Consolidated Financial Statements Flashcards
Basic consolidation concepts
under the voting interest model, consolidated financial statements are prepared when a parent-subsidiary relationship has been formed; an investor is considered to have parent status when control over an investee is established or more than 50% of the voting stock of the investee has been acquired
under U.S. GAAP, all majority-owned subsidiaries (domestic and foreign) must be consolidated except when significant doubt exists regarding the parent’s ability to control the subsidiary, such as when: the subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under severe foreign restrictions
business combinations that do not establish 100% ownership of a subsidiary by a parent company result in a portion of the subsidiary’s equity (net assets) being attributable to noncontrolling shareholders
an investor owning more than 50% of a subsidiary has a controlling interest in that subsidiary
noncontrolling interest is the portion of the equity (net assets) of a subsidiary that is not attributable to the parent; noncontrolling interest is reported at fair value in the equity section of the consolidated balance sheet, separately from the parent’s equity
What is the acquisition method?
it is used to account for business combinations in which the investor/parent establishes control over the investee/subsidiary; it has two distinct accounting characteristics: 100% of the net assets acquired (regardless of ownership percentage) are recorded at fair value with any unallocated balance creating goodwill & when the companies are consolidated, the subsidiary’s entire equity (including its common stock, APIC, and retained earnings) is eliminated (not reported)
the parent’s basis is the acquisition price; the formula is:
fair value = acquisition price = investment in subsidiary
an acquiring corporation should adjust the following items during consolidation:
common stock, APIC, and retained earnings of subsidiary are eliminated
investment in subsidiary is eliminated
noncontrolling interest (NCI) is created
balance sheet of subsidiary is adjusted to fair value
identifiable intangible assets of the subsidiary are recorded at their fair value
goodwill (or gain) is required
so in effect, the consolidated workpaper eliminating journal entry is: CAR IN BIG
DR: C/S - subsidiary
DR: APIC - subsidiary
DR: RE - subsidiary
CR: investment in subsidiary
CR: noncontrolling interest
DR: BS adjustments to fair value
DR: identifiable intangible assets to FV
DR: goodwill
Intercompany transactions
when consolidating, 100% of intercompany transactions must be eliminated, even when the parent owns less than 100% of the subsidiary; intercompany transactions must be eliminated because they lack the criteria of being “arm’s length”
Commonly tested intercompany transactions
it is common for affiliated companies to sell inventory/merchandise to one another; often this inventory/merchandise is sold at a profit; the total amount of this intercompany sale and COGS should be eliminated prior to preparing consolidated financial statements; in addition, the intercompany profit must be eliminated from the ending inventory and the COGS of the purchasing affiliate; 100% of the profit should be eliminated even if the parent’s ownership interest is less than 100%; the intercompany profit in beginning inventory that was recognized by the selling affiliate in the previous year must be eliminated by an adjustment (debit) to retained earnings
if one member of the consolidated group acquires an affiliate’s debt form an outsider, the debt is considered to be retired and a gain/loss is recognized on the consolidated income statement; this gain/loss on extinguishment of debt is calculated as the difference between the price paid to acquire the debt and the boo value of the debt; this gain/loss is not reported on either company’s books, but is recorded through an elimination entry; all intercompany account balances are also eliminated
the intercompany gain/loss on the sale of land remains unrealized until the land is sold to an outsider; a workpaper elimination entry in the period of sale eliminates the intercompany gain/loss and adjusts the land to its original cost
the gain/loss on the intercompany sale of a depreciable asset is unrealized from a consolidated financial statement perspective until the asset is sold to an outsider; a working paper elimination entry in the period of sale eliminated the intercompany gain/loss and adjusts the asset and accumulated depreciation to their original balance on the date of sale
Consolidated financial statements
consolidated balance sheet - it includes 100% of the parent’s and subsidiary’s assets and liabilities (after elimination intercompany transactions), but does not include the subsidiary’s equity; noncontrolling interest is presented as part of equity, separately from the equity of the parent company
consolidated statement of income - it includes 100% of the parent’s revenues and expenses and all of the subsidiary’s revenues and expenses after the date of acquisition; the subsidiary’s pre-acquisition revenues and expenses are not included in the consolidated income statement; the consolidated income statement should show, separately, consolidated net income, net income attributable to noncontrolling interests, and net income attributable to the parent company
consolidated statement of comprehensive income - it includes, separately, consolidated comprehensive income, comprehensive income attributable to the noncontrolling interest, and comprehensive income attributable to the parent company
consolidated statement of changes in equity - because noncontrolling interest is part of the equity of the consolidated group, it is presented in the statement of changes in equity; the consolidated statement of changes in equity should present a reconciliation of the beginning-of-period and end-of-period carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interest
consolidated statement of cash flows - the preparation of the consolidated statement of cash flows in the period of acquisition is complicated by the fact that the prior year financial statements reflect parent-only balance while the year-end financial statements reflect consolidated balances; the following steps are necessary in order to prepare a consolidated statement of cash flows in the period of acquisition: the net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows & the assets and liabilities of the subsidiary on the acquisition date must be added to the parents assets and liabilities at the beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period
in subsequent periods, the preparation of the consolidated statement of cash flows is simplified by the fact that consolidated financial statements are available for the beginning and end of the period; the consolidated statement of cash flows should present the cash inflows and outflows of the consolidated entity, excluding cash flows between the parent and subsidiary; the preparation of the consolidated statement of cash flows should be similar to the preparation of a statement of cash flows for a nonconsolidated entity, except for the following considerations: 1) when reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to both the parent and the noncontrolling interest) should be used 2) the financing section should report dividends paid by the subsidiary to noncontrolling shareholders; dividends paid by the subsidiary to the parent company should not be reported 3) the investing section may report the acquisition of additional subsidiary shares by the parent if the acquisition was on open-market purchase
