FAR F4

goodwill arising from business combinations

- acquisition method: under the acquisition method, goodwill is the excess of an acquired entity's FV over the FV of the entity's net assets, including identifiable intangible assets - equity method: involves purchase of a company's capital stock. goodwill is the excess of the stock purchase price over the FV of the net assets acquired

financial assets

- cash - evidence of an ownership interest in an entity - a contract that conveys to one entity a right to receive cash or another financial instrument from a second entity or exchange other financial instruments on potentially favorable terms with the second entity

noncontrolling interest on BS

- consolidated BS will include 100% of the subsidiary's assets and liabilities - the noncontrolling interest's share of subsidiary's net assets should be presented as part of equity, separately from the equity of the parent company

variable interest examples

- explicit investments at risk - explicit guarantees of debt - implicit guarantees with related party involvement - most liabilities, excluding short term trade payables - most forward contracts to sell assets owned by entity - options to acquire leased assets at end of lease terms at specific prices

the business entity is a VIE if it has any of the following characteristics

- insufficient level of equity investment at risk - inability to make decisions or direct activities - no obligation to absorb entity's expected losses - no right to receive expected residual returns - disproportionately few voting rights

simple incomes statement eliminations

- interest expense/interest income (bonds) - gain on sale/depreciation expense (intercompany FA sales) - sales/COGS (intercompany inventory transactions) **if not consolidating, do not eliminate

following types of entities are ordinarily not subject to consolidation as VIEs

- nonprofit orgs - employee benefit plans - registered investment companies - separate accounts of life insurance companies - governmental organizations and financing entities established by governments

allowed adjustments

- the subsidiary's assets and liabilities may be adjusted to better reflect their values on the acquisition date - new subsidiary assets and liabilities that existed on the acquisition date may be recognized **measurement period adjustments offset goodwill (or gain). adjustments to depreciation and amortization are reported in the period the adjustments are determined (**no restatement required**). **changes in value caused by events after the acquisition date are not included in the measurement period adjustments

distinct accounting characteristics of the acquisition method

1. 100 percent of the net assets acquired are recorded at FV with any unallocated balance remaining creating goodwill 2. when the companies, are consolidated, the subsidiary's entire equity (including its common stock, APIC, and retained earnings) is eliminated (not reported)

consolidated adjustments for external reporting (acquisition method)

1. common stock, APIC, and retained earnings of subsidiary are eliminated 2. investment in subsidiary is eliminated 3. noncontrolling interest is created 4. balance sheet of subsidiary is adjusted to FV 5. identifiable intangible assets of the subsidiary are recorded at FV 6. goodwill (or gain) is required

a company has a variable interest in a business entity when all the following conditions are met

1. the company and business entity have an arrangement 2. the business entity is a legal entity 3. the business fails to qualify for an exclusion 4. the interest is more than significant 5. the company has an explicit or implicit variable interest in the entity

a VIE may exist when a company has any of the following arrangements with a business entity

1. the company or a related party significantly participated in the business entity's design 2. substantially all of the business entity's activities, by its design, involve or are conducted on behalf of the company 3. more than half of the total of the equity, subordinated debt, and other forms of financial support is provided by the company 4. securitizations or other forms of asset backed financing agreements or single lessee leasing arrangements are the primary activities of the entity

variable interest entities

A corporation, partnership, trust, LLC or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks sufficient financial resources to support its activities.

consolidated workpaper eliminating journal entry

CAR IN investmeeBIG C: common stock - subsidiary (debit) A: APIC - subsidiary (debit) R: retained earnings - subsidiary (debit) I: investment in subsidiary (credit) N: noncontrolling interest (credit) B: balance sheet adjustments to FV (debit) I: identifiable intangible assets to FV (debit) G: goodwill (debit)

maintaining goodwill

Costs associated with maintaining, developing or restoring goodwill are expensed, not capitalized - in addition, goodwill generated internally or not purchased is not capitalized as goodwill

trading securities

Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences - generally reported as current assets, although they can be reported as noncurrent if appropriate

