FAR - Specific Transactions, Events, & Disclosures - Intercompany Transactions Flashcards
Transactions/Balances Eliminated
transactions/balances between affiliated companies must be eliminated
items to eliminate (RRIFB):
1) Receivables/Payables
2) Revenues/Expenses
3) Inventory
4) Fixed Assets
5) Bonds
Eliminating I/C Receivables/Payables
result when affiliate has a receivable from another affiliated company
- they are eliminated during consolidation process *offsets receivable against payable
Worksheet Entry:
DR: A/P
CR: A/R
Eliminating Revenues/Expense
result when one affiliate provides goods/services to another affiliated company
- revenues/expenses must be eliminated during consolidation process *offsets revenues against expenses
Worksheet Entry:
DR: Revenues
CR: Expenses
how much of I/C receivables/payables/revenues/expenses eliminated on the consolidated worksheet?
full amount (100%) of receivables and payables that resulted from intercompany transactions must be eliminated on the consolidating worksheet
only types of transactions recognized for consolidation?
non-affiliates, or if there is NCI or control is temporary
true/false
Intercompany transactions between two subsidiaries that will be consolidated with the same parent do need to be eliminated
true
true/false
Subsidiary dividends are never considered part of consolidated dividends. They are either eliminated in the consolidation entries or allocated to reducing noncontrolling interests
true
true/false
The consolidated financial statements should reflect 100% of the assets and liabilities of the subsidiary less any intercompany balances.
true
I/C Transactions
All must be eliminated as if never occurred, cannot have transaction with yourself.
Transactions of a consolidated entity are ONLY with outside 3rd parties
accts may be affected by an intercompany inventory transaction?
1) Sales/Purchases;
2) Net income/loss;
3) Ending Inventory;
4) Beginning Inventory.
intercompany inventory sales and intercompany inventory purchases exactly offset each other, resulting in no net effect on consolidated income, why must they be eliminated?
overstatements would misrepresent the level of operating activity for the firms.
true/false
Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany inventory balances
true
I/C Fixed Asset Transaction
gain/loss cannot be recognized in I/C sales/purchases
- CV of asset, deprec. exp, and A/D must be adj. to amount based on original cost from outside parties
true/false
Intercompany gain on date of sale divided by remaining useful life will always = difference in depreciation taken by buyer and seller
true
effect does an intercompany sale of a fixed asset by a less than 100% owned subsidiary to a parent have on the consolidated financial statements that is different than the sale by a parent to a subsidiary or by a 100% owned subsidiary to a parent?
gain or loss (and subsequent elimination adjustments of depreciation expense) will be allocated on the worksheet between the parent and the noncontrolling interest in proportion to their ownership percentages.
consolidation accounts affected by intercompany fixed asset transactions.
1) Net Income;
2) Fixed Asset;
3) Accumulated Depreciation;
4) Depreciation Expense/Accumulated Depreciation.
I/C Bond Transactions
- when one affiliate owns bonds issues by another affiliate -> “constructive retirement of bonds”
Effects of I/C Bond Transactions
- overstate face amount of invest in bonds/bond payable
- overstated premium/discount on investment in bonds
- overstated interest income/interest expense
- overstated interest receivable/interest payable
I/C Bond Gains/losses
Eliminate:
1) invest. in I/C bonds
2) prem./disc. on invest in I/C bonds
3) I/C Bonds Payable
4) Prem./Disc. on I/C Bonds Payable
Recognize:
- gain/loss on “constructive retirement”
Subsequent I/C Bond Eliminations
I/C bond-related accts remain on separate books:
- separate companies carry I/C bond accts on books an book interest revenue/interest expense and amort. of prem/disc
- in subsequent periods, I/C bonds related accts must continue to be eliminated
eliminating entry required for consolidating purposes immediately following I/C bond purchase that involved a disc. on B/P and premium on bond investment?
DR: Bonds Payable at face amount
DR: Loss on Constructive Retirement (sum of Premium on B/I + Discount on B/P)
CR: Investment in I/C Bonds at face amount CR: Premium on I/C Bond Investment - for full amount CR: Discount on I/C Bonds Payable - for I/C amount.
what accounts can be affected by intercompany bonds?
Bonds Payable;
Premium or Discount on Bonds Payable;
Investment in Bonds;
Premium or Discount on Investment in Bonds;
Interest Income/Interest Expense;
Interest Payable/Interest Receivable.
determines the amount of any net gain or loss resulting from bonds becoming intercompany?
sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate).
Gain would result from eliminating:
- Premium on Bond Payable or
- Discount on Investment.
Loss would result from eliminating:
- Discount on Bond Payable or
- Premium on Investment.
How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?
through amortization on their separate books of the premium(s) and/or discount(s) on the bond investment and/or the bonds payable.
net carrying value of a bond liability?
total bond payable @ face amount + premium on B/P
true/false
The premium or discount on a bond investment is the difference between the par value of the bonds and the price paid for the bonds in the market.
If the price paid is more than par value, there is a premium on the bond investment. If the price paid is less than par value, there is a discount on the bond investment.
true
true/false
When the issuing affiliate has a premium on the bond liability and the buying affiliate has a discount on the bond investment, the elimination of the bond liability against the bond investment will result in a gain on constructive retirement. If the bonds are issued at a premium, the issuing firm received a greater amount for the bonds than face value. In addition, if the buying affiliate acquired the bonds at a discount, it paid less than face value for the bonds. Therefore, the elimination of the payable against the investment in the consolidating process must result in a gain on constructive retirement.
true
IFRS Consolidations
GAAP
GAAP:
1) control = >% ownership
2) defines VIEs
3) Acct policies don’t have to align
4) acct periods up to 3 months apart
5) NCI assigned their % of GW
IFRS Consolidations
IFRS
IFRS:
1) control can be obtained w/
Combined Financials are appropriate when ?
1) common control: 1/more individual owns 2/more entities
2) common mgt: 2/more entities under common mgt
3 unconsolidated subs: combine results of 2/more unconsolidated subs
Combing financials process
1) Eliminate Intercompany transactions/balances
2) no goodwill/bargain purchase
3) treatment of “unusual items”
a) NCI
b) foreign operations
c) income tax issues
d) different fiscal periods
*combined financials equal aggregate results of combined entities after eliminating I/C items
