F3 Marketable Securities and Business Combinations Flashcards
(35 cards)
Identify the three levels of control and the appropriate accounting method for each.
No significant influence:
- cost method; trading or AFS securities at FV
Significant but 50% or less ownership:
- equity method
Control:
- cost or equity (internal accounting)
- consolidated F/S (external reporting)
Acquisition accounting consolidating workpaper elimination entry (CARINBIG)
Dr. Common stock Dr. APIC Dr. R/E of sub Cr. Investment in Sub Cr. NCI Dr. Balance sheet adjustments to FV Dr. Goodwill (Gain)
List three conditions when losses on marketable securities classified as AFS are recognized in income
- sale of the security
- transfer of the security to trading classification
- other than temporary decline of individual security above cost (impairment)
When is the cost method of accounting for investments used?
- cost (also FV method or AFS method) is used when the investor owns less than 20% of investee’s voting stock and does not exercise significant influence.
- lacking evidence to the contrary, its assumed no significant influence can be exercised from 0% - 20%
- original investment under the cost method is accounted for in the same manner as marketable equity securities, generally as an AFS investment.
How is noncontrolling interest (B/S) calculated under IFRS?
IFRS permits the use of the full goodwill method or the partial goodwill method
Full goodwill method (same as GAAP)
NCI = FV of sub * NCI%
Partial goodwill method
NCI = FV of sub’s identifiable assets * NCI%
How is noncontrolling interest on the income statement calculated?
(Subsidiary net income * NCI%) / NCI Net income
How is goodwill calculated under the US GAAP acquisition method?
US GAAP:
- goodwill is excess of FV of sub over the FV of tangible and identifiable intangible assets.
- goodwill = FV of sub - FV of subs net assets
- goodwill recorded in a business combination is not amortized, tested for impairment.
When are combined financial statements prepared?
- companies under common control
- companies under common management
- unconsolidated subs are combined
What disclosures should be made for AFS and held-to-maturity securities?
- aggregate fair value
- gross unrealized holding gains and losses
- amortized cost basis by type
- information about the contractual maturity of debt securities
Name several pro forma workpaper elimination entries when producing consolidated financial statements
Eliminate:
- effects of intercompany dividends
- parent’s investment in sub account
- entire stockholder’s equity section of the sub
- effects of the gain of loss and adjust for the excess depreciation on the sale of PPE between affiliates
- all intercompany sales & purchases
- all intercompany B/S and I/S accounts
- intercompany profit in COGS & beginning & ending inventories relating to an intercompany sale of merchandise between affiliates
Adjust:
- recognize NCI
- adjust B/S of sub to FV, establish and goodwill
In an acquisition, how are acquired identifiable intangible assets amortized?
- finite useful life: amortized to residual value over expected useful life
- indefinite useful life: no amortization
On the B/S, marketable securities classified as trading or AFS are valued….
@ FV
In a step-by-step acquisition, what is the accounting treatment when significant influence is acquired?
- going from the cost method to the equity method is handled like a change in accounting principle (retroactively)
- go back retroactively with the equity method but not w. the new ownership percentage
- prior period financial statements are restated
How is NCI (B/S) calculated under US GAAP?
NCI = FV of sub * NCI%
State the workpaper elimination entry for intercompany inventory transactions.
Dr. R/E (intercompany profit in beg. inventory)
Dr. Intercompany sales
Cr. Intercompany COGS
Cr. COGS (intercompany profit in goods sold)
Cr. Ending inventory (intercompany profit in ending inventory)
How is the year-end “investment in investee” reported on the balance sheet under the equity method?
Beginning investment in investee \+ Investor's share of investee earnings - Investor's share of investee dividends - amortization of FV differences = ending investment in investee
How is an investor’s equity method investment reported on the I/S?
Investor’s share of investee earnings - amortization of FV differences = Equity earnings/investee income
How are dividends distributed by the investee treated by the investor receiving them?
Stock dividends issued by the investee are not recognized by the investor
Cash dividends received by the investor are accounted for as dividend income
How are expenses relating to the combination treated under the acquisition method?
- direct out of pocket costs are expensed
- stock related costs are a reduction in the value of the stock issued (normally a Dr. to APIC)
- indirect costs are expensed
- bond issue costs are capitalized and amortized
How are unrealized gains/losses on AFS securities recognized?
Unrealized gains and losses on AFS securities are reported on OCI
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 net assets acquired?
Acquisition costs is allocated to the FV of 100% of the B/S accounts and the FV of 100% of the ID’d intangibles. This creates a negative balance in the acquisition account recorded as a gain.
How are gains and losses on financial instruments that hedge AFS’ reported?
Reported in earnings together with the offsetting gains or losses on the AFS securities attributable to the hedging risk.
How is goodwill calculated under the IFRS acquisition method?
IFRS:
- recognized using the full goodwill method (same as GAAP) or partial goodwill method
- under partial, goodwill is excess of the acquisition cost over the FV of the subs net assets acquired.
- partial goodwill = acquisition cost - fair value of subs net assets acquired.
When preparing combined financial statements, ID the requirements.
- intercompany tranx and balances are eliminated
- NCI’s treated like consolidated F/S
- Capital stock and R/E are added across, not eliminated
- I/S are added across
