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FAR > F3- Consolidations > Flashcards

F3- Consolidations Flashcards

1
Q

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

A

20% Ownership or Less

Accounted for as a purchase

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

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2
Q

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

A

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

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3
Q

When are companies required to file consolidated financials?

A
  • 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.
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4
Q

When is consolidation not required?

A

Ownership less than 50%

OR

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

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5
Q

What occurs under a step acquisition?

A

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

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6
Q

What is the difference between an acquisition and a merger?

A

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

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7
Q

How are acquisition costs recorded in a merger?

A

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

Netted against stock proceeds:
Stock registration and issuance costs

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8
Q

Application of the Acq. Method reporting

A
  • 100% of the net assets acquired ( regardless of % acquired.)
  • When the companies are consolidated, subsidiary entire equity ( CAR) is Eliminated.
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9
Q

Investment in Sub. Business combination costs/expenses treated:

A
  • 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)
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10
Q

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

A
  • Separately from the parent’s equity

- Includes NCI’s share of any Goodwill

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11
Q

Acq. Date Computation of NCI

B.S

A
  • FV of Sub X NCI %= NCI
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12
Q

NCI Computation AFTER Acq. Date

B.S.

A

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

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13
Q

Allocation of Subsidary Net Losses

B.S

A
  • Allocated to NCI even if the allocation exceeds the equity attributable to the NCI
  • Negative Controlling balance
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14
Q

NCI Presentation in Consolidated Inc. Statement

A
  • 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
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15
Q

In Process Research & Development

[Intangibles]

A
  • 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
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16
Q

Partial Goodwill Method Calc.

[IFRS]

A

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

17
Q

Determining Acq. with Gain: 3 Steps

[B.S. Adjustment]

A
  • 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.

18
Q

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

A
  • The investing section of the statement of Cons. C.F
19
Q

Subsequent Periods: Cash Inflows/Outflows

[Consolidated St. of Cash Flow]

A
  • 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.
20
Q

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

A
  • Total Cons. Net Income including NI of both Parent & Sub. should be used.
21
Q

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

A
  • Report dividends paid by the Sub. TO Noncontrolling shareholders.
  • Dividends paid by the Sub. to the parent should NOT be reported.
22
Q

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

A
  • The acq. was an Open Market Purchase.
23
Q

Non-Control -> Control

[Step Acquisition]

A
  • Step Transition
  • Remeasure previously held equity interests to FV
  • Inc. Statement will reflect this adjustment.
24
Q

Control -> ‘More’ or ‘Less’ Control

[Step Acquisition]

A
  • Equity transaction
  • No gain or loss recognized on the income statement
  • APIC adjusted
25
Q

Control -> Non-Control

[Step Acquisition]

A
  • 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.
26
Q

Joint Venture Accounting

A
  • Under both GAAP & IFRS

- Investors generally account for joint venture investments using the equity method.

27
Q

Consolidated Financial Statements: Legal & Economic Substance

A
  • Ignore important legal relationship & emphasize economic substance over form.
  • Consolidated Financial Statements are an economic truth but a legal fiction.
28
Q

Degree of Control; Methods

A

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)

29
Q

How are Consolidated Financials Recorded?

A
  • 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
30
Q

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

A
  • 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.

31
Q

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

A
  • Owns less then 100% of the Subs.

FAR (24 decks)

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