F3- Consolidations Flashcards
When is the Cost/FV 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?
- Ownership of other company is greater than 50%
- Only parent company prepares consolidated statements; not subsidiary.
- Companies that have different yr-end can be Cons.
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
Application of the Acq. Method reporting
- 100% of the net assets acquired ( regardless of % acquired.)
- When the companies are consolidated, subsidiary entire equity ( CAR) is Eliminated.
Investment in Sub. Business combination costs/expenses treated:
- Direct out-of-pocket costs- legal fees
(Debit:Exp) - Stock Registration & Issuance
(Debit:APIC Acct) - Indirect costs are Exp. as incurred.
(Debit: Bond issue Costs)
Noncontrolling Interest must be reported at FV in Equity section of Consolidated B.S:
- Separately from the parent’s equity
- Includes NCI’s share of any Goodwill
Acq. Date Computation of NCI
B.S
- FV of Sub X NCI %= NCI
NCI Computation AFTER Acq. Date
B.S.
Beg. NCI
+ NCI share of Sub N.I.
- NCI share of Sub. Dividends.
= Ending NCI
Allocation of Subsidary Net Losses
B.S
- Allocated to NCI even if the allocation exceeds the equity attributable to the NCI
- Negative Controlling balance
NCI Presentation in Consolidated Inc. Statement
- Include 100% of the Sub’s Revenues & Expenses (After date of Acq)
- Show Separately:
~ Consolidated Net Income
~ Net. Inc attributable to the NCI
~ Net .Inc attributable to the Parent
In Process Research & Development
[Intangibles]
- Recognize as an intangible asset separately from GW at the Acq. date
- Don’t immediately write off
- Meets definition of an “Asset”- it has probable future economic benefit
Partial Goodwill Method Calc.
[IFRS]
Acq. Cost
- FV of Sub’s net asset acquired.
= Goodwill
Determining Acq. with Gain: 3 Steps
[B.S. Adjustment]
- Step 1: B.S. adjusted to FV
- Step 2: Identifiable Intangible Assets to FV
-Step 3: Record as Gain
~ Negative balance in Acq. cost Acct- due to FV greater then Acq. Cost.
Period of Acq: Net cash spent or received in the Acq. must be reported in ?
- The investing section of the statement of Cons. C.F
Subsequent Periods: Cash Inflows/Outflows
[Consolidated St. of Cash Flow]
- Simplified by Cons. F.S are available for the beginning & end of period.
- Present the cash inflows & outflows of the Cons. Entity.
- Exclude cash flows between Sub. & Parent.
When Reconciling N.Inc to Net cash of Subsequent Periods provided by Operating Activities:
[Cons. St. of Cash Flow]
- Total Cons. Net Income including NI of both Parent & Sub. should be used.
In Fin. Section of Cons. St. of CF in Subsequent Periods ; Dividends paid by Sub. should:
- Report dividends paid by the Sub. TO Noncontrolling shareholders.
- Dividends paid by the Sub. to the parent should NOT be reported.
Investing Section of Subsequent Periods may report the Acq. of additional subsidiary shares by the Parent if?
- The acq. was an Open Market Purchase.
Non-Control -> Control
[Step Acquisition]
- Step Transition
- Remeasure previously held equity interests to FV
- Inc. Statement will reflect this adjustment.
Control -> ‘More’ or ‘Less’ Control
[Step Acquisition]
- Equity transaction
- No gain or loss recognized on the income statement
- APIC adjusted
