Consolidations

Question 0

Definition of business

Answer 0

An integrated set of activities and assets that is capable of being conducted and managed for the purpose if providing a return.

Question 1

Definition of control in business combinations

Answer 1

Control is currently defined as voting control and is essentially greater than 50%

Question 2

What are the 3 legal forms of business combinations?

Answer 2

Mergers: where the acquiree ceases to exist or it’s merged into acquirer and no longer retains it’s identity or legal form and structure. A+B = A

Consolidations: where a new entity consolidates the net assets or the equity interests of two or more pre-existing entities. A+B = C

Acquisitions: where one pre-existing entity acquires controlling equity interest of another pre-existing entity, but both continue to exist and operate as legal entities. They consolidate their F/Ss.

Question 3

The acquisition method of accounting does not apply to the following.

Answer 3

1- The formation of joint ventures.
2- The acquisition of an asset or group of assets that does not constitute a business.
3- A combination between entities under common control.
4- A combination between not for profit organizations.
5- The acquisition of a for-profit entity by a not-for-profit entity.

Question 4

Recording a business combination using the acquisition method of accounting involves the following steps.

Answer 4

1- Identifying the acquirer.
2- Determine the acquisition date and the measurement period.
3- Determining the cost of acquisition.
4- Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non controlling interests in the acquiree.
5- Recognizing and measuring goodwill or gain from bargain purchase, if any.

Question 5

When is the acquisition date recognized?

Answer 5

The acquisition date is the date on which the acquirer obtains control of the acquiree or it is normally the date in which the acquirer legally transfers consideration for, and acquires the assets and assumes the liabilities of, the acquiree.

Question 6

What is a measurement period and what is its duration?

Answer 6

The measurement period is the period after the acquisition date during which the acquirer may adjust any provisional amounts. In other words it is the time frame which acquirer will take to obtain fair market value of all the assets acquired of the acquiree in order to record proper values to all assets and record the difference between consideration paid and value of assets obtained to goodwill. The duration of measurement period is 1 year.

Question 7

An acquirer may obtain control of a business in two ways.

Answer 7

1- by transferring consideration

2- without transferring consideration, by contract or through the lapse of the minority veto rights of others.

Question 8

Don’t forget this important exception to the revaluation of assets at the time of transferring consideration for acquisition of the sub.

Answer 8

If any assets or liabilities transferred by the acquirer have a CV before transfer that is different than FV at acquisition, the assets or liabilities must be adjusted to FV at the date if combination and the related gains or losses recognized in current income by the acquirer. The EXCEPTION to the rule is: If the assets or liabilities to be transferred as consideration in a business combination remain under the control of the acquirer, then no revaluation to FV is needed because then the acquirer is essentially upping its own assets to FV which is not allowed under GAAP.

Question 9

What happens to existing goodwill on the acquiree books?

Answer 9

Goodwill on the books of the acquired entity prior to a business combination would not be recognized by the acquirer in recording the combination. Any goodwill attributable to the acquiree would be separately determined by the acquirer.

Question 10

How should assets held for sale on the books of acquiree be measured?

Answer 10

They should be measured at fair value less cost to dispose.

Question 11

If the acquisition to reach controlling position happened in steps, what happens to previously held equity of acquiree which was on acquirer books?

Answer 11

It is revalued to its current fair market value and any resulting Gain/Loss is recognized in the income of the combination period.

Question 12

What is an indemnification provision?

Answer 12

It is an agreement in business combination which limits the acquirer’s liability associated with specific assets or liabilities.

Question 13

Recognition qualifications for assets and liabilities.

Answer 13

To qualify for recognition as part of the business combination, the assets and liabilities must be part of what the acquirer and acquiree exchanged in the business combination, not the subject matter not the subject matter of any separate transaction.

A pre-combination transaction or arrangement that primarily benefits the acquirer or the subsequent combined entity, rather than the acquiree, is likely to be a separate transaction.

Question 14

Qualifications for recognition of an intangible asset.

Answer 14

An intangible asset (separate from goodwill) is identifiable and would be recognized by the acquirer if it either:

1- Is capable of being separated from the acquiree and sold, transferred, leased, rented, or exchanged; or

2- Arises contractual or other legal rights.

