F-3 Consolidated Financial Statements

Question 1

When are consolidated financial statements prepared?

F3-16.

Answer 1

When the parent company has control over the subsidiary company.

Control is achieved when more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization).

Question 2

In Acquisition Accounting, state the consolidating work-paper elimination entry.

CARINBIG

F3-17

Answer 2

DR: Common stock-Subsidiary

DR: APIC-Subsidiary

DR: Retained earnings-Subsidiary

CR: Investment in subsidiary

CR: Non-controlling Interest

DR: Balance sheet adjustment to fair value

DR: Identifiable intangible assets to fair value

DR: Goodwill

Question 3

How are expenses relating to the combination treated under the acquisition method?

F3-18.

Answer 3

• Direct out-of-pocket cost are expensed.
• Stock-related cost are a reduction in value of the stock issued (normally a debit to additional paid-in-capital).
• Indirect cost are expensed.
• Bond issue cost are capitalized and amortized.

Question 4

In an acquisition, how are acquired identifiable intangible assets amortized?

F3-19

Answer 4

• Finite useful life:* Amortized to residual value over expected useful life.
• Indefinite useful life:* Do not amortize.

Question 5

How is goodwill calculated under U.S GAAP acquisition method?

F3-20

Answer 5

U.S GAAP
• Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus non-controlling interest) over the fair value the subsidiary’s net assets, including identifiable intangible assets at FV.

• Goodwill = Fair value of subsidiary – Fair value of subsidiary’s net assets.
• Goodwill recorded in a business combination is not amortized. The entire investment is subject to the impairment test.

Question 6

How is goodwill calculated under the IFRS *acquisition method? *

F3-21

Answer 6

_IFRS: _

• Goodwill is recognized using the full goodwill method (same as U.S GAAP) or the partial goodwill method.
• Under the partial goodwill method, goodwill is the excess of the acquisition cost over the fair value of the subsidiary’s net assets acquired.
• Partial goodwill = Acquisition cost – Fair value of subsidiary’s net assets acquired.

Question 7

How is non-controlling interest (balance sheet) calculated under U.S GAAP?

F3-22

Answer 7

Noncontrolling interest (NCI)

= FV of subsidiary X NCI %

Question 8

How is non-controlling interest (balance sheet) calculated under IFRS?

F3-23

Answer 8

IFRS permits the use of the full goodwill method or the partial goodwill method.

Full Goodwill Method (same as U.S GAAP)
NCI = FV of subsidiary X NCI %

Partial Goodwill Method
NCI = FV of subsidiary’s net identifiable assets x NCI %

Question 9

How is non-controlling interest on the income statement calculated?

F3-24

Answer 9

Subsidiary net income
X Non-controlling interest %
NCI in net income

Question 10

In a business combination, what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100 % of the next assets acquired?

F3-25

Answer 10

The acquisition cost allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. This creates a negative balance in the acquisition accounts, which is recorded as a gain.