FAR 3-5 & 3-6: Consolidated Financial Statements & Acquisition Method

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 & 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. Goodwill

Question 3

How are expenses relating to the combination treated under 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 APIC)
• Indirect costs are expensed
• Bond issue costs are capitalized & amortized

Question 4

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

Answer 4

• Estimable useful life: Amortized to residual value over expected useful life
• Indefinite 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 assets at FV

• Goodwill = Fair value of subsidiary - Fair value of subsidiary net assets
• Goodwill recorded in a business combination is not amortized. The entire investment 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 net assets acquired
• Partial goodwill = Acquisition cost - Fair value of subsidiary net assets acquired

Question 7

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

Answer 7

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 net assets X NCI %

Question 9

How is noncontrolling interest on the income statement calculated?

Answer 9

Subsidiary net income X NCI % = 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 & 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.