Financial Reporting: Business Combinations Flashcards Preview

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Flashcards in Financial Reporting: Business Combinations Deck (5)
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1
Q

Equity Method for Acquisition Accounting

A
  1. Investment is recorded at cost
  2. Share of investment’s income/loss increase/decrease value on BS
  3. Dividends are a return of capital and decrease value on BS
  4. Percentage earnings or loss recorded on IS as well.
2
Q

Calculate Goodwill for Minority Investment

A

Investment
- % of target’s BV
Excess Investment
+/- Adjustment for PPE (if fair value is greater than BV then this is reduced)
Good will

3
Q

Calculate new BS value of investment (Equity Method)

A

Initial value
+ % of income
- % of additional depreciation if fair value of investment’s assets were greater than bv
- % of dividends
Ending value

4
Q

Treatment of Intercompany Transactions to account for Doubtful Income (Equity Method)

A

Doubtful income X % share of income = reduction in income from investment

    • Doubtful income could be items sold to the parent by the investee with a percentage that is still in inventory. $100 of inventory sold to parent for $30 in profit. Parent owns 20% of investee. Half of the inventory still on the books at the parent. *
  • $30 x 20% x 50% = $3 reduction in income from investee*
5
Q

Equity versus Acquisition

  1. Both methods are identical under GAAP and IFRS
  2. Both methods report same NI on parrent’s BS
  3. Both methods report same equity on parent’s BS
A
  1. Both methods are identical under GAAP and IFRS: True
  2. Both methods report same NI on parrent’s BS: True
  3. Both methods report same equity on parent’s BS: False
    * - Equity under acquisition method includes minority interest so it will be greater than equity reported under equity method.*

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