Financial Reporting: Business Combinations

Question 1

Equity Method for Acquisition Accounting

Answer 1

1. Investment is recorded at cost
2. Share of investment’s income/loss increase/decrease value on BS
3. Dividends are a return of capital and decrease value on BS
4. Percentage earnings or loss recorded on IS as well.

Question 2

Calculate Goodwill for Minority Investment

Answer 2

Investment
- % of target’s BV
Excess Investment
+/- Adjustment for PPE (if fair value is greater than BV then this is reduced)
Good will

Question 3

Calculate new BS value of investment (Equity Method)

Answer 3

Initial value
+ % of income
- % of additional depreciation if fair value of investment’s assets were greater than bv
- % of dividends
Ending value

Question 4

Treatment of Intercompany Transactions to account for Doubtful Income (Equity Method)

Answer 4

Doubtful income X % share of income = reduction in income from investment

• • Doubtful income could be items sold to the parent by the investee with a percentage that is still in inventory. $100 of inventory sold to parent for $30 in profit. Parent owns 20% of investee. Half of the inventory still on the books at the parent. *
• $30 x 20% x 50% = $3 reduction in income from investee*

Question 5

Equity versus Acquisition

1. Both methods are identical under GAAP and IFRS
2. Both methods report same NI on parrent’s BS
3. Both methods report same equity on parent’s BS

Answer 5

1. Both methods are identical under GAAP and IFRS: True
2. Both methods report same NI on parrent’s BS: True
3. Both methods report same equity on parent’s BS: False
   * - Equity under acquisition method includes minority interest so it will be greater than equity reported under equity method.*