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
what is the accounting standards codification for business combinations and consolidations
ASC 805/810
SFAS 141R
at what percentage are consolidations performed at
50%+
are consolidations done through journal entries or on a worksheet only
on a worksheet only
definition of goodwill
an asset representing the future economic benefits that arises from other assets acquired in a business combination that are not individually identified and separately recognized
what is the formula to calculate goodwill
fair value of consideration transferred (cost to the acquirer)
+ fair value of previously held equity interests in acquiree
+ fair value of noncontrolling interest
(-) fair value of net identifiable assets of acquiree
—————————————————————–
Good will or gain from bargain purchase
In an acquisition, are direct, indirect or general costs incurred during the acquisition capitalized or expensed
ALL EXPENSED
In an acquisition, if acquisition costs are related to the issuance and registration of debt or equity securities, what account is debited
additional paid in capital (APIC)
if a company is acquired in the middle of the year, do the end of year financials have income and expenses from the full year or since the date of acquisition
since the date of acquisition because at purchase date, income and expenses are already included in the purchase price.
Acquiror (parent) counts income for the full year
what are the 4 steps in applying the acquisition method
- Identify the acquirer
- Determine the acquisition date
- Recognize and measure at fair value the identifiable assets acquired, liabilities assumed, and noncontrolling interest (minority interest) in the acquiree
- Recognize and measure Goodwill, or a gain from a bargain purchase
is goodwill depreciated or tested for impairment
SFAS 142
tested for impairment on an annual basis
if the acquirer pays LESS than the fair market value of the acquiree, what is the result:
1) Negative goodwill
2) Additional paid in capital
3) Reduction of the values assigned to certain assets and an extraordinary gain for any unallocated portion
4) As a gain in net income for the period
4) As a gain in net income for the period
define noncontrolling interest
formerly called minority interest, it is a percentage ownership of a company less than 50%
what section is non-controlling interest classified under on consolidated balance sheets
the equity section
FASB 160
at what value is non-controlling interest valued at during acquisitions
fair value at date of acquisition
what are the 3 steps in handling acquisitions that are less than 100% of the acquiree company
- The equity accounts of the acquiree are eliminated in consolidation, and a noncontrolling interest is established for the FAIR VALUE of the shares of stock held by the noncontrolling interest at the date of acquisition
- The effects of intercompany transactions are eliminated
- A portion of net income and dividends of the acquiree are allocated to the noncontrolling interest
what are 4 examples of intercompany transaction types that commonly appear on the CPA exam
- Dividends paid from the Acquiree to the Acquirer
- Sales of inventory from one of the companies to the other
- Sales of property, plant and equipment form one to the other
- Purchases by one of the bonds issued by the other
what is done with intercompany A/P and A/R when reporting on financials
eliminated
what is done with gains/losses from intercompany sales when reporting on financials
- eliminate the gain on sale
2. eliminate the additional depreciation or amortization resulting from the markup of the asset
what is done with bonds purchased in intercompany sales when reporting on financials
Eliminate: 1. investment in bonds vs. bonds payable 2. Interest revenue vs. interest expense 3. accrued interest receivable vs accrued interest payable then the plug is a gain or a loss
what is done with intercompany inventory sales when reporting on financials
eliminate the effects of:
- Sale vs. purchase
- Receivable vs. payable
- Profit in ending inventory
Company acquisitions - cheat sheet for CPA exam
If any of these are available, eliminate them:
- Investment account = always zero at the end
- Eliminate 100% of acquiree’s - C/S, APIC, R/E
- Set up noncontrolling interest (adjust for % of income and dividends)
- Dividend income if cost method or investment income if equity method
- Dividends paid by S
- Intercompany transactions (sales, COGS, unrealized inventory profits)
- Intercompany gains/losses on sale of PP&E
- Intercompany receivables/payables
- Bond investments
- Set up excess FMV of PP&E over BV
- Record goodwill
- Record depreciation on excess FMV of PP&E
- Record impairments of goodwill
IFRS - what are the 2 valuation method options for noncontrolling interest
- market price for equity shares not held by the acquirer
(other valuation methods can be used if market value not available) - Calculate fair value of net assets acquired and multiply that by the % of shares owned by the noncontrolling interest
IFRS - what are the 3 conditions that must be met to exclude a subsidiary from consolidation
- it is wholly or partially owned and its other owners do not object to nonconsolidation
- It does not have any debt or equity instruments publicly traded
AND - It’s parent prepares consolidated financial statements that comply with IFRS
IFRS - is “push-down accounting” which is allowed by the SEC, allowed under IFRS
No