intercompany sale of land

Intercompany G/L on the sale of land remains unrealized until land is sold to an outsider. - Elimination entry in period of sale: eliminate gain/loss and adjust land to original cost - debit Intercompany gain on sale of land, credit Land (Sold for - original cost) - in the subsequent year and every year thereafter until the land is sold to a third party, retained earnings would be debited and land would be credited to eliminate the intercompany profit. retained earnings is debited in subsequent years because the gain would have been closed to this account. - if subsidiary was seller of the land, may be need to divided intercompany gain between RE and NCI

insufficient level of equity investment at risk

a business entity an insufficient level of equity investment at risk, and is a VIE, if it cannot operate on its own without additional subordinated financial support in the form of variable interests. an entity has a sufficient equity investment at risk, and is not a VIE, when: - the entity can finance its own activities - the entity's equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality - other facts and circumstances indicate that the equity investment at risk is sufficient - the fair value of the equity investment at risk is greater than expected losses - the fair value of the equity investment at risk is greater than expected losses

significant influence

a company that owns 20% to 50% of voting stock of another investee company is presumed to be able to exercise significant influence over the operating and financial policies of that investee and therefore must the equity method when presenting the investment in that investee in - consolidated FS that include other consolidated entities, but not that investee - unconsolidated parent company FS

financial liabilities

a contract that imposes on one entity an obligation to - deliver cash or another financial instrument to a second entity - exchange other financial instruments on potentially unfavorable terms with the second entity

equity securities

a security that represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices - ownership shares (stock) - rights to acquire ownership shares (stock rights, warrants, call options) - rights to dispose of ownership shares (put options) - NOT preferred stock redeemable at option of investor or stock that must be redeemed by the issuer, treasury stock, or convertible bonds

a variable interest exists when the company must

absorb a portion of the business entity's losses or receive a portion of the business entity's expected residual returns

differences between the purchase price and book value of the investee's net assets

additional adjustments to the investment account under the equity method result from differences between the price paid for the investment and the book value of the investee's net assets. this difference is attributable to: 1. asset fair value differences: differences between the book value and fair value of the net assets required 2. any remaining difference is goodwill

noncontrolling interest computation after acquisition date

after acquisition date, report using equity method - ending noncontrolling interest = beginning noncontrolling interest + NCS share of subsidiary net income - NCI share of subsidiary dividends (BASE)

parent company accounting for investment in subsidiary

after acquisition date, the parent uses either the cost method or the equity method to account for the investment in subsidiary in its accounting records - cost method: the investment in subsidiary account does not change after the acquisition date. no adjustments are made to account for parent's share of subsidiary income. dividends received from the subsidiary are recorded by the parent as dividend income - equity method: the investment in subsidiary increases by the parent company's share of the subsidiary's net income with a corresponding credit to the income statement account, equity in subsidiary/subsidiary income. dividends received from subsidiary decrease investment in it.

fair value disclosures

all entities must disclose on the BS or in notes, all financial assets and liabilities, grouped by measurement category, and if a financial asset, the form of that asset - public business entities must provide FV info regarding classification level in the measurement hierarchy - for assets and liabilities measured at amortized cost, FV should be disclosed in accordance with the exit price - exceptions are for payables and receivables due within one year, deposit liabilities with no defined maturities, and equity investments reported under practicability exception - if elect practicability exception, disclose the carrying amount of all investments without readily determinable FV, impairment changes during period, amount of upward or downward adjustment made to the carrying amount due to any observable price changes with the intent of the adjustments designed to reflect the FV of the security

practicability exception

allows entity to measure an equity investment at cost less impairment, plus/minus observable price changes of identical or similar investments from the same issuer - this exception is applicable for equity investments that do not have a readily determinable fair value - reporting entities that are broker dealers in securities, investment companies, or postretirement benefit plans cannot use this exception

