Business Combinations

Question 1

Consolidated Financial Statement

Answer 1

Ignore important legal relationships and emphasize economic substance over form

Question 2

When to consolidate

Answer 2

1) All majority owned subsidiaries (over 50% of voting interest is owned by the parent company) to have one management and economic identity
2) DO NOT consolidate when the control is not with the owner (under legal reorganization or when the control of a subsidiary is with a trustee)

• when sub is in legal reorganization or bankruptcy; sub operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severed that they cast significant doubt on the parent’s ability to control the sub

3) Companies that have different year ends can be consolidated. If the gap period if three months or less, parent can use the subsidiary’s regular financial statements of a different period, giving recognition to material events during the gap period
US Gaap -> significant events during the gaap year require disclosure
IFRS-> subsidiary financial statements must be adjusted for significant transactions during gap period
4) vertical chain -> a owns more than 50% of b and b owns more than 50% of c: consolidate c into b and then b(with c) into a

Question 3

Consolidation

Answer 3

combination of financial statements of two or more entities into a single set of financial statements representing a single economic unit

Question 4

For external reporting

Answer 4

1) < 20% and no significant influence : cost method
2) between 20% and 50% AND significant influence but NO control : equity method
3) > 50% = control: consolidate; internally the company may use the cost method or the equity method

Question 5

Cost method

Answer 5

fair value method; afs method