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Chapter 5 Consolidation Subsequent To Acquisition (No Intercompany Profits)

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2 Chapter 5 Consolidation Subsequent To Acquisition (No Intercompany Profits)

3 © 2008 Clarence Byrd Inc.2 Conceptual Alternatives Income Statements (Ponto Owns 70 Percent of Sonto) PontoSonto Sales$500,000$200,000 Cost Of Goods Sold $300,000$110,000 Other Expenses 80,00040,000 Total Expenses $380,000$150,000 Net Income $120,000$50,000

4 © 2008 Clarence Byrd Inc.3 Consolidated Income Statement Proprietary Solution Sales [$500,000 + (70%)($200,000)] $640,000 Cost Of Goods Sold [$300,000 + (70%)($110,000)] $377,000 Other Expenses [$80,000 + (70%)($40,000)] 108,000 Total Expenses $485,000 Net Income $155,000

5 © 2008 Clarence Byrd Inc.4 Consolidated Income Statement Parent Company Solution Sales ($500,000 + $200,000) $700,000 Cost Of Goods Sold ($300,000 + $110,000) $410,000 Other Expenses ($80,000 + $40,000) 120,000 Total Expenses $530,000 Combined Income $170,000 Non-Controlling Interest [(30%)($50,000)] 15,000 Net Income $155,000

6 © 2008 Clarence Byrd Inc.5 Consolidated Income Statement Entity Solution Sales ($500,000 + $200,000) $700,000 Cost Of Goods Sold ($300,000 + $110,000) $410,000 Other Expenses ($80,000 + $40,000) 120,000 Total Expenses $530,000 Net Income $170,000 Non-Controlling Interest [(30%)($50,000)] 15,000 Increase In Retained Earnings $155,000

7 © 2008 Clarence Byrd Inc.6 CICA Solution Largely Parent Company Largely Parent Company Extraordinary items disclosed on proprietary basisExtraordinary items disclosed on proprietary basis Discontinued Operations disclosed on proprietary basisDiscontinued Operations disclosed on proprietary basis

8 © 2008 Clarence Byrd Inc.7 Classification of Problems Open Trial Balance (Requires more than just a Balance Sheet) Open Trial Balance (Requires more than just a Balance Sheet) Investment at CostInvestment at Cost Investment at EquityInvestment at Equity

9 © 2008 Clarence Byrd Inc.8 Classification of Problems Closed Trial Balance (Requires only a Balance Sheet) Closed Trial Balance (Requires only a Balance Sheet) Investment at CostInvestment at Cost Investment at EquityInvestment at Equity

10 © 2008 Clarence Byrd Inc.9 Classification of Problems Focus on investment at cost Focus on investment at cost Problems involving the equity method are given limited coverage in Chapter 7 Problems involving the equity method are given limited coverage in Chapter 7

11 © 2008 Clarence Byrd Inc.10 Step A Procedures Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-2 Procedure Eliminate 100 percent of all the balances in the subsidiary’s common shareholders’ equity that are present on the acquisition date. Step A-2 Procedure Eliminate 100 percent of all the balances in the subsidiary’s common shareholders’ equity that are present on the acquisition date. Step A-3 Procedure Allocate any debit or credit Differential that is present at acquisition to the investor’s share of fair value changes on identifiable assets, fair value changes on identifiable liabilities, and positive or negative goodwill. Step A-3 Procedure Allocate any debit or credit Differential that is present at acquisition to the investor’s share of fair value changes on identifiable assets, fair value changes on identifiable liabilities, and positive or negative goodwill. Step A-4 Procedure Allocate to a Non-Controlling Interest account in the consolidated Balance Sheet, the non-controlling interest’s share of the book value of the total Shareholders’ Equity of the subsidiary at acquisition. Step A-4 Procedure Allocate to a Non-Controlling Interest account in the consolidated Balance Sheet, the non-controlling interest’s share of the book value of the total Shareholders’ Equity of the subsidiary at acquisition.

