Consolidations
Typical characteristics of VIEs include the following:
-VIEs are not self-sufficient. -Investors do not participate in a VIE's gains and losses. -A VIE's value is affected by another entity's value.
During Year 3 Park Corp. recorded $500,000 in sales of inventory to Small Co., its wholly owned subsidiary, using the same gross profit rates as made to third parties. On December 31, Year 3, Small held one-fifth of these goods in its inventory. The following information pertains to Park and Small's sales for Year 3. Park - Sales $2,000,000 and Cost of Sales ($800,000) Small - Sales $1,400,000 and Cost of sales ($700,000) In its Year 3 consolidated income statement, what amount should Park report as cost of sales?
Answer: $1,060,000 ($800,000 + $700,000 - $500,000 + $60,000) Where the $60,000 is the intercompany profit that is still carried on Small's balance sheet.
On the transaction date, FMV of the acquiree's net identifiable assets needs to be calculated. First, determine the book value of the net assets purchased and identify any noncontrolling interest (typically based on acquisition date share price).
Book value of Strass' net assets $50,000 Noncontrolling interest FMV (10,000) Book value of Polk's 90% purchase of Strass $40,000
In a business combination, assets and liabilities of the acquiree are purchased at FMV on the acquisition date. The book value of net assets purchased and any noncontrolling interest is determined before calculating the FMV.
Consolidated balances for assets include fair value adjustments created from the transaction.
When businesses combine due to growth, generally the consideration given is more than the FMV of net identifiable assets.
Goodwill is recorded. However, if a distressed business is purchased for less than the FMV of its identifiable net assets, the acquirer records a bargain purchase gain from the transaction.
In a business combination, the acquirer purchases a controlling financial interest in the acquiree. All net identifiable assets are acquired at FMV on the acquisition date.
If the FMV of the net identifiable assets is more than the purchase price, the acquirer records a bargain purchase gain.
A majority voting interest is created when an investor directly or indirectly owns more than 50% of the outstanding voting shares of an entity.
Indirect ownership includes ownership held through another company.
When preparing combined financial statements, principles similar to those used for consolidated financial statements apply.
Intercompany profits and losses and intercompany receivables and payables are eliminated, so there would be no balance in receivables from affiliates.
Combined financial statements can be used to show the results of companies with common ownership.
Intercompany transactions are eliminated for both combined and consolidated financial statements.
Consolidation procedures result in consolidated financial statements that present entities under common control as if they were a single economic entity.
Intercompany transactions are eliminated. To eliminate intercompany sales debit sales and credit COGS; to eliminate ending inventory profit debit COGS and credit inventory. (see next card for example)
In a business combination, assets and liabilities of the acquired are purchased at fair values on the acquisition date.
The fair value of any contingent consideration on the acquisition date is also included in the total purchase consideration.
In the year of an intercompany sale of a depreciable fixed asset, the intercompany gain or loss is eliminated.
The intercompany gain or loss is then realized over the remaining life of the fixed asset as a decrease or increase, respectively, in depreciation expense.
When a company (ie, parent) obtains a controlling financial interest in another company (ie, subsidiary), consolidated financial reporting is required. Subsidiary net income is included in the parent's net income as an increase to the subsidiary investment account and an increase to the subsidiary equity earnings account.
Therefore, for wholly owned subsidiaries, consolidated net income equals the parent's net income.
Using the equity method, subsidiary earnings and dividends during the year are reflected in both the parent and NCI investment accounts based on their proportionate ownership percentages. Dividends declared by the subsidiary company are recorded as a reduction of the investment account.
They do not flow through net income and, therefore, dividends do not impact retained earnings
Dividends reported on consolidated financial statements will consist exclusively of the Acquirer's dividends. The Acquiree's dividends are eliminated.
When the Acquiree owns stock in the Acquirer, the portion of the dividends that are paid to the Acquiree are eliminated as an intercompany transaction reducing dividends to be reported on the consolidated financial statements to the portion of the Acquirer's dividends that are paid to others.
In a business combination accounted for under the acquisition method, the guidelines for assigning amounts to inventory provide for raw materials to be valued at replacement cost.
Work in process is to be valued at selling price of the finished goods less costs to complete, cost of disposal, and a reasonable profit. Finished goods are to be valued at selling prices less costs of disposal and a reasonable profit. (note: this is similar to LCM method where the floor is NRV less profit)
The consideration in excess of the book value of Polk's investment in Strass is $20,000. This difference needs to be allocated to any identifiable assets bringing those assets to FMV .
and the remaining difference to goodwill
Direct costs of a business combination, including costs of issuing debt securities are
capitalized and amortized as debt issue costs
if a distressed business is purchased for less than the FMV of its identifiable net assets,
the acquirer records a bargain purchase gain from the transaction.
When a holder of a VIE purchases additional variable interests,
the holder should evaluate whether its interest has increased to the point of having a controlling interest, therefore becoming the VIE's primary beneficiary
When one company, the acquirer, purchases a controlling financial interest (ie, greater than 50%) in another entity, the acquiree, the resulting combined entity is viewed as a single economic entity. All combinations must be performed using the acquisition method.