Question 15

What is the treatment of goodwill in the Post combination period?

Answer 15

It is not amortized. It is assessed at least annually for impairment, as provided by ASC 350.

Question 16

Treatment of assets and liabilities arising out of contingencies.

Answer 16

1- An asset or liability arising from a contingency recognized at the time of business combination should be accounted for based on subsequent information about the contingency.
2- Until new information about the possible outcome of a contingency is received, the acquirer will continue to report the contingency at its fair value at the date of combination.
3- When new information about the possible outcome of the contingency is received, the acquirer will measure and report the item according to the following rules.

A). If the contingency is a liability, it wi be measured and reported at the higher of:
1- It’s acquisition date fair value, or
2- The amount that would be recognized if the requirements of ASC 450 were followed.

B). If the contingency is an asset, it will be measured and reported at the lower of:
1- Its acquisition date fair value, or
2- The best estimate of its future settlement amount.

Question 17

When is a contingency de-recognized in a business combination?

Answer 17

It is de recognized when it settles or expires.

Question 18

How should contingent consideration be measured?

Answer 18

It should be measured and reported at fair value on the combination date. Any changes to it during the measurement period will be treated as an increase or reduction in the cost if the investment. Reaching a specific share price or an earnings target are not measurement period adjustments and they should not affect the contingent consideration revaluation.

Question 19

Treatment of equity contingent considerations and of asset or liability contingent considerations.

Answer 19

Contingent considerations classified as equity is not remeasured and it’s subsequent settlement is accounted for by adjusting equity.

Contingent consideration classified as an asset or liability is remeasured at each reporting date and recognized in earnings.

If it is hedging, then in OCI.

Question 20

What is a VIE?

Answer 20

A VIE is a legal entity which by design either:

1- cannot finance its activities without additional subordinated financial support ( I.e., its expected losses exceed its total equity investment at risk) or,

2- its equity holders, as a group, do not have the direct or indirect ability to make decisions about the VIE’s activities.

Question 21

Structurally how MAY a VIE exist?

Answer 21

It may exist as a legal trust, partnership, joint venture, LLC, or corporation.

Question 22

How many primary beneficiaries may a VIE have?

Answer 22

Only 1.

Question 23

What do VIEs and special purpose entities have in common?

Answer 23

Same general characteristics.

Question 24

Who consolidates a VIE?

Answer 24

The entity which is the primary beneficiary.

Normally the variable interest holders provide most resources to the VIE, often in the form of loans and loan guarantees. The activities and decision makings in the VIE are governed largely by agreement that establishes the entity and generally reside with the variable interest holders. Risks and rewards associated with the VIE are largely attributable to the variable interest holders, not the equity owners.

Question 25

Qualifications for being primary beneficiary in a VIE

Answer 25

1- Power to direct activities of VIE that most significantly impact the BIEs economic performance ( Power Criterion).

2- It has the obligation to absorb losses from or right to receive benefits of the VIE that potentially could be significant to the VIE (loss/benefit or risk/reward criterion).

Question 26

Rule for adjusting entries for “in-transit” transactions.

Answer 26

The rule of handling “in-transit” inter company transactions is to make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company. (As though the transaction were completed on both sets of books).

Question 27

Which inter-company (IC) transactions are eliminated?

Answer 27

All of the following transactions between parent and it’s subsidiaries and transactions between affiliated subsidiaries are eliminated.

1- Receivables/Payables
2- Revenues/Expenses
3- Inventory 
4- Fixed Assets
5- Bonds

Dividends receivable and payable are eliminated but not the ones to non controlling shareholders.

Question 28

If the parent owns less than 100% but greater than 50%, how should the IC transactions be eliminated?

Answer 28

The entire amount of inter company transaction must be eliminated.

Question 29

Inter company bond consequences

Answer 29

When one affiliate acquires bonds of another affiliate, for consolidated purposes it is as though the bonds have been retired; they have been constructively retired for consolidation purposes.

Therefore, on the consolidating worksheet the bonds payable (and related accounts) brought on by the issuing company must be eliminated against the investment in bonds (and related accounts) brought on by the buying affiliate.