...Chapter 2 – Consolidation of Financial Information FASB allows reporting for businesses combined using the acquisition method. The acquisition method embraces a fair value measurement attribute. * Adoption of this attribute reflects the FASB’s increasing emphasis on fair value for measuring and assessing business activity. * In the past, reporting standards embraced the cost principle to measure and report the financial effects of business combinations. Expansion Through Corporate Takeovers Reasons for firms to combine: 1. Vertical integration of one firm’s output and another firm’s distribution or further processing. 2. Cost savings through elimination of duplicate facilities and staff. 3. Quick entry for new and existing products into domestic and foreign markets. 4. Economies of scale allowing greater efficiency and negotiating power. 5. The ability to access financing at more attractive rates. As firm size increases, negotiating power with financial institutions can increase also. 6. Diversification of business risk. 7. Continuous expansion of the organization, often into diversified areas (creating conglomerates). The Consolidation Process The consolidation of financial information into a dingle set of statements become necessary when the business combination of two or more companies creates a single economic entity – FASB ASC (810-10-10-1) * “There is a presumption that consolidated financial statements are more meaningful...
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...$200,000 Aggregate investment = $600,000 + $200,000 - $32,000 (dividend receivable) = $768,000 Goodwill = $768,000 - $668,000 = $100,000 Recorded goodwill = $40,000 Unrecorded goodwill = $60,000 b) Consolidation worksheet entries at 1 July 2010 Business combination valuation entries 1) Inventory 10,000 Deferred tax liability 3,000 Business combination valuation reserve 7,000 2) Land 8,000 Deferred tax liability 2,400 Business combination valuation reserve 5,600 3) Accumulated depreciation 60,000 Plant 60,000 4) Plant 20,000 Deferred tax liability 6,000 Business combination valuation reserve 14,000 5) Trademark 9,000 Deferred tax liability 2,700 Business combination valuation reserve 6,300 6) Business combination valuation reserve 4,900 Deferred tax asset 2,100 Contingent liability 7,000 7) Goodwill 60,000 Business combination valuation reserve 60,000 Pre-acquisition entry 8) Share capital 480,000 General reserve 80,000 Retained earnings 120,000 Business combination valuation reserve 88,000 Shares in Cook Ltd 768,000 Other consolidation worksheet entry 9) Dividend payable 32,000 Dividend receivable 32,000...
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...the equity method of accounting for investments Chapter Outline I. Three methods are principally used to account for an investment in equity securities along with a fair value option. A. Fair value method: applied by an investor when only a small percentage of a company’s voting stock is held. 1. Income is recognized when dividends are declared. 2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost. A. Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock of a subsidiary or control through variable interests, their financial statements are consolidated and reported for the combined entity. A. Equity method: applied when the investor has the ability to exercise significant influence over operating and financial policies of the investee. 1. Ability to significantly influence investee is indicated by several factors including representation on the board of directors, participation in policy-making, etc. 2. According to GAAP guidelines, the equity method is presumed to be applicable if 20 to 50 percent of the outstanding voting stock of the investee is held by the investor. Current financial reporting standards allow firms to elect to use fair value for any investment in equity shares including those where the equity method would otherwise apply. However, the option, once taken, is irrevocable. After 2008, an entity can make...
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...STUDENT ACTIVITY SECTION 1. SUMMARY OF THE LEARNING OBJECTIVES The preparation of the consolidated financial statements is done using a consolidation worksheet, the left-hand columns of which contain the financial statements of the members of the group. The adjustment columns contain the consolidation worksheet entries that adjust the left-hand columns to form the consolidated financial statements. The adjustment entries have no effect on the actual financial records of the parent and its subsidiaries. At acquisition date, an acquisition analysis is undertaken. The key purposes of this analysis are to determine the fair values of the identifiable assets, liabilities and contingent liabilities of the subsidiary, and to calculate any goodwill or gain on bargain purchase arising from the business combination. From this analysis, the main consolidation worksheet adjustment entries at acquisition date are the business combination valuation entries, to adjust carrying amounts of the subsidiaries’ assets and liabilities to fair value, and the pre-acquisition entries. In preparing consolidated financial statements in periods subsequent to acquisition date, the consolidation worksheet will contain valuation entries and pre-acquisition entries. However, these entries are not necessarily the same as those used at acquisition date. If there are changes to the assets and liabilities of the subsidiaries since acquisition date, or there have been movements in pre-acquisition equity...
