F3 - Consolidated Financial Statements

Question 1

When are consolidated financial statements prepared?

Answer 1

When the parent company has control over the subsidiary company. Control is achieved when more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization).

Question 2

In Acquisition Accounting, state the consolidating workpaper elimination entry.

CARINBIG

Answer 2

Dr. Common stock - Subsidiary

Dr. APIC - Subsidiary

Dr. Retained earnings - Subsidiary

Cr. Investment in subsidiary

Cr. Noncontrolling interest

Dr. Balance sheet adjustments to fair value

Dr. Identifiable intangible assets to fair value

Dr. Goodwil

Question 3

How are expenses relating to the combination treated under the acquisition method?

Answer 3

• Direct out-of-pocket costs are expensed.
• Stock-related costs are a reduction in value of the stock issued (normally a debit to additional paid-in-capital).
• Indirect costs are expensed.
• Bond issue costs are capitalized and amortized.

Question 4

In an acquisition, how are acquired identifiable intangible assets amortized?

Answer 4

• Finite useful life: Amortized to residual value over expected useful life.
• Indefininte useful life: Do not amortize

Question 5

How is goodwill calculated under the U.S. GAAP acquisition method?

Answer 5

U.S. GAAP

• Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiary’s net assets, including identifiable intangible assets at FV.
• Goodwill = FV of subsidiary - FV of subsidiary’s net assets
• Goodwill recorded in a business combination is not amortized. The entire investments is subject to the impairment test.

Question 6

How is goodwill calculated under the IFRS acquisition method?

Answer 6

IFRS

• Goodwill is recognized using the full goodwill method (same as U.S. GAAP) or the partial goodwill method.
• Under the partial goodwill method, goodwill is the excess of the acquisition cost over the fair value of the subsidiary’s net assets acquired.
• Partial goodwill = Acquisition cost - FV of the subsidiary’s net assets acquired.

Question 7

How is the noncontrolling interest (balance sheet) calculated under U.S. GAAP?

Answer 7

Noncontrilling Interest (NCI) = FV of subsidiary x NCI %

Question 8

How is noncontrolling interest (balance sheet) calculated under IFRS?

Answer 8

IFRS permits the use of the full goodwill method or the partial goodwill method.

Full Goodwill Method (same as U.S. GAAP)

NCI = FV of subsidiary x NCI %

Partial Goodwill Method

NCI = FV of subsidiary’s net identifiable assets x NCI %

Question 9

How is noncontrolling interest on the income statement calculated?

Answer 9

Subsidiary net income

x Noncontrolling interest %

NCI in net income

Question 10

In a business combination, what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100% of the net assets acquired?

Answer 10

The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. This creates a negative balance in the acquisition account, which is recorded as a gain.