12 © 2008 Clarence Byrd Inc.11 Step A Procedures Complete coverage in Chapter 4 Complete coverage in Chapter 4 Will be repeated unchanged in every problem Will be repeated unchanged in every problem

13 © 2008 Clarence Byrd Inc.12 Step B Procedures Chapter 4 Coverage Chapter 4 Coverage Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities.Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities. New In Chapter 5 New In Chapter 5 Realization of fair value changesRealization of fair value changes Goodwill impairmentGoodwill impairment Intercompany expenses and revenuesIntercompany expenses and revenues Intercompany dividendsIntercompany dividends

14 © 2008 Clarence Byrd Inc.13 Step C Distribution of subsidiary Retained Earnings since acquisition Distribution of subsidiary Retained Earnings since acquisition Introduced in this ChapterIntroduced in this Chapter Modified in Chapter 6Modified in Chapter 6

15 © 2008 Clarence Byrd Inc.14 Step B(2) Realization of Fair Value Changes Basic Concept Basic Concept Acquisition amounts recorded in Step AAcquisition amounts recorded in Step A As assets are sold or used, the recorded fair value changes become realizedAs assets are sold or used, the recorded fair value changes become realized As the fair value changes become realized, the Step A amounts must be reduced, with the changes taken into incomeAs the fair value changes become realized, the Step A amounts must be reduced, with the changes taken into income

16 © 2008 Clarence Byrd Inc.15 Step B(2) – Current Assets On January 1, 2008, Par acquires 100 percent of the voting shares of Sub. Sub has Inventories with a carrying value of $550,000 and a fair value of $600,000. During the year ending December 31, 2008, the Inventories are sold, with Sub recording a Cost Of Goods Sold of $550,000.

17 © 2008 Clarence Byrd Inc.16 Step B(2) - Inventories Required Adjustment 2008 Required Adjustment 2008 Increases Cost Of Goods Sold and reverses the Step A debit of $50,000 Increases Cost Of Goods Sold and reverses the Step A debit of $50,000 Year Ending December 31, 2008 Cost Of Goods Sold $50,000 Inventories$50,000

18 © 2008 Clarence Byrd Inc.17 Step B(2) - Inventories Required adjustment 2009 Required adjustment 2009 This entry will be required in every subsequent year This entry will be required in every subsequent year Year Ending December 31, 2009 Cost Of Goods Sold $50,000 Inventories$50,000

19 © 2008 Clarence Byrd Inc.18 Step B(2) - Depreciable Assets On January 1, 2008, Par acquires 100 percent of the voting shares of Sub. Sub has a factory building with a carrying value of $810,000 and a fair value of $900,000. The building will be used for 3 years and retired on December 31, 2010 with no salvage value. It is subject to straight line amortization at the rate of $270,000 per year.

20 © 2008 Clarence Byrd Inc.19 Step B(2) - Depreciable Assets Required Adjustment 2008 Required Adjustment 2008 Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $60,000. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $60,000. Year Ending December 31, 2008 Amortization Expense ($90,000 ÷ 3) $30,000 Building (Net) $30,000

21 © 2008 Clarence Byrd Inc.20 Step B(2) - Depreciable Assets Required adjustment 2009 Required adjustment 2009 Reduces the opening Retained Earnings to reflect the 2008 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $30,000. Reduces the opening Retained Earnings to reflect the 2008 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $30,000. Year Ending December 31, 2009 Retained Earnings (Opening) $30,000 Amortization Expense 30,000 Building (Net) $60,000

22 © 2008 Clarence Byrd Inc.21 Step B(2) - Depreciable Assets Required adjustment 2010 Required adjustment 2010 Reduces the opening Retained Earnings to reflect the 2008 and 2009 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to Nil. Reduces the opening Retained Earnings to reflect the 2008 and 2009 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to Nil. Year Ending December 31, 2010 Retained Earnings (Opening) $60,000 Amortization Expense 30,000 Building (Net) $90,000

23 © 2008 Clarence Byrd Inc.22 Step B(2) Depreciable Assets Required adjustment 2011 Required adjustment 2011 This entry will be required in every subsequent year This entry will be required in every subsequent year Year Ending December 31, 2011 Retained Earnings $90,000 Building (Net) $90,000

24 © 2008 Clarence Byrd Inc.23 Step B(2) - Land On January 1, 2008, Par acquires 100 percent of the voting shares of Sub. Sub has Land with a carrying value of $450,000 and a fair value of $600,000. Sub sells this parcel of Land on December 31, 2011 for $700,000.

