Midterm 2 Review Flashcards
What is Fair Value Acquisition Differential? Why is it calculated on the date of acquisition?
It is the difference between the purchase price of the acquired company and the fair value of its net identifiable assets at the date of acquisition.
It is recorded at acquisition for accurate financial reporting and in order to calculate goodwill.
How is goodwill recorded in the subsidiary’s separate entity financial statement accounted for in the consolidated financial statements of the parent?
Goodwill is not carried forward to the parents consolidated financial statements. This is because goodwill is the excess of the purchase price over the fair value of identifiable net assets from the perspective of the acquiring company.
How is NCI reported on the consolidated statement of financial position?
The purpose of reporting is to show the position of the subsidiary’s company that the parent does not own. They have 100% of control, not 100% ownership. NCI is reported under equity on the consolidated statement of financial position.
Why do companies purchase less than 100% ownership in a subsidiary?
- conserves cash.
- spreads ownership risk.
- reduces share dilution if share exchange.
- a non-controlling partner brings expertise.
- NCI can provide a market for sub’s shares.
Why is the Fair Value Acquisition Differential amortized annually?
The fair value acquisition differential is amortized annually to allocate the cost of acquired assets over their useful lives, matching expenses with revenue generation and reflecting the gradual use of these assets.
What is the difference between INA and FVE?
The INA Method highlights the parent’s ownership interest, while the FVE Method represents the total fair value of the subsidiary.
Under the INA Method, only the parent’s share of goodwill is recorded while both the parent’s and the NCI’s share of the subsidiary’s identifiable net assets are shown at their fair values.
In contrast, the FVE Method treats the consolidated entity as having two distinct shareholder groups (controlling and non-controlling).
