Consolidations Flashcards
When is the fair value method used for recording interest in a separate company?
20% Ownership or Less
Accounted for as a purchase
If amount paid is less than fair value; results in a gain in current period
When is the equity method used when purchasing another company’s stock? How is it recorded?
Ownership 21% to 50%
Gives significant influence
Purchase Price - Par Value : Goodwill
Dividends received from the investee reduce the investment account and are not income
When are companies required to file consolidated financials? How is it recorded?
Ownership of other company is greater than 50%
Investment account is eliminated
Only parent company prepares consolidated statements; not subsidiary.
Acquired assets/liabilities are recorded at Fair Value on acquisition date.
Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments
When is consolidation not required?
Ownership less than 50%
OR
Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value
Results in a Gain or Loss in current period
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent’s financial statements
Merged companies cease to exist and only the parent remains
How are acquisition costs recorded in a merger?
Expensed in period incurred - i.e. NOT capitalized: Accounting; Legal; Valuation; Consulting; Professional; Finder Fees (Out of Pocket Expenses)
Costs associated with the Issuance and Registration of Debt or Equity ( Stock registration and issuance costs and sales commission paid) - netted against the proceeds of stock and result in a debit to APIC and credit to cash. No effect on investment price.
How should the acquirer recognize a bargain purchase in a business acquisition?
As a gain in earnings at the acquisition date
What is the effect on consolidated f/s in relation to dividends that are paid by the subsidiary to the parent?
Eliminated
Dividends paid to other shareholders other than the parent are reported as an adjustment to non-controlling interest account
The parent only shows dividends paid to it’s own shareholders.
Difference between GAAP and IFRS in accounting for business combinations
GAAP requires full goodwill method accounting - IFRS allows this as an option
Under IFRS, a recognition of extraordinary gain as a “bargain purchase” is prohibited.
What is a consolidation versus a merger?
Consolidation - “A + B = C” in which a new enterprise (C) is created to acquire the net assets of other enterprises (A and B). Enterprises A and B cease to exist after the combination.
Merger - Merged companies cease to exist and only the parent remains
A company should recognize goodwill in its balance sheet when?
When goodwill has been created in the purchase of a business
It is recognized as the excess of the FV of the purchase price over the recognized amounts of assets, liabilities, and non-controlling interests.
How is internally generated goodwill recognized?
It is not recognized or recorded.
How is Non-Controlling Interest Calculated?
(1.00 - % owned of subsidiary) * Net Assets of Subsidiary
Net Assets = BV of Stk Equity or Assets - Liabilities