25 © 2008 Clarence Byrd Inc.24 Step B(2) - Land As Land does not depreciate, no entry is required in 2008, 2009, or 2010.

26 © 2008 Clarence Byrd Inc.25 Step B(3) - Land Sub’s entry when Land is sold Sub’s entry when Land is sold Year Ending December 31, 2011 Cash$700,000 Gain On Sale Of Land $250,000 Land450,000

27 © 2008 Clarence Byrd Inc.26 Step B(3) - Land Required Consolidation Adjustment Required Consolidation Adjustment Reduce gain to $100,000 ($700,000 - $600,000)Reduce gain to $100,000 ($700,000 - $600,000) Reverse the Step A allocation to LandReverse the Step A allocation to Land Year Ending December 31, 2011 Gain On Sale Of Land $150,000 Land$150,000

28 © 2008 Clarence Byrd Inc.27 Step B(3) – Goodwill Impairment Goodwill is no longer subject to amortization Goodwill is no longer subject to amortization Must be tested annually for impairment Must be tested annually for impairment If impaired: The Step A allocation must be adjusted and charged to income If impaired: The Step A allocation must be adjusted and charged to income

29 © 2008 Clarence Byrd Inc.28 Step B(4) – Intercompany Expenses and Revenues Must be eliminated for purposes of consolidation Must be eliminated for purposes of consolidation Unless an unrealized profit is involved, the elimination does not change consolidated Net Income or the Non-Controlling Interest in income Unless an unrealized profit is involved, the elimination does not change consolidated Net Income or the Non-Controlling Interest in income

30 © 2008 Clarence Byrd Inc.29 Step B(4) – Intercompany Expenses and Revenues During 2008, a subsidiary pays interest of $50,000 to its parent During 2008, a subsidiary pays interest of $50,000 to its parent Required adjustment: Required adjustment: Year Ending December 31, 2008 Interest Revenue (Parent’s) $50,000 Interest Expense (Subsidiary’s) $50,000

31 © 2008 Clarence Byrd Inc.30 Step B(5) – Intercompany Dividends Required Adjustments Required Adjustments Eliminate the Dividend Revenue recorded by the parentEliminate the Dividend Revenue recorded by the parent Eliminate 100 percent of the Dividends Declared by the subsidiaryEliminate 100 percent of the Dividends Declared by the subsidiary Statement Of Retained Earnings contains parent company approach income (doesn’t include minority share) Statement Of Retained Earnings contains parent company approach income (doesn’t include minority share) This means minority dividends cannot be shown in the Statement of Retained Earnings This means minority dividends cannot be shown in the Statement of Retained Earnings Minority share of dividends debited to the Non-Controlling Interest in the Balance SheetMinority share of dividends debited to the Non-Controlling Interest in the Balance Sheet

32 © 2008 Clarence Byrd Inc.31 Step C – Concepts Step A: Eliminate the non- controlling share of Retained Earnings At Acquisition Step A: Eliminate the non- controlling share of Retained Earnings At Acquisition Step B: Make adjustments to the balance since acquisition Step B: Make adjustments to the balance since acquisition Step C: Allocate the balance since acquisition to Non- Controlling Interest and consolidated Retained Earnings Step C: Allocate the balance since acquisition to Non- Controlling Interest and consolidated Retained Earnings

33 © 2008 Clarence Byrd Inc.32 Step C Schedule Beginning Balance Of Retained Earnings $1,200,000 Step A Elimination ( 800,000) Balance Since Acquisition $ 400,000 Step B Adjustments (Fair Value Changes and Goodwill Impairment) and Goodwill Impairment) ( 120,000) Balance To Be Distributed $ 280,000 To Non-Controlling Interest (20%) ( 56,000) To Consolidated Retained Earnings $ 224,000 *Numbers created for this example

34 © 2008 Clarence Byrd Inc.33 Step C Schedule This schedule will be modified in Chapter 6 to deal with unrealized intercompany profits This schedule will be modified in Chapter 6 to deal with unrealized intercompany profits