disproportionately few voting rights

an entity is a VIE if some of the equity investors have disproportionately few voting rights in comparison to their economic interests. an entity is automatically deemed to be a variable interest entity when all three of the following conditions are present 1. substantially all of the activities of the entity are conducted on behalf of an equity investor or substantially all of the activities are involving an equity investor 2. the voting rights of that equity investor are small in comparison with the focus of the entity on that investor 3. the voting rights of one or more of the equity investors, including that equity investor, are out of line with the investor's obligation to absorb expected losses, the investor's right to receive expected residual returns, or both

no obligation to absorb entity's expected losses

an entity is a VIE if the holders of the total equity investment at risk have no obligation to absorb the entity's expected losses

no right to receive expected residual returns

an entity is a VIE if the holders of the total equity investment at risk have no right to receive the entity's expected residual returns

inability to make decisions or direct activities

an entity is a VIE if the holders of the total equity investment at risk, as a group, do not have the power to direct the activities of the entity that most significantly impact the entity's economic performance

equity method impairment

an impairment loss on an equity method investment is recognized when the following two conditions occur: 1. the fair value of the investment falls below the carrying value of the investment 2. the entity believes the decline in value is other than temporary if both conditions are met, the entity reports the impairment loss on the IS and the carrying value of the investment is reduced to the lower fair value on the BS **under GAAP, the impairment loss is not permitted to be reversed if the fair value of the investment increases in subsequent periods

controlling interest

an investor owning more than 50% of a subsidiary has a controlling interest in that subsidiary

contingent consideration

an obligation of the parent company to transfer additional assets or equity interests to the former shareholders of the subsidiary if specified conditions are met

reporting unit

an operating segment or one level below an operating segment - the goodwill of one reporting unit may be impaired, while the goodwill for other units may or may not be impaired

debt securities

any security representing a creditor relationship with an entity - corporate bonds - redeemable preferred stock - government securities - convertible debt - commercial paper - does not include option, futures, or forward contracts, lease contracts, accounts and notes receivable

consolidated statement of changes in equity

because NCI is part of the equity of the consolidated group. it is presented in the statement of changes in equity. - statement of changes in equity should present a reconciliation of the beginning of period and end of period carrying amount of total equity, equity attributable to parent, and equity attributable to NCI

noncontrolling interest (CAR IN BIG)

business combinations that do not establish 100 percent ownership of a subsidiary by a parent will result in a portion of the subsidiary's equity being attributed to noncontrolling shareholders - noncontrolling interest must be reported at FV in the equity section of the consolidated BS, separately from the parent's equity **this includes the noncontrolling interest's share of any goodwill

measurement period

cannot exceed one year from the date of acquisition and ends when improved information is available or it becomes obvious that no better information will become available

NCI on IS

consolidated IS will include 100% of subsidiary's revenues and expenses AFTER date of acquisition. - subsidiary's pre-acquisition revenues and expenses are not include - consolidated IS should show net income attributable to the NCI separately from the net income attributable to the parent

changes in contingent consideration

contingent consideration estimate may be adjusted after the acquisition date based on improved info. - the adjustment is included in earnings in the period of adjustment

voting interest model control

control = over 50% ownership - consolidated FS are prepared when a parent subsidiary relationship has been formed. an investor is considered to have parent status when control over an investee is established or more than 50% of the voting stock has been acquired - under US GAAP, all majority owned subsidiaries must be consolidated except when significant doubt exists regarding the parent's ability to control the subsidiary such as when the subsidiary is in legal reorganization or bankruptcy or the subsidiary operates under severe foreign restrictions

held to maturity securities

corporation has the positive intent and ability to hold these securities to maturity **if intent is to hold security for indefinite period of time but not necessarily maturity, classify as available for sale **if security can be paid or otherwise settled in a manner that the holder may not recover substantially all of its investment, the held to maturity classification may not be used - reported as current or non current assets depending on time to maturity

valuation of debt securities

debt securities classified as trading and available for sale must be reported at FV - FV is the market price of the security or what a willing buyer and seller would pay and accept to exchange the security - changes in FV result in unrealized holding gains or losses - reporting of these gains and losses depends on classification of the security - presentation on balance sheet is net income - held to maturity is reported at amortized cost - cash flow of trading is operating, cash flow of available for sale is investing

