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
Netted against stock proceeds:
Stock registration and issuance costs
Treatment of existing goodwill before business combination
Do my include old goodwill in net assets when calculating new goodwill
Treatment of finders fees and general acquisition expenses
Expensed as incurred
Treatment of registration fees and issuing fees for securities in acquisition
Reduce issue price of securities
Reduces APIC
Calculate the consolidated APIC if stock is issued to finance acquisition
Parent APIC + APIC from shares issues
What is a bargain purchase
FV of NCI + FV previous purchases of CS less than FV of net identifiable assets
What is the acquisition date
Date acquirer obtains control of acquirer
How is acquisition cost determine in step acquisition
Previously held shares Remeasured at FV as of the date control is acquired
Gain recognized in period
Examples of intangible assets not included in goodwill
Trademarks
Lease agreements
Patents
Assets arising from contractual or legal rights
Assets identifiable and can be sold separately
How is the acquisition cost allocated
Allocated to acquired asset and liabilities based in relative FV
Calculate acquisition cost
Cost + FV of NCI
Calculate current liabilities for acquisition of entity via debt financing
Include current portion of LT debt in current liabilities
Calculate acquisition goodwill
Assets transferred + FV NCI - FV net identifiable assets
How are assets valued at acquisition date
At fair value
How are intercompany receivables and payables recorded on subsidiary subsequent to acquisition
Intercompany receivable and payables still recorded
Only eliminate on parents consolidated FS
Calculate NCI account balance
FV of NCI at acquisition date + share of net income - share of dividends
How is the excessive value over CV of equipment treated on consolidated FS
Capitalized and amortized over useful life
How are dividends declared recorded on consolidated FS when parent owns sub and sub owns parent
Eliminate dividends from parent to sub and sub to parent
Sub to NCI not included on consolidated FS because it does not represent dividend of consolidated entity
Rule for consolidating variable purpose entity
Equity less than 10 percent of total assets. Assumed entity does not have sufficient financing to fund operations
Who should consolidate variable purpose entity
Primary benefiticiary
When is the determination of consolidation of variable purpose entity made
Made at time entity gets involved with VIE
Reassessed on ongoing basis
Adjustments required when switching to consolidated FS
Consolidated FS is change in entity
Retroactively restate all FS
How are earnings of parent and sub reflected on consolidated FS
Consolidated FS reflect combined operations of parent and sub subsequent to acquisition. Earnings of sub prior to combo not included in parent income
What causes unrealized profit in ending inventory of consolidated FS
Intercompany sales made at prices greater than cost and merchandise not resold to 3rd party. Must be eliminated from consolidated FS
Calculate unrealized profit in ending inventory
Sales to sub - sub cost x parent GP %
Calculate Consolidated COGS when intercompany sales between parent as sub
Parent COGS + Sub COGS - sales from parent to sub
Calculate consolidated selling expenses with sales from parent to sub and freight out expenses
Selling expense parent + selling expense sub - freight out expense from parent to sub
How to record equipment from parent sold to sub at gain on consolidated FS
Equipment recorded at original cost less accumulated depreciation
As if equipment had never been sold
Calculate gain on subsidiary purchase of parent bonds and effect on NCI
Gain = cash paid - CV
Treated like retirement of bonds
No effect on NCI
Treatment of wholly owned subsidiary’s purchase of parent stock
Treated as if consolidated entity is purchasing treasury stock
No gain recorded
Adjusted accounts on consolidate FS for intercompany sales
Adjust sales and COGS for intercompany sales
Net income needs no adjustment
How is NCI share of net income affected by intercompany sales
Not affected by unrealized gain
It is a downstream sales from parent to subsidiary
How are the parent investment account and subsidiary stockholder equity and NCI reported on consolidated FS
Parent investment account and subsidiary stockholder equity account eliminated
Portion of subsidiary stockholder equity not eliminated is NCI
Examples of consideration transferred on acquisition
FV of assets and liabilities
FV of contingent consideration
Equity interest issued by acquirer
Share based payments required to be replaced by acquirer where not further service is require by employee
How to treat incomplete information on acquisition date
Items recorded at provisional amount at acquisition date
What is the measurement period for incomplete information
Earlier of one year from acquisition date or date complete information is available
If a acquisition provisional amount is inaccurate how to adjust
Retroactively adjust goodwill
How is the voluntary payment of share based payments to employees at acquisition recorded
As compensation expense post acquisition date
When are contingent liabilities arising from acquisition derecognized
Only after contingency is resolved
What are combined financial statements
FS prepared or companies owned by same parent or individual
Eliminate intercompany transactions
When are combined FS used
Present financial position as results of:
Commonly controlled companies
Companies under common mgmt
Group of consolidated subsidiaries
When is goodwill recognized under IFRS
When acquired by purchase
When can a subsidiary be exclude from consolidation under IFRS
Wholly or partially owned and its owners do not object to nonconsolidation
No debt or equity is publicly traded
Parent prepares consolidated FS under IFRS