35 © 2008 Clarence Byrd Inc.34 Preparing The Statements General Approach General Approach Add parent and subsidiary figuresAdd parent and subsidiary figures Add or subtract the Step A and Step B adjustmentsAdd or subtract the Step A and Step B adjustments

36 © 2008 Clarence Byrd Inc.35 Definitional Calculations Useful for checking figures arrived at through statements Useful for checking figures arrived at through statements In problems or exams, this may be the only requirement In problems or exams, this may be the only requirement

37 © 2008 Clarence Byrd Inc.36 Consolidated Net Income – Definitional Calculation Parent Company Income $1,000,000 Less: Intercompany Dividends ( 60,000) $ 940,000 Parent’s Equity In Subsidiary Net Income 220,000 $1,160,000 Fair Value And Goodwill Adjustments For Current Year For Current Year ( 105,000) Consolidated Net Income $1,055,000 *Numbers created for this example

38 © 2008 Clarence Byrd Inc.37 Consolidated Retained Earnings – Definitional Calculation Parent Company Closing Retained Earnings $3,500,000 Add: Parent’s Share Of Subsidiary Retained Earnings Since Acquisition Retained Earnings Since Acquisition800,000 $4,300,000 Fair Value And Goodwill Adjustments (Cumulative Amounts) (Cumulative Amounts) ( 360,000) Consolidated Retained Earnings $3,940,000 *Numbers created for this example

39 © 2008 Clarence Byrd Inc.38 Non-Controlling Interest Calculation - Balance Sheet Using the procedures Using the procedures Add: Step A AllocationAdd: Step A Allocation Subtract: non-controlling dividendsSubtract: non-controlling dividends Add: Non-controlling interest in incomeAdd: Non-controlling interest in income Add: Step C allocationAdd: Step C allocation Direct Calculation Easier Direct Calculation Easier Multiply the non-controlling interest percentage of ownership times the subsidiary’s common Shareholders’ EquityMultiply the non-controlling interest percentage of ownership times the subsidiary’s common Shareholders’ Equity

40 © 2008 Clarence Byrd Inc.39 Subsidiary Preferred Shares If held intercompany: they will be eliminated If held intercompany: they will be eliminated If outstanding: They are a component of the Non-Controlling Interest in the Balance Sheet If outstanding: They are a component of the Non-Controlling Interest in the Balance Sheet

41 © 2008 Clarence Byrd Inc.40 Application of the Equity Method Paragraph 3051.08 Investment income as calculated by the equity method should be the amount necessary to increase or decrease the investor's income to that which would have been recognized if the results of the investee's operations had been consolidated with those of the investor. (August, 1978) Paragraph 3051.08 Investment income as calculated by the equity method should be the amount necessary to increase or decrease the investor's income to that which would have been recognized if the results of the investee's operations had been consolidated with those of the investor. (August, 1978) “One Line Consolidation”: “One Line Consolidation”: All consolidation adjustments are treated as adjustments of investment incomeAll consolidation adjustments are treated as adjustments of investment income No elimination of intercompany assets, liabilities, expenses, or revenuesNo elimination of intercompany assets, liabilities, expenses, or revenues

42 © 2008 Clarence Byrd Inc.41 Investment Income Under The Equity Method Reported Investment Income (All Sources) $200,000 Less: Intercompany Dividends ( 80,000) $120,000 Parent’s Equity In Subsidiary Net Income 150,000 $270,000 Fair Value And Goodwill Adjustments For Current Year For Current Year ( 45,000) Equity Method Investment Income $225,000 *Numbers created for this example

43 © 2008 Clarence Byrd Inc.42 Investment Account Balance Under The Equity Method Investment Cost $1,200,000 Investor’s Equity In Investee Retained Earnings Since Acquisition Earnings Since Acquisition320,000 $1,520,000 Fair Value And Goodwill Adjustments (Cumulative Since Acquisition) (Cumulative Since Acquisition) ( 145,000) Equity Method Investment Account Balance $1,375,000 *Numbers created for this example