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...Patterns and Income Taxes Chapter Outline I. Indirect subsidiary control A. Control of subsidiary companies within a business combination is often of an indirect nature; one subsidiary possesses the stock of another rather than the parent having direct ownership. 1. These ownership patterns may be developed specifically to enhance control or for organizational purposes. 2. Such ownership patterns may also result from the parent company's acquisition of a company that already possesses subsidiaries. B. One of the most common corporate structures is the father-son-grandson configuration where each subsidiary in turn owns one or more subsidiaries. C. The consolidation process is altered somewhat when indirect control is present. 1. The worksheet entries are effectively doubled by each corporate ownership layer but the concepts underlying the consolidation process are not changed. 2. Calculation of the accrual-based income of a subsidiary recognizing the consolidated relationships is an important step in an indirect ownership structure. a. The determination of accrual-based income figures is needed for equity income accruals as well as for the computation of noncontrolling interest balances. b. Any company within the business combination that is in both a parent and a subsidiary position must recognize the equity income accruing from its subsidiary before computing its...
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...Accounting standards for business consolidations XXXX ACC 407 Your name Date Accounting standards for business consolidations In competing market it is very common for one business to merge with another one. In order to survive in this rivalry marketplace, Companies need to expand business to the most profitable capacity. No matter what kind of reasons for company seeking extension under the ownership, the main one is to track potential profit. Today’s business environment Financial Accounting Standards Board (FASB), one of regulators represented concepts related with business combinations. Below is my briefly understanding of accounting standards of business combination. What is the history of account for business combinations? How many businesses are consolidated with each other? Companies often learn that entry into new product areas or geographic regions is more easily accomplished by acquiring or combining with other companies than through internal expansion. For example, SBC Communications, a major telecommunications company and one of the “Baby Bells,” significantly increased its service area by combining with pacific Telesis and Ameritech, later acquiring AT&T ( and adopting its name), and subsequently combining with BellSouth. Moreover, Cingular Wireless, the largest provider of mobile wireless communications in the United States and now part of AT&T, was operated as a joint venture of AT&T (Baker, R. E., Christensen, T., & Cottrell, D. (2011))...
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...Chapter 3 Consolidations – Subsequent to the Date of Acquisition Chapter Outline I. Consolidation — the Effects Created by the Passage of Time A. The present chapter examines the consolidation procedures that must be followed in subsequent periods whenever separate incorporation of the subsidiary is maintained. B. Purchase combinations will continue to require a different set of procedures than a pooling of interests because of allocations and amortization. C. A worksheet and consolidation entries continue to provide structure for the rendering of a single set of financial statements for the combined entity. D. When a time factor is included in the consolidation process, additional complications are encountered. 1. The parent must select and apply an accounting method to cover the relationship between the two companies. The investment balance recorded by the parent varies over time as a result of the method chosen, as does the income consequently recognized. 2. The parent’s investment balance is eliminated on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated. 3. Additionally, the income figure accrued by the parent is excluded each period so that the subsidiary’s revenues and expenses can be included can be included when creating an income statement for the combined entity. ...
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...TABLE OF CONTENTS 1. INTRODUCTION………………………………………………………………………………………………..3 2. CHAPTER 1 --- What is the Business Combination --- ………………………………….……4 3.1. Accounting For Business Combination General Approach…………………………………………………………………………………………………..5 3.2. Accounting For Business Combination Calculate………………………….………6-7 3. CHAPTER 2 --- What is the Business Merger and Acquisition ---……………………………8 3.1. Types of Merger………………………………………………………………………………………..9 3.2. Purpose of Merger and Acquisition……………………………………………………..9-10 3.3. The Process of Merger and Acquisition with Reference to an Organization…………………………………….………………………………………………………………...10 3.4. Stage of Integration……………………………………...………..…..11-12-13 4. CHAPTER 3 --- What is the Business Consolidation…….…..…………………………………..14 4.1. Significance of Consolidation……….…………………...…………………………………….14 4.2. Function of Consolidation…………….………………………………………………………….14 4.3. Effects of Consolidation…….…………………………………………………………………….15 5. CHAPTER 4 --- What is the Business Goodwill…………………….……………………………….15 5.1. What Creates Business Goodwill……………………………….……………………….……15 5.2. Types of Business Goodwill……………………………………………….……………….……16 5.3. Accounting View of Business Goodwill…………………………………………….….….16 5.4. Economic View of Business Goodwill……………………………………………….….….16 5.5. How Business Goodwill is Determined…………………..……………………….….17-18 5.6. How Do You Calculate Goodwill in Accounting?............................18-19-20 ...