classification of debt securities

debt securities should be classified into one of three categories based on the intent of the company - trading securities - available for sale securities - held to maturity securities

disclosures for investments in equity securities

disclose the portion of unrealized gains and losses for the period that relates to equity securities still held at the end of the reporting period **net gains and losses recognized during period on equity securities - net gains and losses recognized during period on equity securities sold during the period = unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date

income from investments in equity securities

dividend income is recognized in net income, unless the dividend is a liquidating dividend - normal divided JE: debit cash, credit dividend income - liquidating dividend = a distribution that exceeds the investor's share of the investee's RE. a liquidating dividend is a return of capital that decreases the investor's basis in the investment - liquidating dividend JE: debit cash, credit investment in investee (bc it is return of capital)

consolidated statement of cash flows

during period of acquisition: complicated by fact that PY FS reflect parent only balances while CY FS reflect consolidated balances. following steps are necessary to prepare a consolidated statement of cash flows in period of acquisition: 1. net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows 2. assets and liabilities of the subsidiary on acquisition date must be added to parent assets and liabilities at beginning of year in order to determine the change in cash due to operating, investing, and financing activities during the period subsequent periods: prep of consolidated statement of cash flows is simplified since consolidated statements are available for beginning and end. consolidated statement of cash flows should present the cash inflows and outflows of the consolidated entity, excluding cash flows between parent and subsidiary. similar to the preparation of statement of cash flows for a nonconsolidated entity except with the following considerations: 1. when reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to parent and NCI) should be used 2. financing section should report dividends paid by subsidiary to noncontrolling SHs. dividends paid by subsidiary to parent should not be reported 3. investing section may report acquisition of additional subsidiary shared by the parent if the acquisition was an open market purchase

simple balance sheet eliminations

eliminate 100% of all intercompany payables and receivables - ex: debit AP, credit AR together

qualitative evaluation of goodwill impairment

entities have the option to perform a qualitative evaluation to determine whether it is more likely than not (>50%) that goodwill is impaired - quantitative impairment test is not necessary if after assessing relevant qualitative factors, an entity determines it is not more likely than not that the FV of the reporting unit is less than its carrying value

eligible financial instruments for fair value option

entities may elect the fair value option for recognized financial assets and financial liabilities - an entity can choose to measure at fair value, a debt investment that would otherwise be classified as available for sale with unrealized gains and losses recorded in earnings rather than in OCI - an entity can choose to measure at FV an equity investment that would otherwise be accounted for using the equity method - financial instruments not eligible for the fair value option include investments in subsidiaries or VIEs that an entity is required to consolidate, pension benefit assets/liabilities, financial assets/liabilities recognized under leases, deposit liabilities of financial institutions, and financial instruments classified as equity

concentrations of credit risk disclosure

entities must disclose all significant concentrations of credit risk arising from all financial instruments, whether from a single party or a group of parties engaged in similar activities and that have similar economic characteristics - credit risk is the possibility of loss from the failure of another party to perform according to the terms of a contract - concentration of credit risk occurs when an entity has contracts of material value with one or more parties in the same industry or region - this applies to all entities except nonpublic entities with total assets less than 100 million and no instruments accounted for as derivatives

impairment of equity securities

equity investments that do not have a readily determinable fair value are measured at cost - impairment (practicability exception). an entity should consider the following qualitative indicators in order to determine whether an equity investment with no readily determinable fair value is impaired - heightened concerns regarding ability of investee to continue as a going concern - significant and adverse changes in industry, geography, technology - significant decline in earnings, business prospects, asset quality, credit rating - offers to buy from investee and willingness to sell the same or similar investment for less than investor's carrying value **when a qualitative assessment indicates that impairment exists, the cost basis of the security is written down to a fair value and the amount of the write down is accounted for as a realized loss and included in earnings

valuation of equity securities

equity securities are reported at fair value through net income - unrealized holding gains and losses on equity securities are included in earnings as they occur - debit unrealized loss on equity security, credit valuation account