44 © 2008 Clarence Byrd Inc.43 Consolidated Statement Of Cash Flows In general, the procedures are the same for consolidated Cash Flow Statements as for single entity Cash Flow Statements In general, the procedures are the same for consolidated Cash Flow Statements as for single entity Cash Flow Statements Preparation requires a consolidated Net Income figure Preparation requires a consolidated Net Income figure

45 © 2008 Clarence Byrd Inc.44 Consolidated Statement Of Cash Flows Differences Differences Non-Controlling Interest must be added back to get cash from operationsNon-Controlling Interest must be added back to get cash from operations The dividend figure in this statement (all dividends of parent and sub) will be different than the dividend figure in the Statement Of Retained Earnings (excludes dividends to non-controlling interest)The dividend figure in this statement (all dividends of parent and sub) will be different than the dividend figure in the Statement Of Retained Earnings (excludes dividends to non-controlling interest)

46 © 2008 Clarence Byrd Inc.45 Consolidated Statement Of Cash Flows Parent acquires additional subsidiary shares Parent acquires additional subsidiary shares For cash from sub: an intercompany transaction that would be eliminatedFor cash from sub: an intercompany transaction that would be eliminated For cash from non-controlling shareholders: an outflow of consolidated cashFor cash from non-controlling shareholders: an outflow of consolidated cash Similar analysis for sales of shares Similar analysis for sales of shares

47 © 2008 Clarence Byrd Inc.46 Section 1540 on Business Combinations Paragraph 1540.42 The aggregate cash flows arising from each of business combinations accounted for using the purchase method and disposals of business units should be presented separately and classified as cash flows from investing activities. (August, 1998) Paragraph 1540.42 The aggregate cash flows arising from each of business combinations accounted for using the purchase method and disposals of business units should be presented separately and classified as cash flows from investing activities. (August, 1998)

48 © 2008 Clarence Byrd Inc.47 Section 1540 on Business Combinations Paragraph 1540.43 An enterprise should disclose, in aggregate, in respect of both business combinations accounted for using the purchase method and disposals of business units during the period each of the following: Paragraph 1540.43 An enterprise should disclose, in aggregate, in respect of both business combinations accounted for using the purchase method and disposals of business units during the period each of the following: (a) the total purchase or disposal consideration; (a) the total purchase or disposal consideration; (b) the portion of the purchase or disposal consideration composed of cash and cash equivalents; (b) the portion of the purchase or disposal consideration composed of cash and cash equivalents; (c) the amount of cash and cash equivalents acquired or disposed of; and (c) the amount of cash and cash equivalents acquired or disposed of; and (d) the total assets, other than cash or cash equivalents, and total liabilities acquired or disposed of. (August, 1998) (d) the total assets, other than cash or cash equivalents, and total liabilities acquired or disposed of. (August, 1998)

49 © 2008 Clarence Byrd Inc.48 Step-By-Step Acquisitions Paragraph 1600.13 Where an investment in a subsidiary is acquired through two or more purchases, the parent company's interest in the subsidiary's identifiable assets and liabilities should be determined as follows: Paragraph 1600.13 Where an investment in a subsidiary is acquired through two or more purchases, the parent company's interest in the subsidiary's identifiable assets and liabilities should be determined as follows: (a) the assignable costs of the subsidiary's identifiable assets and liabilities should be determined as at each date on which an investment was required;(a) the assignable costs of the subsidiary's identifiable assets and liabilities should be determined as at each date on which an investment was required; (b) the parent company's interest in the subsidiary's identifiable assets and liabilities acquired at each step in the purchase should be based on the assignable costs of all such assets and liabilities at that date. (April, 1975)(b) the parent company's interest in the subsidiary's identifiable assets and liabilities acquired at each step in the purchase should be based on the assignable costs of all such assets and liabilities at that date. (April, 1975)

50 © 2008 Clarence Byrd Inc.49 Step-By-Step Acquisitions Implementation Issues Implementation Issues 1 st purchases without significant influence1 st purchases without significant influence No need to acquire fair value data No need to acquire fair value data Use fair values at the time of the first application of the equity method Use fair values at the time of the first application of the equity method Numerous small purchases can be accounted for as one stepNumerous small purchases can be accounted for as one step

