FAR CPA Lessons 37-47 Flashcards
When does an entity have control of another entity?
- It is the primary beneficiary of a variable interest entity
- It has greater than 50% ownership of another entity
Benefits of consolidated financial statements
- Presents all economic resources and obligations of the economic entity
- Presents economic substance over legal form
- More decision useful than the separate financial statements
When should you not consolidate?
- A foreign subsidiary can be controlled by a foreign government
- When the subsidiary is in bankruptcy
Circumstances that effect consolidation
- The date of the consolidation
- consolidated are the date of business combination or at subsequent dates - Ownership percentage
- The type of accounting the subsidiary uses
- Intercompany transactions
Which financial statements get combined at the date of acquisition?
Balance Sheet Only
How do you consolidate equity in consolidated balance sheet at the date of acquisition?
Use only the parent company’s balances for equity, the subsidiaries should be eliminated.
What are the basic elimination entries for consolidated financial statements
- Eliminate the equity investment in the subsidiary and the equity reported by the subsidiary
- Record the incremental revaluation of fair value (Including goodwill)
- Eliminate intercompany receivables and payables
- Eliminate intercompany sales and expenses
- Eliminate intercompany profits
How to determine the amounts to record on the consolidated financial statements for the balance sheet
Balance Sheet (P + S + fair value increment - intercompany balances)
How to determine the amounts to record on the consolidated financial statements for the income statement
Income Statement (P entire year + S since acquisition - depreciation fair value increment)
How to determine the amounts to record on the consolidated financial statements for the Equity Accounts
Equity Accounts (common stock of P only)
How to determine the amounts to record on the consolidated financial statements for Retained Earnings
Retained Earnings (P only if P uses full equity method)
Equity Method Investment Accounting
The equity investment in parents company mirrors the equity in the subsidiary. If the equity method is used to consolidate you would account for the subsidiaries net income and dividends at the consolidated level along with FV adjustments and depreciation adjustemts
Cost Method Investment Accounting
No adjustments are done at the consolidation level. The adjustments are done at the subsidiary level at the date of the investment to reflect the change in fair value, goodwill, investment etc.
How to determine the subsidiary end of year net book value
Beginning net book value + S Net Income - S Dividends Paid
How to calculate Noncontrolling Interest Equity (NIE)
End of Year Net Book Value \+ 100% FV increments - accumulated depreciation = S adjusted Net Book Value * Noncontrolling interest in S % = Noncontrolling Interest Equity
How to calculate Income to Noncontrolling Interest
S Net Income - Depreciation/ amortization of differential - Goodwill Impairment Loss = S adjusted net income NCI % ownership of S = Income to noncontrolling interest
Identify the accounts affected by intercompany inventory transactions.
Sales
Cost of Goods Sold
Inventory
What is downstream transaction?
when the parent sells to the subsidiary
What is an upstream transaction?
when the subsidiary sells to the parent
Identify the accounts affected by intercompany fixed-asset transactions.
Fixed Assets
Accumulated Depreciation
Depreciation Expense
Identify the accounts affected by intercompany bond transactions.
Bond Payable Premium or Discount on Bonds Payable Investment in Bonds Premium or Discount on Investment in Bonds Interest Income Interest Expense Interest Receivable Interest Payable
When are combined financial statements appropriate rather than consolidated financial statements?
Common control - one individual owns two or more entities
Common Management - two or more entities under common management
Unconsolidated subsidiaries - combine results of two or more unconsolidated subsidiaries
Define Variable Interest Entity (VIE)?
A VIE is a legal entity which by design:
- Cannot finance its activities without additional subordinated financial support
- OR-
- Expected losses exceed its total equity investment at risk
- OR-
- Its equity holders as a group don’t have direct or indirect ability to make decisions about the VIE’s activities
- OR-
- Shareholders do not control the entity
What are the legal characteristics of a Variable Interest Entity (VIE)?
- May be a partnership, joint venture, legal trust, or corporation
- Set up for a well-defined, limited purpose
- Sponsor or sponsors provide most of its resources
- Activities are governed largely by contract or agreement and rest with sponsors, not shareholders
- Risks and rewards are largely attributable to sponsors
- Value of sponsor interest increases/decreases with changes in net asset value of the VIE
What are the two conditions a primary beneficiary must meet?
- Power Criterion - Power to direct the activities of VIE that significantly impact the VIE’s economic performance
- Losses/benefits (or risk/rewards) criterion - Has the obligation to absorb losses from or right to receive benefits of the VIE
Under IFRS, one entity (investor) controls another entity (investee) when the investor has:
- Power over an investee through existing rights that give it the ability to direct the activities that significantly affect the investee’s returns; and
- Exposure, or rights, to variable returns from its involvement with the investee; and
- The ability to use its power over the investee to affect the amount of the investor’s return.
