Consolidated Financial Statements Flashcards
Consolidated Financial Statements
Present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as one economic entity.
Controlling Interest
One entity has control of another if it owns more than 50% of that entity. A parent company must consolidate any subsidiaries under its control.
Non-controlling interest
An ownership stake of less than 50% of an entity.
Variable Interest Entity (VIE)
An entity that is controlled by another entity, but not through voting rights. A VIE has a primary beneficiary, and when the beneficiary is a company, the company will consolidate the VIE’s holdings onto its balance sheet and produce consolidated financial statements. A VIE is usually setup by the controlling entity to perform a specific business purpose.
A private company doesn’t need to apply these VIE rules if the reporting entity and the legal entity aren’t a public company, and aren’t under common control of a public company.
3 tests to be a primary beneficiary of a VIE
- The direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights
- The obligation to absorb losses of the entity if they occur
- The right to receive returns from the entity if they occur, which is compensation for taking the risk to absorb the entity’s losses
Calculating Goodwill in consolidation
Goodwill = Cost of the acquired business - fair value of the net assets
Issuance Costs
Costs to register and issue stock to acquire another company are netted against the paid-in capital account upon consolidation.
Legal fees
Legal or consulting fees due to the consolidation are just expenses as incurred.
Intercompany transactions
Must be removed on consolidated statements, or else the level of activity would be overstated for both entities.
Downstream transaction
When a parent sells to the sub.
Upstream Transaction
When sub sells to the parent