51 © 2008 Clarence Byrd Inc.50 Step-By-Step Acquisitions Procedures Procedures Nothing really new – multiple applications of the same proceduresNothing really new – multiple applications of the same procedures Journal entries do not work for this type of problemJournal entries do not work for this type of problem Rely on direct definitional calculationsRely on direct definitional calculations

52 © 2008 Clarence Byrd Inc.51 Step-By-Step Retained Earnings Example On January 1, 2008, Part acquires 20 percent of the shares of Smart. At that time Smart has Retained Earnings of $2,000,000. On January 1, 2009, Part acquires an additional 40 percent of Smart. At that time Smart has Retained Earnings of $2,400,000. On December 31, 2009, Part has Retained Earnings of $4,000,000 and Smart has Retained Earnings of $2,600,000.

53 © 2008 Clarence Byrd Inc.52 Step-By-Step Retained Earnings Consolidated Retained Earnings – December 31, 2009 Part’s Balance $4,000,000 Equity Pickups 1 st Purchase [(20%)($2,600,000 – 1 st Purchase [(20%)($2,600,000 – $2,000,000)] $2,000,000)]$120,000 2 nd Purchase [(40%)($2,600,000 – 2 nd Purchase [(40%)($2,600,000 – $2,400,000)] $2,400,000)]80,000 200,000 200,000 Consolidated Retained Earnings $4,200,000 *This solution ignores possible Step B Adjustments

54 © 2008 Clarence Byrd Inc.53 Step-By-Step Retained Earnings Alternative Calculation Consolidated Retained Earnings – December 31, 2009 Part’s Balance $4,000,000 Equity Pickups 1 st Purchase [(20%)($2,400,000 – 1 st Purchase [(20%)($2,400,000 – $2,000,000)] $2,000,000)] $ 80,000 2 nd Purchase [(60%)($2,600,000 – 2 nd Purchase [(60%)($2,600,000 – $2,400,000)] $2,400,000)]120,000 200,000 200,000 Consolidated Retained Earnings $4,200,000 *This solution ignores possible Step B Adjustments

55 © 2008 Clarence Byrd Inc.54 Summary Of Consolidation Procedures Step A-1 Procedure Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-2 Procedure Step A-2 Procedure Eliminate 100 percent of all the acquisition date balances in the subsidiary’s shareholders’ equity (includes both contributed capital and retained earnings). Step A-3 Procedure Step A-3 Procedure Allocate any debit or credit Differential that is present at acquisition to the investor’s share of fair value changes on identifiable assets, fair value changes on identifiable liabilities, and positive or negative goodwill. Step A-4 Procedure Step A-4 Procedure Allocate to a Non-Controlling Interest account in the consolidated Balance Sheet, the non-controlling interest’s share of the at acquisition book value of the common shareholders’ equity of the subsidiary (includes both contributed capital and retained earnings).

56 © 2008 Clarence Byrd Inc.55 Summary Of Consolidation Procedures Step B-1 Procedure Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities. Step B-2 Procedure Step B-2 Procedure Give recognition to the post-acquisition realization of acquisition date fair value changes on assets and liabilities that have been used up or sold during the post-acquisition period. To the extent that this realization occurred in prior periods, recognition will require an adjustment of the opening retained earnings of the subsidiary. Alternatively, if the realization occurred in the current period, the adjustment will be to the subsidiary’s current period expenses, revenues, gains, or losses. Step B-3 Procedure Step B-3 Procedure Recognize current and cumulative goodwill impairment losses that have been measured since the acquisition of the subsidiary and the initial recognition of the goodwill balance. To the extent that the impairment took place during the current period, the measured amount will be charged to Goodwill Impairment Loss. To the extent that it occurred in prior periods, it will be charged to retained earnings.

57 © 2008 Clarence Byrd Inc.56 Summary Of Consolidation Procedures Step B-4 Procedure Step B-4 Procedure Eliminate 100 percent of all intercompany expenses and revenues. Step B-5 Procedure. Step B-5 Procedure Eliminate 100 percent of subsidiary dividends declared. The parent’s share of this amount will be deducted from the revenues of the parent company and the non-controlling interest’s share of this amount will be deducted from the Non-Controlling Interest in the Balance Sheet.

