are expensed in the period incurred. However, costs associated with issuing debt securities are capitalized as a contra account to the liability and cost incurred to issue stock are recorded as a reduction in the acquirer’s Additional paid in Capital.
How are assets and liabilities of subsidiary recorded in business combinations?
In business combinations, assets and liabilities of subsidiaries are recorded at FV on the acquisition date. Goodwill is an intangible asset measured as the excess of the consideration given (ie. the purchase amount) over the FV of the identifiable assets acquired.
What is a variable interest entity?
This exists when an investor has a controlling financial interest in another entity, but the amount of control in the VIE is disproportionate to its ownership. The entity with a controlling interest in the VIE is the primary beneficiary and is required to prepare consolidated financial statements with the VIE, even if it does meet the 50% ownership threshold for consolidation.
What happens when a subsidiary pays dividends?
When a subsidiary pays dividends, the portion that is paid to the parent is eliminated and has no effect on retained earnings. The remainder is paid to the noncontrolling interest (NCI) shareholders, decreases their investment account and decreases the NCI on the shareholders’ section of the consolidated balance sheet.
When does a business combination result in a bargain?
This results in a bargain when the acquirer pays less than FV of the net identifiable assets of the acquiree. The gain is measured as the excess of the FV of the identifiable net assets of the acquiree over the FV of the consideration paid by the acquirer plus the FV of any noncontrolling interest.
What is a majority voting interest?
This is created when an investor directly or indirectly owns more than 50% outstanding voting shares of an entity. Indirect ownership includes ownership held through another company.
