Module 1: Ch 3 - Consolidated F/S After Acquisition Date

1. Whether the acquiring company qualifies as a "private company" according to the definitions in the FASB ASC Master Glossary, and 2. Whether the acquiring company elects to adopt the Goodwill amortization exception available to private companies.

The amortization of Goodwill depends on what 2 factors?

undistributed adj earnings of the subsidiary

The difference in N/I & Shareholders' Equity when cost vs equity method is used is equal to....

it is more likely than not that the FV of a reporting unit is less than its carrying amount.

The qualitative test for Goodwill impairment allows a lower-cost means to determine whether....

false (indefinite)

True/False: Goodwill assets are assumed to have infinite lives until impaired

false (beginning of year)

True/False: The [ADJ] entry causes the parent's Equity Investment account & R/E earnings account to = the end of year balance "as if" the equity method had been used

1. name and a description of the acquiree 2. acquisition date 3. % of voting equity interests acquired. 4. primary reasons for the business combo and a description of how the acquirer obtained control of the acquiree. 5. qualitative description of the factors that make up the Goodwill recognized 6. Acq-date FV of the total consideration transferred and the acquisition-date FV of each major class of consideration. 7. For contingent consideration arrangements and indemnification assets: amount @ acquisition, description, estimate of range, etc

What are the required disclosures? (7)

1. C - eliminate changes in Eq Inv during acct period 2. E - remove BOY bal of Eq Inv related to Sh Eq 3. A - remove BOY bal of Eq Inv related to AAP 4. D - recognize current period AAP dep/amort in I/S 5. I - eliminate intercompany transactions

What does each letter in CEADI stand for?

an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit

What is the FASB 2017 update that simplifies the Goodwill Impairment test? (what does it do?)

Debit: Operating Expenses (S) Credit: Asset Accounts

What is the J/E to record the [D] entry: *AAP depreciation*

C,E,A

What letters in CEADI refer to the steps that reduce the Eq Inv account balance to zero

Annually (same time of the year) and b/w annual evaluation dates if an event occurs or circumstances change that would more likely than not reduce the FV of a reporting unit below its carrying amount

When Should Goodwill Be Evaluated for Impairment?

No

When preparing the consolidated *Statement of Cash Flows,* should you sum the statements of CF of the individual companies in the consolidated group?

ROE

When the parent company uses the equity method to account for the investment, the _____ (ratio) will equal the parent's (pre-consolidation)

no (once impaired, GW asset is gone)

after writing down GW for impairment, if the value increases in future years, can we write up the value of goodwill to the new value?

goodwill

an asset representing future economic benefits arising from other assets acquired in a business combination and not identifiable or separately recognized

same as normal but the R/E is consolidated and the "dividends" to compute RE refers to the parent's dividend distributions

how is the consolidated balance sheet prepared (parent uses *equity method*)

Parent I/S + % of Sub's I/S - amortization of AAP

how is the consolidated income statement prepared (parent uses *equity method*) (formula)

6 years (economic life>legal life)

if a parent company acquires a Patent asset with a remaining 10-year legal life, but did not expect positive net cash flows from the Patent after six years, over how long of a period should the company amortize the patent?

debit: impairment loss credit: goodwill

if goodwill is found to be impaired, what [D] journal entry is required?

debit: equity income credit: equity investment

if goodwill is found to be impaired, what journal entry is recorded assuming that the equity method is used?

[A] Debit: Asset accounts Credit: Equity investment Credit: Bargain Purchase Gain

in what CEADI entry do we recognize a bargain purchase gain?

1. Is the FV of the reporting unit < carrying value? 2. Is the Goodwill component of the Equity Investment account impaired? (implied GW < carrying value)

The Goodwill impairment test has the following two steps:

bargain acquisition

A ______ is said to occur if the total FV of the investee company is < acquisition-date amounts of the identifiable A/L

similar to the way in which the amount of Goodwill recognized in a business combination is determined

According to ASC 350-20-35-42 through 35-43, how is the amount of Goodwill that is assigned to a reporting unit determined?