election dates for fair value option

fair value option may only be applied on certain dates, including the date that an entity first recognizes an eligible financial instrument, the date that an investment becomes subject to equity method accounting, or the date an entity ceases to consolidate an investment in a subsidiary or VIE

disclosures for investments in debt securities

following info for AFS and HTM securities must be disclosed in FS: - aggregate FV - gross unrealized holding gains and losses - amortized cost basis by major security type - info about contractual maturities of debt securities

fair value changes attributable to instrument specific credit risk

for financial liabilities other than derivative liabilities that are designated under the fair value option, the portion of the change in fair value that relates to a change in instrument specific credit risk is recognized in other comprehensive income - derivative liabilities recognize these changes in net income - once financial liability is derecognized, any accumulated gains or losses in other comprehensive income are recognized in earnings

classification of equity securities

generally carried at fair value through net income (FVTNI) - This requirement does not apply to investments accounted for under the equity method, consolidated investees, or when the practicability exception is applied

goodwill

goodwill represents the intangible resources and elements connected with an entity that cannot be separately identified and reported on the BS - goodwill is capitalized excess earnings power

financial asset valuation

held to maturity securities are reported at amortized cost - unrealized gains and losses are not recognized in the FS as held to maturity securities are not marked to market at period end - cash flow = investing

investments in investee common stock and preferred stock

if an investor company owns both common and preferred stock of an investee company: - the significant influence test is generally met by the amount of common stock owned - the calculation of the income from subsidiary or investee to be reported on the IS includes preferred stock dividends and share of earnings available to common shareholders

impairment of held to maturity securities

if it is determined that all amounts due (principal and interest) will not be collected on a debt investment recorded at amortized cost, the investment should be reported at the present value of the principal and interest that is expected to be collected - the credit loss is the difference between the present value and the amortized cost

intercompany bond transactions

if one member of the consolidated group acquires an affiliate's debt from an outsider, the debt is considered to be retired and a gain/loss is recognized on the consolidated income statement. - the gain/loss on extinguishment of debt is calculated as the difference between the price paid to acquire the debt and the book value of the debt. - the gain/loss is not reported on either company's books, but is recorded through an elimination entry. - all intercompany account balances are also eliminated - intercompany interest: eliminate intercompany accounts such as interest expense, interest income, interest payable, and interest receivable - amortization of discount or premium: eliminate amortization of the discount/premium which serves as an increase/decrease in the amount of interest expense/revenue that is recorded. unamortized discount/premium on the intercompany bond is eliminated - subsequent years: eliminated for realized but unrecorded gain/loss on extinguishment of bonds in subsequent years would be adjusted to retained earnings. noncontrolling interest would be adjusted if the bonds were originally issued by the subsidiary

impairment of available for sale debt securities

impairment on AFS securities is different than HTM securities because the investor has the option to sell an AFS security if the loss on the sale will be less than the expected credit loss - as a result, the credit loss reported in net income on AFS securities is limited to the amount by which FV is below amortized cost - any additional loss is reported as an unrealized loss in other comprehensive income

calculating acquisition price (acquisition method)

in a business combination accounted for as an acquisition, the subsidiary may be acquired for cash, stock, debt securities etc - the investment is valued at the FV of the consideration given or the FV of the consideration received, whichever is more clearly evident - accounting for an acquisition begins at the date of acquisition - JE to record acquisition for cash: debit investment in subsidiary, credit cash - JE to record acquisition for parent common stock (use FV at date transaction closes): debit investment in subsidiary, credit common stock (parent at par) and APIC (parent/FV - par)

equity method not appropriate

in the following situations, the equity method is not appropriate even if an investor owns 20 to 50% of the subsidiary - bankruptcy of subsidiary - investment in subsidiary is temporary - a lawsuit or complaint is filed - a standstill agreement is signed - another small group has majority ownership and operates the company without regard to the investor - another small group has majority ownership and operates the company without regard to the investor - the investor cannot obtain the financial information necessary to apply the equity method - investor cannot obtain representation on the board of directors in order to exercise significant influence

