Concepts of Consolid. Statements - 1 Parent Subsidiary Consolidated financial statements are...
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Transcript of Concepts of Consolid. Statements - 1 Parent Subsidiary Consolidated financial statements are...
Concepts of Consolid. Statements - 1
Parent Subsidiary
Consolidated financial statements
are prepared.
Concepts of Consolidated Financial Statements
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Concepts of Consolid. Statements - 2
CONSOLIDATEDFINANCIAL STATEMENTS
“Economic Substance Over Legal Form”
Conditions for consolidation– Majority control
• Parent company owns more than 50% of voting stock• Intent is long-term control• ALL majority owned subsidiaries MUST be
consolidated (SFAS No. 94 - October 1987)
– Effective control by majority shareholders• Not in bankruptcy or reorganization• Not in restricted foreign environment
Concepts of Consolid. Statements - 3
CONSOLIDATED STATEMENTSGeneral Concepts
Same GAAP as separate statements
Only external transactions
Specific consolidation mechanics depend on Parent’s accounting for investment in subsidiary
Concepts of Consolid. Statements - 4
CONSOLIDATED STATEMENTSOther Issues
Classification of “noncontrolling” (minority) interest
Elimination of intercompany items– Receivables and payables– Profits on intercompany sales
Mechanics of consolidation
Concepts of Consolid. Statements - 5
LIMITATIONS OFCONSOLIDATED STATEMENTS
Limited relevance for certain users– Minority stockholders– Separate creditors– Regulatory authorities (related to
subsidiary)
Consolidation of highly diversified companies
Difficult financial analysis
Concepts of Consolid. Statements - 6
Consolidation - The Effects of the Passage of Time
The parent can account for its
investment in one of three ways:
Equity Method Cost Method Partial Equity
The parent can account for its
investment in one of three ways:
Equity Method Cost Method Partial Equity
Let’s briefly compare the
three methods
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Concepts of Consolid. Statements - 9
Before the consolidation balances can be determined, the Parent’s investment
account must be adjusted to reflect
application of the Equity method.Record the Investment in Sub on the
acquisition date.Recognize the receipt of dividends
from the sub.Recognize a share of the sub’s
income (loss).FMV adjustments and other
intangible assets.
Record the Investment in Sub on the acquisition date.
Recognize the receipt of dividends from the sub.
Recognize a share of the sub’s income (loss).
FMV adjustments and other intangible assets.
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Concepts of Consolid. Statements - 10
CONSOLIDATION MECHANICS
Consolidation workpapers– No “set of books” for consolidated entity– Each party maintains their own books
Eliminating entries– Necessary to eliminate “intercompany
items”– Appear only on consolidation workpapers
Concepts of Consolid. Statements - 11
CONSOLIDATION MECHANICS
OtherAssets(BOOK)
Invest.In S
(ELIMIN)
Liab.(BOOK)
Stk.Equity
OtherAssets(FMV)
Liab.(FMV)
Stk.Equity(ELIMIN)
Parent Co. Subsidiary Co. Consolidated Entity
OtherAssets
Liab.
Stk.Equity
+
+
=
=
Consolid – Other. Issues - 12
INVESTMENT ELIMINATION
Investment account (Parent’s books) vs. Stockholders’ equity (Subsidiary’s books)
Treatment of the differential– Cost of the investment– FMV of subsidiary’s net assets– Book value of subsidiary’s net assets
Consolid – Other. Issues - 13
INVESTMENT ELIMINATIONContinued
Positive differential (Cost vs. Book value)– Errors or omissions on subsidiary’s books– Excess of FMV over book value of subsidiary’s
net assets– Existence of goodwill
Negative differential (Cost vs. Book value)– Errors or omissions on subsidiary’s books– Excess of book value over FMV of subsidiary’s
net assets– Bargain purchase or “negative goodwill”
Consolid – Other. Issues - 14
INVESTMENT ELIMINATIONContinued
Treatment of noncontrolling interest Cost vs. Equity methods on Parent’s books Intercompany receivables and payables Valuation accounts at acquisition
– Accumulated depreciation– Allowance for change in FMV of investment
securities– Allowance for uncollectible accounts– Discount or premium on bonds payable
Negative Retained earnings of subsidiary at acquisition Other stockholders’ equity accounts
– Accounts accruing to common stock
Concepts of Consolid. Statements - 15
Subsequent Consolidation - Worksheet Entries
5 basic entries are posted to the worksheet.The Sub’s equity accounts are eliminated.Other intangible assets are recorded and
the Sub’s assets are adjusted to FV. The Equity in Sub Income account is
eliminated.The Sub’s dividends are eliminated.Amortization Expense is recorded for the
FMV adjustments and other intangible assets associated with the consolidated entity.
5 basic entries are posted to the worksheet.The Sub’s equity accounts are eliminated.Other intangible assets are recorded and
the Sub’s assets are adjusted to FV. The Equity in Sub Income account is
eliminated.The Sub’s dividends are eliminated.Amortization Expense is recorded for the
FMV adjustments and other intangible assets associated with the consolidated entity.
