Chapter 14: Business Combinations and Consolidated FR Flashcards
When is consolidated financial reporting required?
When an entity owns 50% of the outstanding voting interests of another entity. The exception to this is when the control does not rest with the majority owner.
What is the acquisition cost of a sub for a parent under a business combination?
The sum at the acquisition date the fair values of assets, liabilities, and equity of the acquiree.
What is the difference between the initial recognition of net assets acquired under a business combination vs a non-business asset acquisition??
The net assets acquired under a business combination are recognized at the fair value at the acquisition date with goodwill recognized if
FV < Consideration Paid
Under a non-business asset acquisition, the assets are recorded at a allocation of cost based on relative fair values (with a gain/loss recognized when the asset is sold).
How are direct equity issuance costs accounted for under business combinations?
By reducing APIC
How are indirect equity issuance costs accounted for under business combinations?
They are expensed, just like acquisition-related costs
How are debt issue costs accounted for under business combinations?
By reducing the debt carrying amount.
How is percentage owed balanced out on the BS?
All liabilities of controlling interests will be reported on the BS, however, in the Equity section, there will be a split of Controlling Interest (CI) and Non-controlling interest (NCI)
What are the methods a parent can use to account for acquisition?
The equity or cost method.
What is the calculation of goodwill or gain from bargain purchase?
Fair Value of the consideration transferred (cash/stocks) (this purchase)
+ Fair value of any non-controlling interest in the acquiree (other’s interest)
+ Fair value of any previously-held equity interest in the acquiree (any previous ownership)
- Fair Value of identifiable net assets acquired
= Positive outcome = Goodwill; Negative outcome = Gain
What needs to be identified for the calculation of Goodwill or Gain from Bargain on Purchase?
- Fair value of consideration
- Fair value of previous equity interests
- Fair value of NCI
- Fair value of identifiable net assets
What account will need to be eliminated in consolidated noncurrent assets under the equity method?
Equity investment
The consolidated balance sheet will be a combination of parent and subsidiary except for
the Equity section
Are parents required to perform consolidated financial statements on the date of acquisition?
Yes, stop, drop and roll out those consolidated FS. Yesterday we were two, now we are one.
How do you calculate consolidated retained earnings for the parent?
Parent’s retained earnings, beginning
+ Consolidated NI attributable to parent’s shareholders
- Parent’s dividends declared
= Consolidated retained earnings
What are consolidated dividends?
Those paid outside the “consolidated group”
How do you consolidated intraentity noncurrent assets transactions?
- Eliminate the gain - > Recognize 1/nth of gain each remaining year in useful life
- Bring the asset back to OG cost
- Establish accumulated depreciation needed
- Reverse excess depreciation expense
What is the eliminating JE needed for consolidated intraentity noncurrent assets transactions when there was a gain?
(DB) Gain on sale (only in the year of the sale) or Equity Investment for future years
(DB) Equipment
(CR) Accumulated depreciation
(CR) Depreciation
What is the calculation for de-consolidation gain or loss?
Fair value of proceeds received
+ Fair value of any investment retained
+ Carrying amount of NCI
- Carrying amount of subsidiary, including Goodwill
= Gain, if positive or Loss, if negative
What is the variable interest model steps?
- Identify variable interest in entity
- Determine if entity is VIE
- Identify primary beneficiary - must consolidate
What are examples of variable interest?
- Common stock stock ownership
- Debt guarantees
- Subordinated debt
- Leases
- Derivatives
What are the 3 questions to ask yourself about VIEs?
- Is it a variable interest?
- Is it a variable interest entity?
- If so, who is the primary beneficiary?
When are combined statements used?
1) to combine the statements of several entities with related operations when one individual owns a controlling financial interest in them or (2) to combine the statements of entities under common management.