unrealized gains and losses for trading securities

included in earnings and recognized in net income - debit unrealized loss on trading securities, credit valuation account (fair value adjustment)

consolidated BS

includes 100% of parent and subsidiary assets and liabilities after removing intercompany transactions, but does not include subsidiary's equity - NCI is presented as part of equity separately from equity of parent company

consolidated IS

includes 100% of parent revenues and expenses and all of subsidiary revenues and expenses after date of acquisition - pre acquisition revenues and expenses are not included - show separately consolidated net income, income attributable to NCI, and net income attributable to parent company

financial instruments

includes financial assets and financial liabilities

income from investments in debt securities

interest income from an investment in debt securities classified as trading or available for sale is recorded on the income statement - debit cash, credit interest income

quantitative evaluation of goodwill impairment

involves comparing the carrying value of the reporting unit including goodwill to the FV of the reporting unit including goodwill. - if the FV exceeds carrying value, there is no impairment - if the FV is less than the carrying value, there will be an impairment charge equal to the difference between the FV and carrying value - impairment charge cannot exceed the value of the goodwill that is allocated to that reporting unit

intercompany inventory/merchandise transactions

it is common for affiliated companies to sell inventory to each other. often this inventory is sold at a profit. the total amount of this intercompany sale and COGS should be eliminated prior to preparing consolidated FS. - in addition, the intercompany profit must be eliminated from the ending inventory and the COGS of the purchasing affiliate. - 100% of the profit should be eliminated even if the parent's ownership is less than 100% - the intercompany profit in the beginning inventory that was recognized by selling affiliate in the previous year must be eliminated by an adjustment (debit) to retained earnings - debit intercompany sales, retained earnings (profit in beginning inventory). credit intercompany COGS, COGS (profit included in COGS of purchasing affiliate), ending inventory (profit in inventory remaining)

goodwill impairment

like other intangible assets with indefinite useful lives, goodwill is tested for impairment at least annually - under GAAP, goodwill impairment is calculated at the reporting unit level - impairment exists when the carrying amount of the reporting unit including goodwill exceeds its FV including goodwill

market risk disclosure

market risk is the possibility of loss from changes in market value not necessarily due to failure of another party but due to changes in economic circumstances -under GAAP all entities are encouraged to disclosed quantitative info about market risk of financial instruments that is consistent with the way it manages or adjusts those risks

acquisition date computation of noncontrolling interest

noncontrolling interest = FV of subsidiary*noncontrolling interest %

business entity is a legal entity

not a person, includes corps, partnerships, LLCs, trusts, and majority owned subsidiaries

fair value option

on specified election dates, entities may choose to measure at fair value eligible financial instruments that are not typically measured at fair value - under the fair value option, unrealized gains and losses are reported in earnings - fair value option is irrevocable and is applied to individual financial instruments

primary beneficiary consolidates

once a company has established that it has a variable interest in a business entity that is a variable interest entity (VIE), the primary beneficiary must be determined. the primary beneficiary must consolidate the VIE. the company is the primary beneficiary if it has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and the company: - absorbs the expected VIE losses or - receives the expected VIE residual returns if one party receives the expected residual returns and another party absorbs the expected losses, the party that absorbs the expected losses consolidates. it is possible for an entity to be a VIE, but have no primary beneficiary and, therefore, nobody consolidates

sale of trading security

realized gain or loss reported when a trading debt security is sold is the difference between the adjusted cost and the selling price - debit cash, credit trading security and realized gain on trading security

realized gains and losses

realized gains or losses are recognized when a debt security is sold and when an available for sale security is deemed to be an impaired - all realized gains and losses are recognized in net income

unrealized gains and losses for available for sale securities

recognized in other comprehensive income - debit unrealized loss on available for sale securities, credit valuation account

recording contingent consideration

recorded by parent on acquisition date by - adding an estimate of the probable settlement cost to the investment in subsidiary and - crediting the liability expected value of contingent consideration

