FAR - Consolidations Flashcards
(44 cards)
What is a VIE
Variable Interest Entity
- this is when an entity has control over anoretic entity, but not through voting rights
- When a company is the primary beneficiary of the VIE the company will consolidate the VIE’s holding onto its balance sheet
- A VIE is usually set up by the controlling entity to perform a specific business purpose
What is a Primary Beneficiary of a VIE and how “test”if you are the controlling interest
Need all Three:
1 - the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights
2 - The obligation to absorb losses of the entity if/when they occur
3 - The right to receive returns when they occur ( compensation for taking the risk to absorb the entity’s losses
In summary
1 - do you make decisions for the entity
2-do you absorb their losses if they happen
3 - do you get returns if they happen
Must have all three to be considered the primary beneficiary of a VIE
On the date of consolidation what is included on the F/S of the parent
On the date of consolidation:
B/S: parent and sub are combined
I/S - parent only
statement of cashflow - parent only
this is because they were not combined until this point
What is the difference between a downstream and an upstream transaction
Downstream - parent sells to sub
Upstream - sub sells to parent
What needs to be eliminated when you consolidate
RIB FR
Intercompany:
Receivables and payables
Revenues and expenses
Inventory
Fixed assets
Bonds
RIB FR
What is the difference between GAAP and IFRS in business combinations
GAAP - contingent assets and liabilities can be recognized if criteria are met
IFRS - Contingent assets are not recognized
Disclosures - nonquantitative
- cane and description of sub
- date of acquisition
- %of voting equity acquired
- reason for the combo
- description of how acquirer gained control
- qualitative factors that make up the goodwill amount
Disclosures - acquisition date value disclosures
- Fair value of each class of consideration transferred
- Total amount transferred
- Fair value of non-controlling interest
- Techniques/inputs used to determine fair value
Goodwill disclosures
- amount allocated to each reportable segment
- amount expected to be tax deductible
Bargain Purchase Disclosures
- amount of gain
- where ether gain shows on the F/S
- Description of basis for gain
Publicly Traded Entity Disclosures
- Amount of post - combination revenue and earning of sub included in consolidated income
- Revenue and earning s for period as though combination occurred at beginning of period
when do you prepare consolidated f/s
- when one company has controlling financial interest in another
can also do it when “ its useful to financial statement users”
- like when two or more companies are under common control
- or when two or more companies are und er common management
What is considered a “ majority voting interest”
It is GREATER than 50% of the directly or indirectly owned outstanding VOTING shares of another entity
When there is a combination, what expenses are considered expenses that would be included in net income as part of a business combination
Expense:
direct costs like finder’s fees and consulting fees are expensed in period they occur, attorney fees, appraiser fees, cost stop print new stationary, new training manuals
The exception:
The costs of issuing securities - registration fees -
These fees reduce the amount recognized as proceeds -
Costs of issuing equity securities - reduce APIC
Costs of issuing debt securities - are capitalized and amortized as debt issue costs
Under the acquisition method what do you do with the direct costs of combination (not registration and issuance costs)
they are expensed in the period incurred as a deduction in determining net income
If you have controlling interest over Co B and they have controlling interest over Co. C - how do you report?
You use consolidation accounting for both B and C
What do you do when one company is a wholly owned subsidiary of another - at the end of the year
The books are kept separately, but the Parent will reported consolidated statements
Exception when control is temporary or control is not held bytes majority owner
When you combine business what are the rules for valuing Inventory including Work in Process, and Finished Goods, and raw material s
- Raw Materials should be valued at Replacement Cost
- WIP - be valued at selling price less cost to complete, cost of disposal, and a reasonable profit
- Finished Goods - Selling price less costs of disposal and a reasonable profit
Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?
70,000 = gain
amount paid by parent =
shares + contingent consideration (200K +10K)= 210
Value of sub = fair value of assets (350) - Fair value of liabilities (70K) = 350-70 = 280
the gain is the difference between the two:
paid 210 for 280value is a 70K gain
JE at acquisition:
dr. Investment in sub 280,000
cr. C/S (par) 20K * $1 20,000
cr APIC 180,000
cr Cash (contingent consideration) 10,000
cr Gain on bargain purchase 70,000
the direct acquisition costs would just be expensed:
dr acquisition costs 15,000
cr cash 15,000
what do do when you have intracompany receivable to each other in a consolidation or combination ( less than 100$):
Mr. & Mrs. Dart own a majority of the outstanding capital stock of Wall Corp., Black Co., and West, Inc. During 20X0, Wall advanced cash to Black and West in the amount of $50,000 and $80,000, respectively. West advanced $70,000 in cash to Black. At December 31, 20X0, none of the advances was repaid. In the combined December 31, 20X0, balance sheet of these companies, what amount would be reported as receivables from affiliates?
The answer is $0
Intercompany profits and losses and intercompany receivables and payables are eliminated, so there would be no balance in receivables from affiliates.
When preparing combined financial statements, principles similar to those used for consolidated financial statements apply.
what do you do with dividends if you have 100% interest or 90% interest in a company and each pay 100,000 in dividends
Dividends paid will be eliminated in a consolidation because you can’t pay a dividend to yourself
-the 10% that is paid your non controlling interest (10,000 because you own 90%) is recorded as a reduction of the non-controlling interest
How do you record a gain on a bargain purchase in a business acquisition
a gain will be recorded at the acquisition date to recognize the bargain purchase
dr Investment ( at fair value) X + Y
cr cash X
cr Gain on bargain purchase Y
Under IFRS when must an impairment loss be recognized and how is it allocated
first recognized when CGU ( cash generating unit) is less than the carrying amount if the CGU
It is then first allocated to goodwill
what do you do when you buy controlling interest in a company an d decide to move the head quarters
the cost of relcoating may be partially or fully capitalized when incurred, but does not go into the acquisition cost
acquisition cost = fair value of the consideration given in exchange for a controlling financial interest