The acquiree's assets and liabilities are recorded at FMV at the acquisition date. On the acquisition date, the values of any noncontrolling and previously held interest in the acquiree are measured at FMV.
When one entity (ie, parent company) obtains a controlling financial interest in another entity (ie, subsidiary), consolidated financial reporting is required.
The combined company is viewed as a single economic entity because all of its resources are controlled by the acquirer (ie, parent).
When an acquiring corporation pays less than fair value for an acquired entity, a bargain purchase has occurred, and a gain will be recorded at the acquisition date to recognize the bargain purchase.
The journal entry will be as follows: DR: Investment (at net fair value) X + Y CR: Cash X CR: Gain on bargain purchase Y
When one entity (ie, parent company) obtains a controlling financial interest in another entity (ie, subsidiary), consolidated statements are required. They are required even if the parent owns less than 100% of the subsidiary's outstanding shares.
The portion of the subsidiary that is held by outside investors (ie, noncontrolling interest [NCI]) is reported on the shareholders' equity section of the consolidated balance sheet. This allows for transparency of the investors' percentage ownership claim on the net assets (ie, equity) of the subsidiary.
A VIE's primary beneficiary has the power and authority to direct the VIE's operations and to participate in its gains and losses to a significant extent.
The primary beneficiary is required to prepare consolidated financial statements with the VIE, even if it does not meet the 50% threshold for consolidation
When a subsidiary pays dividends, the portion that is paid to the parent is eliminated.
The remainder is paid to the noncontrolling interest (NCI) shareholders, decreases their investment account, and decreases the NCI on the shareholders' section of the consolidated balance sheet.
The portion of a subsidiary held by outside investors is the noncontrolling interest.
To determine the noncontrolling interest in a subsidiary, divide the noncontrolling interest by the subsidiary stockholders' equity
The fair value of an earnout is required to be recorded as a liability on the balance sheet of the purchaser on the date of the acquisition if additional assets (such as cash) will be transferred to the seller (or within the equity section of the balance sheet when additional equity interests will be transferred to the seller). Earnouts recognized as a liability must be re-measured to fair value at each reporting period until the contingency is resolved.
To the extent there is a change in fair value, the change must be recognized in the income statement (as a gain or a loss in earnings). Contingent consideration recorded in equity is not required to be re-measured.
Combined statements may be used to present the results of operations of: (1) Companies under common management, or (2) Commonly controlled companies
Answer: both Combined financial statements (F/S) can be prepared for related entities that are commonly controlled or under common management when consolidated statements are not required. Combined F/S show the results of both the group as a whole and the individual companies. Consolidated F/S show only the aggregate results of parent and subsidiary companies.
When one company (ie, the parent) owns more than 50% of the voting stock of another company (ie, the subsidiary), consolidated financial statements must be prepared.
Any intercompany transactions, such as an advance to the subsidiary, are eliminated in the consolidation.
Direct costs of a business combination, including finders' fees and consulting fees, are recognized as expenses in the period incurred.
Costs of issuing securities in the combination, such as registration fees, reduce the amount recognized as proceeds from their issuance and are not recognized as expenses but reduce APIC.
For which of the following reporting units is the preparation of combined financial statements most appropriate? A. A corporation and a majority-owned subsidiary with nonhomogeneous operations. B. A corporation and a foreign subsidiary with nonintegrated homogeneous operations. C. Several corporations with related operations with some common individual owners. D. Several corporations with related operations owned by one individual.
D. Several corporations with related operations owned by one individual. A corporation with a majority-owned subsidiary will prepare consolidated financial statements, even though the operations of the subsidiary may be nonhomogeneous or when the subsidiary is a foreign company. When one individual owns several corporations, however, combined financial statements would be appropriate.
In a business combination, the acquirer's investment in the acquiree is equal to the fair value of the consideration transferred (ie, market value of stock) to the acquiree's shareholders. In general, acquisition-related costs (eg, professional fees, appraisal costs) incurred by the acquirer are currently expensed.
However, costs associated with issuing debt (ie, bonds) and equity securities (ie, stock) receive special treatment. Costs associated with debt securities are capitalized as contra accounts to the liability and amortized. Costs incurred with registering and issuing the acquirer's stock are treated as a reduction in the additional paid-in capital (APIC).
The noncontrolling interest in a subsidiary is reported in the shareholders' equity section of the parent's consolidated balance sheet.
Additional shares of the subsidiary issued to outside investors reduce the parent's investment, and the change in equity does not result in a gain or loss on the consolidated income statement.
A variable interest entity (VIE) exists when an investor has a controlling financial interest in another entity, but the amount of control in the VIE is disproportionate to its ownership.
A VIE is formed as a separate legal entity for the purpose of holding assets or incurring liabilities and is used to protect the business from creditors and legal action. Enron used VIEs to avoid reporting impairment losses by selling the impaired assets to VIEs at full value.
The parent company's investment account is eliminated through the consolidation process. The Non-controlling interest (NCI) investment account is not eliminated with consolidation and is reduced by the subsidiary dividends.
Accordingly, the NCI reported on the shareholders' section of the balance sheet is also reduced
