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Flashcards in Consolidated Financial Statments Deck (33):
1

Why do we create consolidated financial statements?

The presumption that consolidated statements are more meaningful than separate financial statements.


The supposition that economic substance (common controlling interest) take precedence over legal form (separate legal entities).

2

What are the exceptions to preparing consolidated financial statements?

-If the parent is prevented from exercising majority ownership

- Certain entities are excluded based on industry specific guidelines

-VIE that is not included in consolidated statements is recorded as an investment.

3

How can a parent carry an investment in a subsidiary on its books?

1. Cost Method;
2. Equity Method;
3. Any other method it chooses.

4

Does the method the parent uses to carry the subsidiary on its books affect the consolidating process or the final resulting consolidated statements?

The method a Parent uses to carry an "Investment" in a subsidiary on its books (cost, equity, or other) will affect only the consolidating process (entries).
The method a Parent uses to carry an "Investment" in a subsidiary on its books (cost, equity, or other) will not affect final resulting Consolidated Statements.

5

Is the consolidating process carried out on the books?

No, it is done on a consolidating worksheet

6

What steps are taken in the consolidating process?

1. Record Trial Balances
2. Record Adjusting Entries
3. Record Eliminating Entries
4. Complete the Consolidating Worksheet
5. Prepare formal consolidated financial statements

7

What does an income statement, statement of cash flows, or statement of retained earnings were prepared at the date of acquisition look like?

it would represent information of the Parent company only because there will not yet have been any activity including the subsidiary

8

How do you treat "in transit" intercompany items when consolidating?

make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company

9

When a parent has a subsidiary, are its standalone financial statements complaint?

Remember that P's stand alone financial statements are not GAAP compliant because P must consolidate all subsidiaries under its control

10

How do you account for P using the equity method?

P DOES adjust on its books the carrying value of its investment in the subsidiary to reflect:
1. The parent's share of the subsidiary's income or loss.
2. The parent's share of dividends declared by the subsidiary.
3. The amortization (e.g., "depreciation") of any difference between the FV of identifiable assets (but not goodwill) and the book value of those assets. Example entry (assuming FV > BV):
4.This entry reduces the income recognized from the Subsidiary (and the related investment increase) by the amount of "depreciation" the parent must recognize on its fair value greater than book value

11

How do you account for P using the cost method?

P DOES NOT adjust on its books the carrying value of its investment in the subsidiary

P DOES recognize its share of dividends declared by the subsidiary as dividend income

12

How do you eliminate the investment accounts for consolidation?

1. Eliminate the investment account of the parent (as of the beginning of the year) against the shareholder equity accounts of the subsidiary (as of the beginning of the year);
2. Adjust identifiable assets and liabilities of the subsidiary to fair value as of the date of the business combination;
3. Recognize goodwill, if any, as of the date of the business combination. Goodwill would be recognized at the original amount by which the investment value > FV of identifiable net assets acquired.


13

What is the noncontrolling interest claim to consolidated net income?

the noncontrolling interest percentage share of the subsidiary's reported net income, plus (minus) its percentage share of depreciation/amortization expense on fair value in excess of (less than) book value and its percentage share of any other revenues/expenses or gains/losses attributable to the subsidiary recognized on the consolidating worksheet.

14

What are the primary types of intercompany transactions?

Receivable/payables;
Revenues/expenses;
Inventory;
Fixed assets;
Bonds.

15

what is a down stream transaction?

when the parent sells to the subsidiary

16

What is an upstream transaction?

when the subsidiary sells to the parent.

17

Which accounts do intercompany inventory transactions affect?

Sales, Cost of Goods Sold and Inventory

No profit: reverse the sales and cost of goods sold when eliminating intercompany transactions

Profit:
DR:Sales (I/S)
CR: COGS (I/S)

DR: COGS (I/S) (gain)
CR: Inventory (B/S) (gain)

18

How do you calculate the ending NCI using the beginning NCI value?

NCI Equity at the beginning of the year*
Plus: NCI % of S's Net Income
Less: NCI % of S's dividends
Less: NCI % of Goodwill impairment loss
Less: NCI %Depreciation / amortization of differential
=NCI Equity at the end of the year

19

How do you calculate income to NCI?

S's Net Income
Less: Depreciation / amortization of differential
Less: Goodwill impairment loss
S's adjusted Net Income
NCI % ownership of S
= Income to Noncontrolling Interest

20

How do you eliminate inventory intercompany transactions if the parent owns 100% of the subsidiary?

Eliminate Sales/COGS -- All of the intercompany sale/COGS would be eliminated as above. It is a mere reversal of the original intercompany sale and cost of goods sold.
Profit Elimination -- All the intercompany profit and profit in ending inventory carrying value would be eliminated as above and would reduce the parent's claim to net income and asset (inventory) carrying value, since there are no noncontrolling claims to the subsidiary.

21

How do you determine the NCI equity?

First determine the NBV of S as of the date of consolidation. Add to S's NBV the 100% purchase price differential less 100% of any depreciation/amortization or goodwill impairment. Multiply the S's adjusted NBV by the NCI % to arrive at NCI Equity. NCI Equity represents the amount of S's NBV allocated to the non-controlling shareholders of S including any FMV adjustments from the date of acquisition.