sale of debt securities

sale of a debt security from any category results in a realized gain or loss and is recognized in net income for the period. - the valuation account, if used, also would have to be removed on the sale of a security

statement of consolidated comprehensive income

show separately consolidated comprehensive income, comprehensive income attributable to NCI, and comprehensive income attributable to parent company

computation of net income attributable to NCI

subsidiary income - subsidiary expenses = subsidiary net income subsidiary net income * NCI % = net income attributable to the NCI

acquisition date calculation of CAR

the determination of the difference between book value and fair value is computed as of the acquisition date - when the subsidiary's FS are provided for a subsequent period, it is necessary to reverse the activity in the subsidiary's retained earnings in order to squeeze back into the book value (assets - liabilities = CAR) at the acquisition date BASE B: beginning retained earnings A: add income S: subtract dividends E: ending retained earnings

primary beneficiary

the entity that is required to consolidate the VIE. the primary beneficiary is the entity that has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and absorbs the expected VIE losses or receives the expected VIE returns

accounting for asset fair value differences

the excess of an asset's fair value over its book value is amortized over the life of the asset. this additional amortization causes the investor's share of the investee's net income to decrease (debit equity in investee income, credit investment in investee)

accounting for equity method goodwill

the fair value excess attributable to goodwill is not amortized and is not subject to a separate impairment test. however, the total equity method investment must be analyzed at least annually for impairment.

"CAR" subsidiary equity acquired

the following formula is used to determine the book value of the assets acquired from the subsidiary: assets - liabilities = equity assets - liabilities = NBV assets - liabilities = CAR

intercompany profit on sale of depreciable fixed assets

the gain or loss on the intercompany sale of a depreciable asset is unrealized from a consolidated FS perspective until the asset is sold to an outsider - an elimination entry in the period of sale eliminates the intercompany gain/loss and adjusts the assets and accumulated depreciation to original balance on the date of sale

equity method accounting

the investment is originally recorded at the price paid to acquire the investment. the investment account is subsequently adjusted as the net assets of the investee change through the earning of income and payment of dividends. the investment account increases by the investor's share of the investee's net income with a corresponding credit to the investor's income statement account. the distribution of dividends by the investee reduces the investment balance. continuing losses by an investee may result in a decrease of the investment account to a zero balance - JE: 1) debit investment in investee, credit cash 2) debit investment in investee, credit equity in earnings/investee income 3) debit cash, credit investment in investee

investment in subsidiary: original carrying amount

the original carrying amount of the investment in subsidiary account on the parent's books is: - original cost measured by the FV on the date the acquisition is completed of the consideration given - business combination costs/expenses in an acquisition are treated as follows: -- direct out of pocket costs and indirect costs are expenses -- stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issues

noncontrolling interest

the portion of equity of a subsidiary that is not attributable to the parent. noncontrolling interest is reported at fair value in the equity section of the consolidated BS, separately from the parent's equity

available for sale security

the realized gain or loss reported when an available for sale debt security is sold is the difference between the selling price and the original cost of the security - any unrealized gains or losses in accumulated other comprehensive income must be reversed at the time the security is sold - debit cash and unrealized gain on AFS security, credit AFS security and realized gain on AFS security

sale of equity security

the sale of equity security does not give rise to a gain or loss if all changes in the equity's fair value have been reported in earnings as unrealized gains or losses as they occurred - debit cash, credit equity security if an entity has not recorded an equity security's change in FV up to the point of a sale, a gain or loss is recorded at the time of the sale equal to the difference between adjusted cost and the selling price - debit cash, credit equity security and gain on equity security

reclass from trading category

the unrealized holding gain or loss at the date of transfer is already recognized in earnings and shall not be reversed

reclass to trading category

the unrealized holding gain or loss at the date of transfer shall be recognized in earnings immediately

measurement period adjustments

the values assigned to the assets and liabilities of a subsidiary are not always known with certainty on the acquisition date. when this is the case, the values recorded are provisional and may be adjusted during the measurement period. provisional FVs are used in the consolidated FS that are prepared before the end of the measurement period