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...ch04 Student: ___________________________________________________________________________ On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows: 1. Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is: A. $0. B. $25,000. C. $70,000. D. $45,000. Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet, prepared after this business combination? A. $0 B. $25,000 C. $70,000 D. $45,000 2. On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here: At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. 3. Based on the information provided, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition? A. $60,000 B. $75,000 C. $15,000 D. $45,000 4. Based on the information provided, what amount of goodwill will be included in the consolidated balance...
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...acquisition date, and is compared with the acquisition-date fair value of the acquiree’s net identifiable assets, and the difference is goodwill. * Establishes A New Basis of Accounting * The new basis of accounting depends on the acquirer’s purchase price (FMV) + the NCI’s (FMV). * The depreciation cycle for fixed assets starts over based on current values and estimates. * If acquisition price > FMV, goodwill exists. * Recognize as an asset. * Do not amortize. * Evaluate periodically for possible impairment. * If acquisition price < FMV, a bargain purchase element (formerly called “negative goodwill”) exists. * Testing for goodwill impairment * When goodwill arises in a business combination, it must be assigned to individual reporting units. * To test for impairment, the fair value of the reporting unit is compared with its carrying amount. * If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. * If the carrying amount of the reporting unit exceeds its fair value, an impairment of the reporting unit’s goodwill is implied. * The amount of the reporting unit’s goodwill impairment is measured as the excess of the carrying amount of the unit’s goodwill over the implied value of its goodwill. * The implied value of its...
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...Chapter 3 AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Chapter Outline A BUSINESS COMBINATION UNDER GAAP INCLUDES COMBINATIONS IN WHICH ONE OR MORE COMPANIES BECOME SUBSIDIARIES OF A PARENT CORPORATION. A A corporation that holds a majority interest (over 50%) of the voting stock of another corporation is referred to as the parent company. B The interest not held by the parent company is referred to as the noncontrolling interest. C A corporation whose outstanding voting stock is over 50% owned by another corporation is a subsidiary of that corporation. D GAAP states that the acquisition of additional shares of a subsidiary is recorded by an increase in the investment account and a reduction of the noncontrolling interest, based on the carrying amount of the noncontrolling interest at the additional acquisition date. APIC is adjusted for any difference between the price and the carrying amount. E The parent company and subsidiary exist as separate legal entities and maintain separate accounting records. However, each reporting period their separate accounting records are combined into one set of consolidated financial statements for reporting the financial position and results of operations of a consolidated reporting entity. 1 Consolidated financial statements are prepared for all the companies under the control of a single management team to reflect a single reporting entity with multiple divisions. 2 The purpose of consolidated...
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...Question 1 Date | Account Name | Dr | Cr | 1-Apr-12 | No entry required until shares are allotted | | | | | | | 30-Apr-12 | Cash Trust | 1,700,000 | | | Application | | 1,700,000 | | | | | 5-May-12 | Application | 1,700,000 | | | Share Capital | | 1,500,000 | | Allotment | | 200,000 | | Cash at Bank | 1,700,000 | | | Cash Trust | | 1,700,000 | | | | | 8-May-12 | Cash at Bank | 550,000 | | | Allotment | | 550,000 | | Allotment | 750,000 | | | Share Capital | | 750,000 | | | | | 10-May-12 | Formation Cost | 2,000 | | | Share Issue Cost | 1,000 | | | Cash at Bank | | 3,000 | | (Forming the company and share issue cost) | | | | | | | 8-Aug-12 | First Call | 375,000 | | | Share Capital | | 375,000 | | Cash at Bank | 347,500 | | | First Call | | 347,500 | | | | | 8-Nov-12 | Second Call | 375,000 | | | Forfieted share account | | 375,000 | | Cash at Bank | 3,325,000 | | | Second Call | | 3,325,000 | | | | | 10-Mar-13 | Share Capital | 340,000 | | | First Call | | 27,500 | | Second Call | | 42,500 | | Forfieted share account | | 270,000 | | | | | 25-Mar-13 | Cash at Bank | 306,000 | | | Forfieted share account | 34,000 | | | Share Capital | | 340,000 | | Forfieted share account | 2,500 | | ...
