Advanced accounting 10th by a beams athony ch03

Allocate the excess of the fair value over the book value of the subsidiary at the date of acquisition... Business Acquisitions• FASB Statement 141R • Business combinations occur – Acqu

Chapter 3: An Introduction to Consolidated Financial Statements

by Jeanne M David, Ph.D., Univ of Detroit Mercy

to accompany Advanced Accounting , 10th edition

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

Intro to Consolidations: Objectives

1 Recognize the benefits and limitations of

consolidated financial statements.

2 Understand the requirements for inclusion of a

subsidiary in consolidated financial statements.

3 Apply the consolidation concepts to parent

company recording of the investment in a

subsidiary at the date of acquisition.

4 Allocate the excess of the fair value over the book

value of the subsidiary at the date of acquisition.

Objectives (continued)

5 Learn the concept of noncontrolling interest when

the parent company acquires less than 100% of the subsidiary's outstanding common stock.

6 Amortize the excess of the fair value over the book

value in periods subsequent to the acquisition.

7 Prepare consolidated balance sheets subsequent to

the date of acquisition, including preparation of

elimination entries.

8 Apply the concepts underlying preparation of a

consolidated income statement.

1: Benefits & Limitations

1: Benefits & Limitations

An Introduction to Consolidated Financial Statements

Business Acquisitions

• FASB Statement 141R

• Business combinations occur

– Acquire controlling interest in voting stock

– More than 50%

– May have control through indirect ownership

• Consolidated financial statements

– Primarily for owners & creditors of parent

– Not for noncontrolling owners or subsidiary

creditors

2: Subsidiaries

An Introduction to Consolidated Financial Statements

Who is a Subsidiary?

• ARB No 51 allowed broad discretion

• FASB Statement No 94

– Control based on share ownership

• FASB Statement No 160

– Financial control

• Subsidiaries, or affiliates, continue as separate

legal entities and reporting to their controlling and noncontrolling interests.

Consolidated Statements

• Prepared by the parent company

• Parent discloses

– Consolidation policy, Reg S-X

– Exceptions to consolidation, temporary control and inability to obtain control

• Fiscal year end

– Use parent's FYE, but

– May include subsidiary statements with FYE within 3 months of parent's FYE.

• Disclose intervening material events

3: Parent Company Recording

An Introduction to Consolidated Financial Statements

Penn Example: Acquisition Cost = Fair Value = Book Value

Penn acquires 100% of Skelly for

$40, which equals the book value and fair values of the net assets acquired.

Excess of cost over book value $0

Skelly BV=FV

Other current assets 15

Net plant assets 40

Total $65 To consolidate, eliminate Penn's Investment account and Skelly's

capital stock and retained earnings.

Balance sheets Separate Consolidated

Penn Skelly Penn & Sub.

4: Allocations at Acquisition Date

An Introduction to Consolidated Financial Statements

Cost, Fair Value and Book Value

Acquisition cost, fair values of identifiable net assets and book values may differ.

– Allocate excess or deficiency of cost over book value and determine goodwill, if any.

– When BV = FV, excess is goodwill.

Cost less BV = Excess to allocate

– Allocate first to FV-BV differences

– Remainder is goodwill (or bargain purchase)

Example: BV ≠ FV but Cost = FV

Piper acquires 100% of Sandy for $310

BV = 100 + 145 = $245

FV = 385 – 75 = $310 Cost – FV = $0 goodwill

Piper and Sandy (cont.)

Example: BV ≠ FV and Cost ≠ FV

Panda acquires 100% of Salty for $530.

Panda and Salty (cont.)

Panda's elimination worksheet entry:

Example: BV ≠ FV and Cost ≠ FV

Printemps acquires 100% of Summer for $185.

Printemps and Summer (cont.)

Allocate to: Amt Amort.

Printemps records the acquisition of Summer assuming a cash purchase as follows Note that the investment account is recorded at its fair value and the bargain purchase is treated immediately as a gain.

Worksheet Elimination Entry

Printemps' elimination worksheet entry:

Unamortized excess equals $30 (gain is recognized)

• $10 for undervalued inventory

• $20 for undervalued land included in plant

assets

  Printemps Summer Adjustments

5: Noncontrolling Interests

An Introduction to Consolidated Financial Statements

Noncontrolling Interest

Parent owns less than 100%

– Noncontrolling interest represents the

minority shareholders – Part of stockholders' equity

– Measured at fair value, based on parent's

acquisition price

• Parent pays $40,000 for an 85% interest

– Implied value of the full investee is

40,000/85% = $47,059.

Example: Noncontrolling Interests

Popo acquires 80% of Sine for $400 when Sine had

capital stock of $200 and retained earnings of $175 Sine's assets and liabilities equaled their fair values except for buildings which are undervalued by $50 Buildings have a 10-year remaining life

  Popo Sine Adjustments

6: Amortizations After Acquisition

An Introduction to Consolidated Financial Statements

Unamortized Excess

Excess assigned to assets and liabilities are

amortized according to the account

Balance sheet

account Amortization period Income statement account

Inventories and

other current assets Generally, 1

st year Cost of sales and

other expense Buildings,

equipment,

patents,

Remaining life at business

combination

Depreciation and amortization

expense Land, copyrights Not amortized

Long term debt Time to maturity Interest expense

Piper and Sandy (cont.)

Allocate to: Amt Amort.

excess

Current year's amortization

Ending unamortized excess

Panda and Salty (cont.)

Beginning unamortized

excess

Current year's amortization

Ending unamortized excess

Printemps and Summer (cont.)

Beginning unamortized

excess

Current year's amortization

Ending unamortized excess

7: Subsequent Balance Sheets

An Introduction to Consolidated Financial Statements

Balance Sheets After Acquisition

In preparing a consolidated balance sheet

– Eliminate the parent's Investment in

Subsidiary – Eliminate the subsidiary's equity accounts

(common stock, retained earnings, etc.) – Adjust asset and liability accounts for any

unamortized excess balance – Record goodwill, if any

– Record Noncontrolling Interest, if any

Popo and Sine (cont.)

excess

Current year's amortization

Ending unamortized excess

After 1 year: Popo Sine

After 1 year: Popo Sine Adjustments

Key Balance Sheet Items

• Investment in Subsidiary does not exist on the

consolidated balance sheet

• Equity on the consolidated balance sheet consists of

the parent's equity plus the noncontrolling interest.

• Noncontrolling interest is proportional to the

Investment in Subsidiary account when the equity method is used.

$101 = $404 x 20/.80

8: Consolidated Income Statements

An Introduction to Consolidated Financial Statements

Comprehensive Example, Data

Pilot acquires 90% of Sand on 12/31/2009 for $4,333 when Sand's equity consists of $4,000 common

stock, $1,000 other paid in capital, and $900

retained earnings On that date Sand's inventories, land and buildings are understated by $100, $200, and $1,000, respectively and its equipment and

notes payable are overstated by $300 and $100

Pilot Sand Consol.*

* Cost of sales, building depreciation and interest expense are

increased by $100, $25, and $100, and equipment

Key Income Statement Items

• The Income from Subsidiary account is

eliminated.

• Current period amortizations are included in the appropriate expense accounts.

• Noncontrolling interest share of net income is

proportional to the Income from Subsidiary under the equity method.

$571.50 x 10/.90

= $63.50

Push-Down Accounting

90%)

based on acquisition price

which includes retained earnings and the valuation

adjustments

Copyright © 2009 Pearson Education, Inc  

Publishing as Prentice Hall

All rights reserved No part of this publication may be reproduced, stored in

a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America.