FAR - Specific Transactions, Events, & Disclosures - Intro to Consolidated Financials Flashcards
Intro to Consolidated Financials
present financials as if it were 1 economic entity
Entity controlled when:
1) entity has greater than 50% ownership of another entity
2) entity is primary beneficiary of VIE
*GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities
Consolidated Financials
- present all economic resources/obligations of economic entity
- more decision useful than separate financials
- present economic substance over legal form
Exceptions to consolidation
parent prevented from exercising effective control:
1) foreign sub controlled by foreign gov’t
2) domestic sub is bankrupt
Variable-interest holder not primary beneficiary
Factors affecting consolidating process
alternative circumstances affect adjustments/eliminations in consolidating process
- whether consolidating at date of business combo OR at subsequent date
- whether parent owns 100% of sub or less than 100%
- whether parent uses cost/equity method to carry investment on books
- whether transactions between affiliated entities originate with parent or with sub
Where is the consolidating process carried out?
on worksheet, not company’s books
Identify the general kinds of eliminating entries made in the consolidating process
1) Investment eliminating entry. (Always);
2) Intercompany Receivables/Payables elimination(s);
3) Intercompany Revenues/Expenses elimination(s);
4) Intercompany Profit elimination(s).
kinds of information needed to prepare consolidated financial statements?
1) Financials/Adj. trial balances of affiliated entities;
2) Data as of date of acquisition, including:
a) BV of sub’s assets/liab;
b) FMV of sub’s assets/liab;
c) FMV of NCI, if any;
d) FMV of pre-combo equity interest, if any.
e) cost of parent’s investment in sub
3) Intercompany transaction data/balances.
sequence of steps in the consolidating process?
1) Record trial balances on consolidating worksheet;
2) Record adjusting entries, if any;
3) Record eliminating entries;
4) Complete consolidating worksheet;
5) Prepare consolidated financials
How does a parent company record a subsidiary?
As an “investment”
Under GAAP, process must be followed to determine if an entity should be consolidated?
First, must be determined if the entity is a (VIE).
If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE.
Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
true/false
Consolidated statements are prepared only by a parent company, not separately by both a parent and a sub
true
legal acquisition
- one entity acquires controlling interest (> 50% of the voting stock) of another firm
- both firms continue to exist and operate as separate legal entities, the acquiring firm as the parent and the acquired firm as a subsidiary.
true/false
While the method a parent uses on its books to account for its investment in a subsidiary will affect the consolidating process, the choice of methods will not affect the final consolidated financial statements. The final consolidated financial statements will be the same regardless of the method used by the parent on its books; only the details of the process of developing those statements will be different. The primary difference will be in the nature of the investment eliminating entry on the worksheet.
true
true/false
An intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.
true
Consolidated statements @ Acquisition
- Balance sheet = Parent’s B/S + Sub’s B/S
- I/S, Retained Earnings Statement, CFs Statement = Parent’s statements ONLY (at acquisition sub cannot provide activities when newly acquired)
Consolidating Eliminating Entries
Investment Eliminating Entry
- basic to all consolidating processes
- Eliminates:
1) investment in sub
2) Sub’s equity items
3) recognizes NCI in Sub’s Net Assets
Avoids Multiple counting of same “value”
- eliminate investment/sub’s equity
- investment -> sub’s equity -> sub’s Assets/Liab
Eliminate investment entry
DR: Sub's C/S
DR: Sub's APIC
DR: Sub's R/E
Differential (if any)
CR: Investment in Sub
CR: NCIPurchase price differential J/E
DR: PPE/INV
CR: Differential Liab, bonds, etc.
*records incremental revaluation to FMV
Intercompany A/R & A/P J/E
Close out respective amounts/accts
DR: A/P
CR: A/R
amount at NCI recognized in eliminating entry at date of business combo?
FMV of NCI % claim to consolidated net assets attributable to sub
steps followed to make adj. entries to help derive consolidated financials?
1) Determine if any transactions are in transit between the affiliated entities;
2) Record entry on consolidating worksheet to treat in transit transactions as though they were completed.
Where will NCI show in consolidated financials?
Consolidated Balance Sheet as a separate item within Shareholders’ Equity
examples of intercompany amounts to be eliminated during a consolidation
1) Receivables/payables;
2) Interest;
3) Dividends;
4) Bonds.
difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?
no difference
*consolidated statements will be the same regardless of which method is used, only the consolidating process will be different
“in-transit” intercompany transaction handled?
adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company
effect on an Investment in Subsidiary account when the parent accounts for its investment using the equity method?
CV of investment would change with changes in the equity accounts of sub, including:
1) Increasing with reported sub profits/decreasing with reported subsidiary losses;
2) Decreasing with the payment of dividends by the sub
3) Decreasing for “deprec/amort” of excess of FMV over BV at date of investment.
Effect of method of carrying sub investment via cost/equity
equity method - to carry on its books the investment in a sub, CV of the investment will change as the equity of the sub changes.
cost method, CV on its books normally will not change.
true/false
Goodwill previously recognized by the acquired entity should not be recognized by the acquiring entity as an intangible asset.
true
Equity Method of Acct
Parent adj. invest in sub for
1) P’ share of sub’s income/loss
2) p’s share of div declared
3) amort of diff. between FMV of investment and net BV of assets acquired
*p’s invest in sub at end of combo period may be diff. than at date of combo
Cost Method of Acct
Parent DOESN’T adj. invest in sub for:
1) p’s share of sub income/loss
2) p’s share of sub div declared
3) amort of diff. between FMV and BV of net assets acquired
*p’s invest in sub acct at end of period of combo = same as date of combo
parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
1) P only recognize its share of the subsidiary’s dividends declared/paid as dividend income
2) NOT recognize on its books its share of the subsidiary’s reported net income/loss, nor will it adjust its investment account for the subsidiary’s income/loss or dividends.
investment eliminating entry on the consolidating worksheet accomplish?
(1) eliminates investment account (sub) brought on to the worksheet by parent against shareholders equity accounts (of sub) brought on to the worksheet by the subsidiary
(2) in process, it adjusts the sub’s identifiable assets/liab to FMV at date of acquisition
(3) recognizes Goodwill, if any.
parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?
purpose of the reciprocity is to bring the investment account (on the worksheet) in balance with the subsidiary’s retained earnings as of the beginning of the period being consolidated
NCI
Portion of sub not owned by Parent
NCI Equity Calculation
Sub NBV \+ 100% Differential (Price paid - BV) - Deprec/Amort of Differential - GW Impairment Loss = Sub's adj. NBV X NCI % ownership of Sub = NCI Equity
NCI Income Calculation
Sub's net income - deprec/amort of differential - GW Impairment Loss = Sub's adj. net income X NCI % ownership of Sub = NCI Income
effect on consolidated values when the FMV of subs’s identifiable assets
1) identifiable assets written down to FMV at date of business combo
2) Any depreciation/amortization expense on those assets taken by the subsidiary will be reduced on the consolidating worksheet to an amount based on the lower fair values.
true/false
Under the equity method, when a subsidiary reports income, the parent recognizes its share as: DR: Investment and CR: Equity Income. Therefore, the subsidiary’s reported income increases the investment account. In addition, when a subsidiary declares a dividend, the parent recognizes its share as: DR: Dividends Receivable/Cash and CR: Investment. Therefore, the subsidiary’s dividends do not increase the investment account but rather decrease the investment account.
true
true/false
The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated
true
true/false
When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary’s income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, those entries (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.
true
Total investment value (purchase price)
Investment value is the sum of the parent’s investment (which is the fair value of consideration paid) + the fair value of any noncontrolling interest