58 © 2008 Clarence Byrd Inc.57 Summary Of Consolidation Procedures Step C-1 Procedure Step C-1 Procedure Determine the appropriate allocation of the subsidiary’s adjusted retained earnings since acquisition. The Non-Controlling Interest’s share will be based on book value. After the Non-Controlling Interest’s share is subtracted, the resulting balance will be adjusted for the fair value write-offs called for in Step B(2), as well as any goodwill impairment as described in Step B(3). The balance remaining after these adjustments will be allocated to consolidated Retained Earnings. Step C-2 Procedure Step C-2 Procedure Eliminate the subsidiary’s adjusted Retained Earnings since acquisition. This amount will be allocated to the Non-Controlling Interest in the consolidated Balance Sheet and to consolidated Retained Earnings as determined in Step C-1.

59 © 2008 Clarence Byrd Inc.58 Summary Of Definitional Calculations Identifiable Assets And Liabilities Identifiable Assets And Liabilities The amount to be included in the consolidated Balance Sheet for any identifiable asset or liability is calculated as follows: 100 percent of the carrying value of the identifiable asset (liability) on the books of the parent company at the Balance Sheet date; plus 100 percent of the carrying value of the identifiable asset (liability) on the books of the subsidiary company at the Balance Sheet date; plus (minus) the parent company’s share of the fair value increase (decrease) on the asset (liability) (i.e., the parent company’s share of the difference between the fair value of the subsidiary’s asset or liability at time of acquisition and the carrying value of that asset or liability at the time of acquisition); minus (plus) amortization of the parent company’s share of the fair value increase (decrease) on the asset (liability) for the period since acquisition to the current Balance Sheet date.

60 © 2008 Clarence Byrd Inc.59 Summary Of Definitional Calculations Goodwill Goodwill The Goodwill to be recorded in the consolidated Balance Sheet is equal to: the excess of the cost of the investment over the parent company’s share of the fair values of the subsidiary’s net assets at the time of acquisition; minus the amount of any goodwill impairment that has been recognized in the period since the acquisition to the current Balance Sheet date.

61 © 2008 Clarence Byrd Inc.60 Summary Of Definitional Calculations Non-Controlling Interest - Balance Sheet Non-Controlling Interest - Balance Sheet The Non- Controlling Interest to be recorded in the consolidated Balance Sheet is an amount equal to the non-controlling interest’s ownership percentage of the book value of the subsidiary’s common stock equity at the Balance Sheet date.

62 © 2008 Clarence Byrd Inc.61 Summary Of Definitional Calculations Contributed Capital. Contributed Capital The Contributed Capital to be recorded in the consolidated Balance Sheet is equal to the contributed capital from the single entity Balance Sheet of the parent company.

63 © 2008 Clarence Byrd Inc.62 Summary Of Definitional Calculations Retained Earnings Retained Earnings The Retained Earnings amount to be included in the consolidated Balance Sheet is calculated as follows: 100 percent of the Retained Earnings of the parent company; plus (minus) the parent company’s share of the subsidiary’s Retained Earnings (Deficit) since acquisition; plus (minus) 100 percent of the adjustments to consolidated expenses, revenues, gains, and losses for realized fair value changes during the period since acquisition to the current Balance Sheet date; minus 100 percent of any goodwill impairment that has been recognized since the acquisition to the current Balance Sheet date.

64 © 2008 Clarence Byrd Inc.63 Summary Of Definitional Calculations Revenue Revenue The amount of any revenue to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) the parent’s share of any fair value changes realized during the period through usage or sale of subsidiary assets (fair value amortization and amounts realized through the sale of subsidiary assets prior to the end of their economic life). It would be unusual for fair value realizations to be related to revenues. However, it could happen. For example, amortization of a fair value change on a long-term receivable would be treated as an adjustment of interest revenue. Revenue Revenue The amount of any revenue to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) the parent’s share of any fair value changes realized during the period through usage or sale of subsidiary assets (fair value amortization and amounts realized through the sale of subsidiary assets prior to the end of their economic life). It would be unusual for fair value realizations to be related to revenues. However, it could happen. For example, amortization of a fair value change on a long-term receivable would be treated as an adjustment of interest revenue.

