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FISCHER | TAYLOR | CHENG Consolidated Statements: Date of Acquisition.

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Presentation on theme: "FISCHER | TAYLOR | CHENG Consolidated Statements: Date of Acquisition."— Presentation transcript:

1 FISCHER | TAYLOR | CHENG Consolidated Statements: Date of Acquisition

2 Learning Objectives (1 of 2) 1.Differentiate among the accounting methods used for investments, based on the level of common stock ownership in another company. 2.State the criteria for presenting consolidated statements, and explain why disclosure of separate subsidiary financial information might be important. 3.Demonstrate the worksheet procedures needed to eliminate the investment account. 4.Demonstrate the worksheet procedures needed to consolidate parent and subsidiary accounts. 5.Apply value analysis to guide the adjustment process to reflect the price paid for the controlling interest. COPYRIGHT © 2012 South-Western/Cengage Learning 2

3 Learning Objectives (2 of 2) 6.Develop a determination and distribution of excess (D&D) schedule that will guide the worksheet procedures needed to consolidate a subsidiary. 7.Explain the impact of a noncontrolling interest on worksheet procedures and financial statement preparation. 8.Show the impact of preexisting goodwill on the consolidation process, and be able to include prior investments in the acquisition price. 9.Define push-down accounting, and explain when it may be used and its impact. 10.Demonstrate worksheet procedures for reverse acquisitions (Appendix) COPYRIGHT © 2012 South-Western/Cengage Learning 3

4 Levels of Investment Level of OwnershipInitial RecordingRecording of Income Passive generally < 20% At cost including brokers’ fees Dividends as declared Influential generally 20%-50% At cost including brokers’ fees Ownership share of investee income; dividends reduce investment Controlling generally > 50% At costOwnership share of income; accomplished by consolidating subsidiary income statements with those of parent COPYRIGHT © 2012 South-Western/Cengage Learning 4

5 Function of Consolidated Statements Present the results of operations, cash flow, and the balance sheet of both the parent and its subsidiaries as if they were a single company COPYRIGHT © 2012 South-Western/Cengage Learning 5

6 Criteria for Consolidated Statements Generally, when a parent firm owns over 50% of the voting common stock of another company Evidence may exist that indicates control when less than 51% of common stock is owned COPYRIGHT © 2012 South-Western/Cengage Learning 6 IFRS considers currently exercisable potential voting rights permits consolidation for de facto control

7 Techniques of Consolidation Asset acquisition (Chapter 1) –Acquired assets are recorded by acquirer –Automatic consolidation Stock acquisition (Chapter 2 and following) –Acquired company remains as a separate legal entity –Parent records investment –Consolidation process produces financial statements for the economic entity COPYRIGHT © 2012 South-Western/Cengage Learning 7

8 100% Stock Acquisition COPYRIGHT © 2012 South-Western/Cengage Learning 8 Acquirer’s Journal Entry: Investment in Company S500,000 Cash500,000 Assumptions: Book value of the asset and liabilities represent fair values Fair value of net assets = $500,000 Price paid equals fair value of net identifiable assets

9 Consolidating the 100% Stock Acquisition Parent’s Investment in Company S account is eliminated against the equity accounts of the subsidiary COPYRIGHT © 2012 South-Western/Cengage Learning 9 ELCommon Stk- Company S200,000 Retained Earnings- Company S300,000 Investment in Company S500,000 Worksheet 2-1

10 Adjustment of Subsidiary Accounts Usually the price paid exceeds the book value of subsidiary’s net assets –Fair values exceed book values –Unrecorded intangibles may exist Elimination entries required: EL to eliminate Investment In account against equity of subsidiary Dto distribute the remaining cost to the acquired assets COPYRIGHT © 2012 South-Western/Cengage Learning 10

11 100% Stock Acquisition COPYRIGHT © 2012 South-Western/Cengage Learning 11 Acquirer’s Journal Entry: Investment in Company S700,000 Cash700,000 Assumptions: Parent pays $700,000 for the investment in S Price paid exceeds fair value of net identifiable assets

12 Consolidating the 100% Stock Acquisition COPYRIGHT © 2012 South-Western/Cengage Learning 12 ELC Stk-Company S200,000 Retained Earnings-Company S300,000 Investment in Company S500,000 D1Inventory (increase to $120,000)20,000 D2Equipment (increase to $400,000)100,000 D3Goodwill (excess of price paid)80,000 DInvestment in Company S200,000 Worksheet 2-2 Parent’s Investment in Company S account is eliminated against the equity accounts of the subsidiary; accounts are adjusted to fair value and goodwill recognized.

13 COPYRIGHT © 2009 South-Western/Cengage Learning 13 Sample (Subsidiary) Company Data Parental, Inc. issues 20,000 shares $1 par stock; fair value $25 for 100% Sample’s stock. $25,000 acquisition costs are expensed when incurred.

