F3- Consolidations

Question 1

When is the Cost/FV Method used for recording interest in a separate company?

Answer 1

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

Question 2

When is the equity method used when purchasing another company’s stock? How is it recorded?

Answer 2

Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income

Question 3

When are companies required to file consolidated financials?

Answer 3

• Ownership of other company is greater than 50%
• Only parent company prepares consolidated statements; not subsidiary.
• Companies that have different yr-end can be Cons.

Question 4

When is consolidation not required?

Answer 4

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 5

What occurs under a step acquisition?

Answer 5

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value

Results in a Gain or Loss in current period

Question 6

What is the difference between an acquisition and a merger?

Answer 6

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent’s financial statements

Merged companies cease to exist and only the parent remains

Question 7

How are acquisition costs recorded in a merger?

Answer 7

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

Question 8

Application of the Acq. Method reporting

Answer 8

• 100% of the net assets acquired ( regardless of % acquired.)
• When the companies are consolidated, subsidiary entire equity ( CAR) is Eliminated.

Question 9

Investment in Sub. Business combination costs/expenses treated:

Answer 9

• Direct out-of-pocket costs- legal fees
  (Debit:Exp)
• Stock Registration & Issuance
  (Debit:APIC Acct)
• Indirect costs are Exp. as incurred.
  (Debit: Bond issue Costs)

Question 10

Noncontrolling Interest must be reported at FV in Equity section of Consolidated B.S:

Answer 10

• Separately from the parent’s equity

- Includes NCI’s share of any Goodwill

Question 11

Acq. Date Computation of NCI

B.S

Answer 11

• FV of Sub X NCI %= NCI

Question 12

NCI Computation AFTER Acq. Date

B.S.

Answer 12

Beg. NCI
+ NCI share of Sub N.I.
- NCI share of Sub. Dividends.
= Ending NCI

Question 13

Allocation of Subsidary Net Losses

B.S

Answer 13

• Allocated to NCI even if the allocation exceeds the equity attributable to the NCI
• Negative Controlling balance

Question 14

NCI Presentation in Consolidated Inc. Statement

Answer 14

• Include 100% of the Sub’s Revenues & Expenses (After date of Acq)
• Show Separately:
  ~ Consolidated Net Income
  ~ Net. Inc attributable to the NCI
  ~ Net .Inc attributable to the Parent

Question 15

In Process Research & Development

[Intangibles]

Answer 15

• Recognize as an intangible asset separately from GW at the Acq. date
• Don’t immediately write off
• Meets definition of an “Asset”- it has probable future economic benefit

Question 16

Partial Goodwill Method Calc.

[IFRS]

Answer 16

Acq. Cost
- FV of Sub’s net asset acquired.
= Goodwill

Question 17

Determining Acq. with Gain: 3 Steps

[B.S. Adjustment]

Answer 17

• Step 1: B.S. adjusted to FV
• Step 2: Identifiable Intangible Assets to FV

-Step 3: Record as Gain
~ Negative balance in Acq. cost Acct- due to FV greater then Acq. Cost.

Question 18

Period of Acq: Net cash spent or received in the Acq. must be reported in ?

Answer 18

• The investing section of the statement of Cons. C.F

Question 19

Subsequent Periods: Cash Inflows/Outflows

[Consolidated St. of Cash Flow]

Answer 19

• Simplified by Cons. F.S are available for the beginning & end of period.
• Present the cash inflows & outflows of the Cons. Entity.
• Exclude cash flows between Sub. & Parent.

Question 20

When Reconciling N.Inc to Net cash of Subsequent Periods provided by Operating Activities:
[Cons. St. of Cash Flow]

Answer 20

• Total Cons. Net Income including NI of both Parent & Sub. should be used.

Question 21

In Fin. Section of Cons. St. of CF in Subsequent Periods ; Dividends paid by Sub. should:

Answer 21

• Report dividends paid by the Sub. TO Noncontrolling shareholders.
• Dividends paid by the Sub. to the parent should NOT be reported.

Question 22

Investing Section of Subsequent Periods may report the Acq. of additional subsidiary shares by the Parent if?

Answer 22

• The acq. was an Open Market Purchase.

Question 23

Non-Control -> Control

[Step Acquisition]

Answer 23

• Step Transition
• Remeasure previously held equity interests to FV
• Inc. Statement will reflect this adjustment.

Question 24

Control -> ‘More’ or ‘Less’ Control

[Step Acquisition]

Answer 24

• Equity transaction
• No gain or loss recognized on the income statement
• APIC adjusted

Question 25

Control -> Non-Control | [Step Acquisition]

Answer 25

- Recognize the gain or loss of the sale of the stock - Remeasure the remaining non-consolidating interest to FV - Recognize the adjustment to FV on the income statement.

Question 26

Joint Venture Accounting

Answer 26

- Under both GAAP & IFRS | - Investors generally account for joint venture investments using the equity method.

Question 27

Consolidated Financial Statements: Legal & Economic Substance

Answer 27

- Ignore important legal relationship & emphasize economic substance over form. - Consolidated Financial Statements are an economic truth but a legal fiction.

Question 28

Degree of Control; Methods

Answer 28

Do Not Consolidate: - Cost Method: No Significant influence (Typically<20%) - Equity Method: Significant Influence but 50% or Less Ownership (typically 20%-50%) Consolidate: - Control (Greater than 50% Ownership)

Question 29

How are Consolidated Financials Recorded?

Answer 29

- Investment account is eliminated - Acquired assets/liabilities are recorded at Fair Value on acquisition date. - Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

Question 30

When are Assets/Liab. of Sub. added to in the period of Acq.? [Cons.St. of Cash Flow]

Answer 30

- Must be added to the Parent's A&L at Beg. of the year | - In order to determine the change in cash due to Operating, Investing & Financing activities during the period.

Question 31

Partial & Full GW Methods differ only when the parent owns: [IFRS]

Answer 31

- Owns less then 100% of the Subs.