65 © 2008 Clarence Byrd Inc.64 Summary Of Definitional Calculations Expense Expense The amount of any expense to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) life).the parent’s share of any fair value changes realized during the period through usage or sale of subsidiary assets (fair value amortization and amounts realized through the sale of subsidiary assets prior to the end of their economic life).

66 © 2008 Clarence Byrd Inc.65 Summary Of Definitional Calculations Goodwill. Goodwill Impairment Loss If the required annual test of goodwill for impairment determines that any impairment has occurred during the current period, this amount will be recorded as a Goodwill Impairment Loss.

67 © 2008 Clarence Byrd Inc.66 Summary Of Definitional Calculations Non-Controlling Interest - Income Statement The non-controlling interest in the consolidated Income Statement is an amount equal to the non-controlling interest’s ownership percentage of the reported Net Income. Non-Controlling Interest - Income Statement The non-controlling interest in the consolidated Income Statement is an amount equal to the non-controlling interest’s ownership percentage of the reported Net Income. Note that, if the subsidiary has extraordinary items or results from discontinued operations, this Non-Controlling Interest will be based on the subsidiary’s Income Before Extraordinary Items And Discontinued Operations. Note that, if the subsidiary has extraordinary items or results from discontinued operations, this Non-Controlling Interest will be based on the subsidiary’s Income Before Extraordinary Items And Discontinued Operations. Also note that, in situations where there are preferred shares with a prior claim on the income of the subsidiary, the Non-Controlling Interest to be disclosed in the consolidated Income Statement will include such claims. Also note that, in situations where there are preferred shares with a prior claim on the income of the subsidiary, the Non-Controlling Interest to be disclosed in the consolidated Income Statement will include such claims.

68 © 2008 Clarence Byrd Inc.67 Summary Of Definitional Calculations Consolidated Net Income Consolidated Net Income can be calculated as follows: 100 percent of the parent company’s Net Income, excluding dividends received from the subsidiary; plus (minus) the parent’s share of the subsidiary’s reported Net Income (Net Loss); plus (minus) the parent’s share of any fair value changes realized during the period through usage or sale of subsidiary assets (fair value amortization and amounts realized through the sale of subsidiary assets prior to the end of their economic life); minus any Goodwill Impairment Loss that is recognized during the period.

69 © 2008 Clarence Byrd Inc.68 International Convergence Standards Standards IFRS No. 3, Business CombinationsIFRS No. 3, Business Combinations IAS No. 27, Consolidated And Separate Financial StatementsIAS No. 27, Consolidated And Separate Financial Statements

70 © 2008 Clarence Byrd Inc.69 International Convergence Differences (Current Standards) Asset ValuationAsset Valuation IFRS No. 3 requires that 100 percent of fair value changes on identifiable assets be recognized at the time of acquisition. Section 1581 only allows the acquirer’s share to be recognized. Note, however, IFRS No. 3 does not allow the recognition of 100 percent of goodwill. Only the acquirer’s share of this asset can be recognized. Non-Controlling InterestNon-Controlling Interest Consistent with the entity approach, IAS No. 27 requires the non-controlling interest to be presented as a component of consolidated Shareholders’ Equity. The value to be recognized will include the non-controlling interest’s share of fair value changes on identifiable assets. Terminology IAS No. 27Terminology IAS No. 27 continues to use the term Minority Interest, rather than the more accurate Non-Controlling Interest. However, this is certain to be changed by the amendments resulting from the FASB/IASB project. Given this, we will ignore this difference in presenting examples based on current IFRSs.

71 © 2008 Clarence Byrd Inc.70 International Convergence Proposals Proposals At this time (December, 2007), it appears that the IASB will require the recognition of 100 percent of goodwillAt this time (December, 2007), it appears that the IASB will require the recognition of 100 percent of goodwill There may also be a different approach to its measurementThere may also be a different approach to its measurement

72 © 2008 Clarence Byrd Inc.71


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