14 Parental’s Journal Entries COPYRIGHT © 2012 South-Western/Cengage Learning 14 To record the acquisition: Investment in Sample Company500,000 C Stk (20,000 shares par $1)20,000 Additional Paid-in Capital480,000 To record associated costs: Acquisition Expense25,000 Cash25,000

15 Value Analysis Schedule COPYRIGHT © 2012 South-Western/Cengage Learning 15 Note: Company fair value ($500,000) exceeds fair value of net assets ($365,000) Accounts will be adjusted to fair value Goodwill will be recognized

16 Determination and Distribution Schedule: Account Adjustment and Goodwill COPYRIGHT © 2012 South-Western/Cengage Learning 16

17 Consolidating the 100% Stock Acquisition COPYRIGHT © 2012 South-Western/Cengage Learning 17 ELCommon Stock- Sample 10,000 Addn’l Paid-in Capt - Sample 90,000 Retained Earnings -Sample 60,000 Investment in Sample160,000 D1Inventory5,000 D2Land30,000 D3Buildings100,000 D4Equipment20,000 D5Copyright50,000 D6Goodwill135,000 DInvestment in Sample340,000 Worksheet 2-3

18 Bargain Purchase Acquisition price is less than the fair value of the subsidiary net identifiable assets Acquisition journal entries –Record investment at value of consideration given –Expense all acquisition costs Consolidation process –Acquired assets and liabilities are consolidated at their fair values –A gain on acquisition is recognized by the consolidated entity COPYRIGHT © 2012 South-Western/Cengage Learning 18

19 Value Analysis Schedule COPYRIGHT © 2012 South-Western/Cengage Learning 19 Parental, Inc. issues 12,000 shares $1 par stock; fair value $25 for 100% Sample’s stock. $25,000 acquisition costs are expensed when incurred.

20 Determination and Distribution Schedule: Account Adjustment and Gain COPYRIGHT © 2012 South-Western/Cengage Learning 20

21 Consolidating with a Noncontrolling Interest Parent acquires less than 100% of the subsiduary but still exercises control. Non-Parent owner interest is referred to as Noncontrolling Interest (NCI) Parent’s investment account is eliminated against its ownership percentage of the sub’s equity accounts Subsidiary accounts are adjusted to full fair value regardless of controlling interest percentage; adjustment allocated to Parent and NCI COPYRIGHT © 2012 South-Western/Cengage Learning 21

22 Value Analysis Schedule COPYRIGHT © 2012 South-Western/Cengage Learning 22 Note: Company implied fair value = $400,000 ÷ 80% Parent paid $400,000 for 80% Entire subsidiary must be worth $500,000 Fair value of identifiable net assets is proportionally allocated Goodwill is proportionally allocated

23 Determination and Distribution Schedule: Account Adjustment and Goodwill; NCI COPYRIGHT © 2012 South-Western/Cengage Learning 23

24 Consolidating with a Noncontrolling Interest COPYRIGHT © 2012 South-Western/Cengage Learning 24 ELC Stk-Sample8,000 Addn’l Pd-in Capt-Sample72,000 Retained Earnings-Sample48,000 Investment in Sample128,000 D1Inventory5000 D2Land30,000 D3Buildings100,000 D4Equipment20,000 D5Copyright50,000 D6Goodwill135,000 DInvestment in Sample272,000 NCIRetained Earnings-Sample68,000 Worksheet 2-5 Controlling Interest

25 Adjustment of Goodwill Applicable to NCI Necessary if parent pays a premium to achieve control –Adjust NCI value as necessary –NCI value cannot be less than share of identifiable net assets –NCI share of fair value of identifiable net assets is never reduced COPYRIGHT © 2012 South-Western/Cengage Learning 25

26 Adjustment of NCI in Bargain Purchase 1.Determine preliminary Sub implied value Parent price ÷ Parent % = preliminary sub value 2.Measure preliminary NCI value Preliminary sub value × NCI% = preliminary NCI 3.Preliminary NCI value < NCI share of assets? Set NCI value equal to NCI share of assets Revise implied fair value = Parent + finalized NCI COPYRIGHT © 2012 South-Western/Cengage Learning 26

27 Adjustment of NCI in Bargain Purchase COPYRIGHT © 2012 South-Western/Cengage Learning 27 $250,000 ÷ 80% =$312,500 $312,500 × 20% =$62,500 NCI cannot participate in the acquisition gain

28 Adjustment of NCI in Bargain Purchase COPYRIGHT © 2012 South-Western/Cengage Learning 28 Adjusted $250,000 ÷ 80% =$312,500 $312,500 × 20% =$62,500 NCI cannot participate in the acquisition gain Revised

29 Sample Company; Preexisting Goodwill COPYRIGHT © 2012 South-Western/Cengage Learning 29 Preexisting goodwill is not included in fair valuation

30 Preexisting Goodwill Preexisting goodwill is ignored in value analysis COPYRIGHT © 2012 South-Western/Cengage Learning 30

31 Determination and Distribution Schedule: Account Adjustment, Preexisting Goodwill, NCI COPYRIGHT © 2012 South-Western/Cengage Learning 31 D&D schedule adjusts from the preexisting goodwill to the goodwill calculated in the valuation schedule Preexisting goodwill40,000 D&D goodwill95,000 Goodwill on valuation schedule135,000 Worksheet 2-7

32 Push-Down Accounting Subsidiary’s accounts are adjusted to reflect the adjustments to fair value Fair value adjustments are added to paid-in capital No excess to eliminate during consolidation process The consolidated statements are unaffected –The adjustments are the same –The adjustments are recorded on the subsidiary’s books COPYRIGHT © 2012 South-Western/Cengage Learning 32 IFRS does not permit push-down accounting

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