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...cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in: A. | A worksheet. | B. | Lisa's general journal. | C. | Victoria's general journal. | D. | Victoria's secret consolidation journal. | E. | The general journals of both companies. | | | | 2. | Using the acquisition method for a business combination, goodwill is generally defined as: A. | Cost of the investment less the subsidiary's book value at the beginning of the year. | B. | Cost of the investment less the subsidiary's book value at the acquisition date. | C. | Cost of the investment less the subsidiary's fair value at the beginning of the year. | D. | Cost of the investment less the subsidiary's fair value at acquisition date. | E. | None of the above; it is no longer allowed under federal law. | | | | 3. | How are direct and indirect costs accounted for when applying the acquisition method for a business combination? A. | Option A | B. | Option B | C. | Option C | D. | Option D | E. | Option E | | | | | | 4. | A statutory merger is a(n): A. | Business combination in which only one of the two companies continues to exist as a legal corporation. | B. | Business combination in which both companies continues to exist. | C. | Acquisition of a competitor. | D. | Acquisition of a supplier or a customer...
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...assets and liabilities at December 31, Year 1, are as follows: Assets Liabilities Net assets € 109,000 29,000 € 80,000 Illustration 1 Illustration 1 is an example of the acquisition of an enterprise’s assets for cash. Assume that on January 1, Year 2, A Company pays €95,000 in cash to B Corporation for all of its net assets. The acquisition cost is allocated as follows: Purchase price Fair value of net identifiable assets acquired Goodwill € 95,000 80,000 € 15,000 A company’s statement of financial position after the business combination is not a consolidated statement of financial position and would be as shown below. A COMPANY LTD. Statement of Financial Position January 1, Year 2 Assets (300,000 + 109,000 – 95,000) Goodwill € 314,000 15,000 € 329,000 Liabilities (120,000 + 29,000) Shareholders’ equity Ordinary stock (5,000 shares) Retained earnings € 149,000 Financial Accounting: Consolidations & Advanced Issues 100,000 80,000 Lesson 3 11 € 329,000 Illustration 2 Illustration 2 is an example of the acquisition of an enterprise’s assets for equity. Assume that on January 1, Year 2, A Company issues 4,000 ordinary shares (with a market value of €23.75 per share) to B Corporation for all of its net assets. In this case, the total number of A Company’s shares will be 9,000. The acquisition cost is allocated as follows: Purchase...
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...CHAPTER 2 CONSOLIDATION OF FINANCIAL INFORMATION Answers to Questions 1. A business combination is the process of forming a single economic entity by the uniting of two or more organizations under common ownership. The term also refers to the entity that results from this process. (1) A statutory merger is created whenever two or more companies come together to form a business combination and only one remains in existence as an identifiable entity. This arrangement is often instituted by the acquisition of substantially all of an enterprise’s assets. (2) a statutory merger can also be produced by the acquisition of a company’s capital stock. This transaction is labeled a statutory merger if the acquired company transfers its assets and liabilities to the buyer and then legally dissolves as a corporation. (3) A statutory consolidation results when two or more companies transfer all of their assets or capital stock to a newly formed corporation. The original companies are being “consolidated” into the new entity. (4) A business combination is also formed whenever one company gains control over another through the acquisition of outstanding voting stock. Both companies retain their separate legal identities although the common ownership indicates that only a single economic entity exists. Consolidated financial statements represent accounting information gathered from two or more separate companies. This data, although accumulated individually by the organizations, is brought together...
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