1. macroeconomic conditions 2. industry/market considerations 3. cost factors 4. overall financial performance 5. other relevant entity-specific events 6. sustained decrease in share price

According to FASB ASC 350-20-35-3C, in performing the qualitative assessment, companies should consider the totality of "relevant events and circumstances" that suggest it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of these factors include (6)

1. Information relating to each acquisition, including the name of the acquire, date of acquisition, percentage of voting equity interest acquired, and primary reasons for the acquisition 2. The amounts of revenue and earnings of the acquiree since the acquisition date are included in the consolidated I/S for the reporting period 3. The revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during that year had been as of the beginning of the annual reporting period (supplemental pro forma information). 4. If comparative financial statements are presented, the revenue and earnings of the combined entity for the comparable prior reporting period as though the acquisition date for all business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information)

According to appendix 3A, what are 4 required disclosures?

no - only when significant events occur

Are private companies that adopt the Goodwill amortization exception required to test annually for impairment?

NO (same regardless if cost or equity method used)

Do the consolidated financial statements look different based on what method of Eq Inv bookkeeping is used by the parent?

no

Do the consolidation entries affect the parent or subsidiary's accounting records?

reporting unit level

For public companies, is Goodwill tested at the reporting unit level or entire-company level?

1. asset will be employed in or the liability relates to the operations of a reporting unit, and 2. A or L will be considered in determining the FV of the reporting unit

For the purpose of testing Goodwill for impairment, acquired assets and assumed liabilities must be assigned to individual reporting units as of the acquisition date if ..... (2)

1. Does the parent company control the Goodwill asset? 2. Will the Goodwill asset provide future benefits? (annually reviewed)

Goodwill must meet the conceptual definition of an asset to be recognized on the balance sheet. That requires an affirmative answer to both of these questions:

prepare like normal using consolidated financial statements (DO NOT sum the statements of CF of the individual companies)

How is the consolidated *Statement of Cash Flows* prepared?

whether to test Goodwill for impairment at the entire-company level or at the "reporting unit" level

If a private company chooses to adopt the Goodwill amortization exception, then FASB ASC 350-20-35-65 requires the company to also make a policy election of....

no, company will be required to retroactively restate its F/S without the private-company exception included

If a private company elects to amortize goodwill and then attempts to transition to being a public business entity, does the company continue to amortize the Goodwill?

equity

If the parent company uses the ____ method, the consolidated NI and Shareholders Eq will equal the parent company's pre-consolidated

ADJ entry

In addition to the CEADI entries, the cost method also has.....

qualitative

Prior to 2012, all companies were required to perform the annual quantitative assessment that we describe below. Responding to negative feedback from companies about the cost of performing this annual quantitative assessment, in 2011 the FASB revised the requirements for annual Goodwill impairment testing to allow companies the annual option to assess ____ factors to determine whether it is necessary to perform the quantitative two-step Goodwill impairment test (described below).

NI/Sh Eq

ROE formula

1. backs out cumulative cost method activity that has been recorded in parents' R/E 2. inserts the cumulative R/E that would have been recorded with the equity method

the ADJ entry need when cost method is used essentially essentially does what 2 things?

10

the acquiring company is required to amortize the Goodwill on a straight-line basis over ____ years, or less if the entity demonstrates that another useful life is more appropriate.

impairment

the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value.

cost

under the ____ method, the Equity Investment always remains unchanged at its original acquisition date

1. Add back amortization/depreciation of the AAP 2. In acquisition year, the net cash paid for an acquisition is recorded in the Investing section 3. In acquisition year, the changes in Working Cap (current A/L) are computed based on amounts exclusing the effects of the acquisition

what are 3 peculiarities relating to the preparation of the consolidated *Statement of Cash Flows*?

The Equity Investment account and the parent company's R/E are changed to an "as-if-equity-method" basis

what is the ADJ entry for the cost method of bookkeeping?

Debit: dividend income (P) Credit: dividends (S)

what is the [C] journal entry when the cost method of booking is used?

Change in Subs R/E since acq - ∑ AAP amortization since acq

what is the shortcut method for computing the [ADJ] journal entry?

EADI

which of the CEADI entries are the exact same regardless of whether cost or equity method bookkeeping is used?

because companies complained that the 2-step impairment test was expensive

why did the FASB implement a qualitative assessment for Testing Goodwill impairment?

because with the equity method, the parent recognizes its share of the subsidiary's income and AAP depreciation through the "equity investment" account

why does the consolidated NI and Shareholders Eq equal the parent company's pre-consolidated when the Equity method is used?