available for sale securities

those not meeting the definitions of the other 2 classifications - reported as either current or noncurrent assets depending on intent of corporation

reclassification of debt securities

transfers between categories should occur only when justified - transfers from held to maturity category should be rare and only made when there is a change in the entity's intent to hold a specific security to maturity that does not call into question the entity's intent to hold other debt securities to maturity - transfers from trading category should be rare - any transfer of a particular security from one group to another group is accounted for at fair value. any unrealized holding gain or loss on that security is accounted for in certain ways

fair value of subsidiary

under acquisition method, FV of subsidiary is equal to the acquisition cost + NCI at FV on the acquisition date, the FV of the subsidiary must be compared with the respective assets and liabilities of the subsidiary. any difference between the FV of subsidiary and book value will require adjustment to: 1. BS: adjustment of assets and liabilities to FV 2. identifiable intangible assets: related to the acquisition of the subsidiary are recorded at FV 3. goodwill: recognized for any excess FV of subsidiary over the FV of the subsidiary's net assets. if FV of subsidiary is less than FV of subsidiary's net assets, a gain is recognized

impairment of debt securities

under current expected credit losses (CECL) model, available for sale debt securities and held to maturity debt securities should be reported at net amount expected to be collected using an allowance for expected credit losses - expected credit losses are determined based on current conditions, past experience, and future expectations - credit loss is recognized as a current period expense on the income statement and as an offsetting allowance on the BS

reclass from available for sale to held to maturity

unrealized holding gain or loss at date of transfer is already reported in other comprehensive income - unrealized holding gain or loss shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount

reclass from held to maturity to available for sale

unrealized holding gain or loss at date of transfer shall be reported in other comprehensive income - this debt security was valued at amortized cost as a held to maturity security and is being transferred to a category at FV

when to use the equity method

used to account for investments if significant influence can be exercised by the investor over the investee - consolidated statements should be presented when ownership is greater than 50% and there is control over the investee - a parent company that does not consolidate a subsidiary that is more than 50% owned must use the equity method when presenting the investment in that subsidiary in consolidated FS

acquisition with gain

when acquiring a subsidiary or corporation with a FV that is less than the FV of 100% of the underlying assets required, the following steps are required: 1. BS adjusted to FV: adjust assets and liabilities to FV even if the acquisition cost is less than the FV to be assigned. this will create a negative balance in the acquisition cost account 2. identifiable intangible assets to FV: allocate any remaining acquisition cost, if any, to the FV of any identifiable intangible assets acquired (even if remaining acquisition cost is less than the FV to be assigned). this will create or increase the negative balance in the acquisition cost account 3. gain: the negative balance in the acquisition cost account is recorded as a gain

acquisition with goodwill

when acquiring a subsidiary with a FV (acquisition price + FV of NCI) that is greater than the FV of 100% of the underlying assets acquired, the following steps are required: 1. BS adjusted to FV: allocate subsidiary assets and liabilities to FV 2. identifiable intangible assets to FV: allocate remaining acquisition cost to FV of any identifiable intangible assets acquired. **separate into 2 categories: finite life and indefinite life. finite life is amortized over remaining life and is subject to the 2 step impairment test. indefinite life is not amortized and is subject to the one step impairment test. 3. goodwill: allocate any remaining acquisition cost to goodwill (goodwill = FV subsidiary - FV subsidiary net assets) **goodwill generally not amortized. acquisition goodwill is subject to impairment testing. in the period it is determined to be impaired, it is written down and charged as an expense against income on the IS

eliminating intercompany transactions

when consolidating, 100% of intercompany transactions must be eliminated, even when the parent owns less than 100% of the subsidiary. - intercompany transactions must be eliminated because they lack the criteria of being arm's length

transition to equity method

when significant influence is acquired, it is necessary to record a change from the fair value method to the equity method by doing the following on the date the investment qualifies for the equity method: 1. add the cost of acquiring additional interest in the investee to the carrying value of the previously held investment 2. adopt the equity method as of that date and going forward. retroactive adjustments are not required