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Consolid – Other. Issues - 16
ELIMINATING ENTRIESFirst Subsequent Period
(Equity Method)
Impact of current equity method entries– Ignore any impairment of goodwill
Assignment of income to noncontrolling interest
Investment account – Stockholders’ equity of subsidiary– Including identification of noncontrolling interest– Identification of differential– Allocation of differential– Depreciation/amortization of appropriate differentials– Impairment of goodwill
Consolid – Other. Issues - 17
ELIMINATING ENTRIESFurther Subsequent Period
(Equity Method) Impact of current equity method entries
– Ignore impairment of goodwill
Assignment of income to noncontrolling interest
Investment account – Stockholders’ equity of subsidiary– Retained earnings of subsidiary at BEGINNING of current
year– Including identification of noncontrolling interest– Identification of REMAINING differential– Allocation of REMAINING differential
• Including appropriate valuation accounts– Depreciation/amortization of appropriate differentials– Impairment of goodwill
Concepts of Consolid. Statements - 18
Applying the Cost Method
If the COST METHOD is used by the parent If the COST METHOD is used by the parent company to account for the investment, then the company to account for the investment, then the consolidation entries will change only slightly.consolidation entries will change only slightly.
If the COST METHOD is used by the parent If the COST METHOD is used by the parent company to account for the investment, then the company to account for the investment, then the consolidation entries will change only slightly.consolidation entries will change only slightly.
Remember . . . Remember . . .
1. No adjustments are recorded in the Investment account for current year operations, dividends paid by the subsidiary, or amortization of purchase price allocations.
2. Dividends received from the subsidiary are recorded as Dividend Revenue.
1. No adjustments are recorded in the Investment account for current year operations, dividends paid by the subsidiary, or amortization of purchase price allocations.
2. Dividends received from the subsidiary are recorded as Dividend Revenue.
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Concepts of Consolid. Statements - 19
Consolidation EntriesCost Method
Adjust Investment in Sub to equity method as of the beginning of the period
This would be necessary for periods after the year of the Investment in the Sub.
This entry is NOT REQUIRED under the Equity Method
Adjust Investment in Sub to equity method as of the beginning of the period
This would be necessary for periods after the year of the Investment in the Sub.
This entry is NOT REQUIRED under the Equity Method
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Concepts of Consolid. Statements - 20
Consolidation EntriesCost Method
Eliminate the sub’s equity balances as of the beginning of the period.
This entry is the same under both the Equity Method and the Cost Method.
Eliminate the sub’s equity balances as of the beginning of the period.
This entry is the same under both the Equity Method and the Cost Method.
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Concepts of Consolid. Statements - 21
Consolidation EntriesCost MethodAdjust sub’s assets and liabilities to FV.
Set up the Goodwill account and the other intangible assets. This is part of the
elimination of the Investment in Subsidiary account.
This entry is the same under both the Equity Method and the Cost Method.
Adjust sub’s assets and liabilities to FV.Set up the Goodwill account and the other
intangible assets. This is part of the elimination of the Investment in Subsidiary
account.This entry is the same under both the Equity Method and
the Cost Method.
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Concepts of Consolid. Statements - 22
Consolidation EntriesCost Method
This entry is different under the Cost Method.Eliminate the Parent’s Dividend Income
account.Also, eliminate the Sub’s Dividends Paid
account.
This entry is different under the Cost Method.Eliminate the Parent’s Dividend Income
account.Also, eliminate the Sub’s Dividends Paid
account.
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Concepts of Consolid. Statements - 23
SFAS No. 142 - Goodwill and Other Intangible Assets
For fiscal periods beginning AFTER
December 15, 2001, goodwill is no longer
amortized.
For fiscal periods beginning AFTER
December 15, 2001, goodwill is no longer
amortized.
The “nonamortization” rule is applied to both previously recognized
and newly acquired goodwill.
The “nonamortization” rule is applied to both previously recognized
and newly acquired goodwill.
Any unamortized goodwill arising
from pre-SFAS 142 combinations is
carried on the books as a
permanent asset (subject to
impairment).
Any unamortized goodwill arising
from pre-SFAS 142 combinations is
carried on the books as a
permanent asset (subject to
impairment).
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Concepts of Consolid. Statements - 24
SFAS No. 142 - Goodwill and Other Intangible Assets
Generally, once goodwill has been recorded, the value will remain unchanged.
Generally, once goodwill has been recorded, the value will remain unchanged.
Sale of a ll or part of therelated subsidiary.
Any im pairm ent in the valueof goodw ill should be reported
as an extraordinary item .
A determ ination that goodw illhas experienced a perm anent
im pairm ent of value.
T w o circum stances exist thatw ill result in adjusting the am ount
of goodw ill on the consolidated balance sheet.
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Concepts of Consolid. Statements - 25
Goodwill Impairment Test
Step 1– Compare fair value of
REPORTING UNIT to carrying value of the REPORTING UNIT
Step 2– Compare fair value of
GOODWILL to carrying value of GOODWILL
(SEE HANDOUT)
Step 1– Compare fair value of
REPORTING UNIT to carrying value of the REPORTING UNIT
Step 2– Compare fair value of
GOODWILL to carrying value of GOODWILL
(SEE HANDOUT)
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