Calculation of NCI Equity :
S's Net Book Value
Plus 100% of the differential
Less: Goodwill impairment loss
Less: Depreciation / amortization of differential
S's adjusted NBV
NCI % ownership of S
=NCI Equity

22

How do you eliminate inventory intercompany transactions if the parent owns less than 100% of the subsidiary?

If the elimination occurs on a consolidating worksheet that does not include an income statement (i.e., only a balance sheet is provided), the elimination would be allocated on the worksheet between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages
1. Eliminate Sale/COGS -- All of the intercompany sale/COGS would be eliminated as above. It is a mere reversal of the original intercompany sale and cost of goods sold.
2. Profit Elimination -- All of the intercompany profit and the profit in ending inventory would be eliminated, but the profit elimination would be allocated between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages as part of the allocation of net income.

23

How are fixed asset intercompany transactions treated when P sells to S in the year of sale?

Calculation of CNI, CI, NCI -
1. Adjust P's independent NI for CY gain or loss
2. Adjust P's independent NI for CY depreciation adjustment (if sale is not at EOY)

Consolidating Entries:Eliminate intercompany gain or loss, adjust asset basis, accum depreciation, and depreciation expense

24

How are fixed asset intercompany transactions treated when P sells to S in the years after sale?

Calculation of CNI, CI, NCI -
Adjust P s independent NI for CY depreciation adjustment

consolidating Entries- Eliminate prior year intercompany gain or loss through Investment in S, adjust asset basis, accum depreciation, and depreciation expense

25

How are fixed asset intercompany transactions treated when S sells to P in the year of sale?

Calculation of CNI, CI, NCI -
1. Adjust S's independent NI for CY gain or loss
2. Adjust S's independent NI for CY depreciation adjustment (if sale is not at EOY)

Calculation of NCI Equity -
1. Adjust S's NBV for CY gain or loss
2. Adjust S's NBV for CY depreciation adjustment (if sale is not at EOY)

Consolidating Entries -
Eliminate intercompany gain or loss, adjust asset basis, accum depreciation, and depreciation expense

26

How are fixed asset intercompany transactions treated when S sells to P in the year after sale?

Calculation of CNI, CI, NCI -
Adjust S's independent NI for CY depreciation adjustment

Calculation of NCI Equity -
1. Adjust S's NBV for PY gain or loss
2. Adjust S's NBV for PY PLUS CY depreciation adjustment

Consolidating Entries -
Eliminate prior year intercompany gain or loss through Invest in S and NCI Equity, adjust asset basis, accum depreciation, and depreciation expense

27

How do you treat an over or understatement of depreciation expense when dealing with intercompany fixed asset transactions?

1. Because the purchase price to the buying affiliate included an intercompany profit, the buying affiliate will recognize depreciation expense on its books (and brought onto the worksheet) of more per year
2. The extra amount per year is attributable to the intercompany profit depreciated over the remaining life.

3. The excess depreciation expense (and related accumulated depreciation) must be eliminated on the consolidating worksheet.

28

How do you treat an intercompany elimination of fixed assets when the Parent owns 100% of the subsidiary ?

1. The worksheet eliminating entries made when the parent owns 100% of a subsidiary which sells fixed assets to the parent are the same as those made when the parent sells fixed assets to the subsidiary; there is no noncontrolling interest in the subsidiary.
2. All of the intercompany gain (or loss), net asset adjustment and subsequent depreciation expense adjustment would affect the parent's claim to net income and net asset carrying value.

29

How do you treat an intercompany elimination of fixed assets when the Parent owns less than 100% of the subsidiary ?

The worksheet eliminating entries made when the parent owns less than 100% of a subsidiary that sells fixed assets to the parent are the same as those made when the parent sells fixed assets to the subsidiary, but the gain (or loss) eliminated, the net asset adjustment and the subsequent depreciation expense adjustment would be allocated between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages. Those entries are repeated below as a means of review and to show the allocations necessary when a less than 100% owned subsidiary sells fixed assets to its parent.

30

How do you treat intercompany bonds when consolidating?

When one affiliate acquires the bonds of another affiliate, for consolidated purposes it is as though the bonds have been retired; they have been constructively retired for consolidated purposes.
Therefore, on the consolidating worksheet the bonds payable (and related accounts) brought on by the issuing company must be eliminated against the investment in bonds (and related accounts) brought on by the buying affiliate.

31

Which Accounts are affected when eliminating intercompany bonds?

Bonds Payable
Premium or Discount on Bonds Payable
Investment in Bonds
Prem or disc on investment
Interest income/expense
interest receivable/payable

32

Under IFRS, one entity (investor) controls another entity (investee) when the investor has:

Power over an investee through existing rights that give it the ability to direct the activities that significantly affect the investee's returns; and
Exposure, or rights, to variable returns from its involvement with the investee; and
The ability to use its power over the investee to affect the amount of the investor's return.

33

What is a special-purpose entity (SPE)?

a separate legal entity (or other entity) established to fulfill a narrow, specific or temporary purpose, generally with the intent of isolating the establishing firm from risk and assigning responsibility for risk through the use of agreements and other instruments

Most, but not all, special-purpose entities will be variable-interest entities.