Chapter 03students.docx

Chapter 03students.docx

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Chapter03students

Chapter3

Consolidations—Subsequentto

theDateofacquisition

I.Severalfactorsservetocomplicatetheconsolidationprocesswhenitoccurssubsequenttothedateofacquisition.Inallcombinationswithinitsowninternalrecordstheacquiringcompanywillutilizeaspecificmethodtoaccountfortheinvestmentintheacquiredcompany.

1.Threealternativesareavailable

a.Initialvaluemethod（formerlycalledthecostmethodpriortoSFAS141R）

b.Equitymethod

c.Partialequitymethod

2.Dependinguponthemethodapplied,theacquiringcompanywillrecordearningsfromitsownershipoftheacquiredcompany.Thistotalmustbeeliminatedontheconsolidationworksheetandbereplacedbythesubsidiary’srevenuesandexpenses.

3.Undereachofthesethreemethods,thebalanceintheInvestmentaccountwillalsovary.Ittoomustberemovedinproducingconsolidatedstatementsandbereplacedbythesubsidiary’sassetsandliabilities.

II.Forcombinationsbeingconsolidatedaftertheacquisitiondate,certainproceduresarerequired.Iftheacquiringcompanyhasappliedtheequitymethod,thefollowingprocessisappropriate.

A.Assumingthattheacquisitionwasmadeduringthecurrentfiscalperiod

1.TheparentadjustsitsownInvestmentaccounttoreflectthesubsidiary’sincomeanddividendpaymentsaswellasanyamortizationexpenserelatingtoexcessacquisition-datefairvalueoverbookvalueallocationsandgoodwill.

2.Worksheetentriesarethenusedtoestablishconsolidatedfiguresforreportingpurposes.

a.EntrySoffsetsthesubsidiary’sstockholders’equityaccountsagainstthebookvaluecomponentoftheInvestmentaccount（asoftheacquisitiondate）.

b.EntryArecognizestheexcessfairoverbookvalueallocationsmadetospecificsubsidiaryaccountsand/ortogoodwill.

c.EntryIeliminatestheinvestmentincomebalanceaccruedbytheparent.

d.EntryDremovesintercompanydividendpayments

e.EntryErecordsthecurrentexcessamortizationexpensesontheexcessfairoverbookvalueallocations.

f.EntryPeliminatesanyintercompanypayable/receivablebalances.

B.Assumingthattheacquisitionwasmadeduringapreviousfiscalperiod

1.Mostoftheconsolidationentriesdescribedaboveremainapplicableregardlessofthetimethathaselapsedsincethecombinationwasformed.

2.Theamountofthesubsidiary’sstockholders’equitytoberemovedinEntrySwilldiffereachperiodtoreflectthebalanceasofthebeginningofthecurrentyear

3.TheallocationsestablishedbyentryAwillalsochangeineachsubsequentconsolidation.Onlytheunamortizedbalancesremainingasofthebeginningofthecurrentperiodarerecognizedinthisentry.

III.Foracombinationwheretheparenthasappliedanaccountingmethodotherthantheequitymethod,theconsolidationproceduresdescribedabovemustbemodified.

A.Iftheinitialvaluemethodisappliedbytheparentcompany,theintercompanydividendseliminatedinEntryIwillonlyconsistofthedividendstransferredfromthesubsidiary.NoseparateEntryDisneeded.

B.Ifthepartialequitymethodisinuse,theintercompanyincometoberemovedinEntryIistheequityaccrualonly;noamortizationexpenseisincluded.IntercompanydividendsareeliminatedthroughEntryD.

C.Inanytimeperiodaftertheyearofacquisition.

1.Theinitialvaluemethodrecognizesneitherincomeinexcessofdividendpaymentsnoramortizationexpense.Thus,forallyearspriortothecurrentperiod,bothofthesefiguresmustbeentereddirectlyintotheconsolidation.Entry*Cisusedforthispurpose;itconvertsallprioramountstoequitymethodbalances.

2.Thepartialequitymethoddoesnotrecognizeexcessamortizationexpenses.Therefore,Entry*Cconvertstheappropriateaccountbalancestotheequitymethodbyrecognizingtheexpensethatrelatestoallofthepastyears.

IV.Bargainpurchases

A.AsdiscussedinChapterTwo,bargainpurchasesoccurwhentheparentcompanytransfersconsiderationlessthannetfairvaluesofthesubsidiary’sassetsacquiredandliabilitiesassumed.

B.AccordingtoSFAS141R,theparentrecognizesanexcessofnetassetfairvalueovertheconsiderationtransferredasa“gainonbargainpurchase.”

V.GoodwillImpairment–SFASNo.142

A.Whenisgoodwillimpaired?

1.Goodwillisconsideredimpairedwhenthefairvalueofitsrelatedreportingunitfallsbelowitscarryingvalue.Goodwillshouldnotbeamortized,butshouldbetestedforimpairmentatthereportingunitlevel（operatingsegmentorloweridentifiablelevel）.

2.Goodwillshouldbetestedforimpairmentatleastannually.

3.Interimimpairmenttestingmaybenecessaryinthepresenceofnegativeindicatorssuchasanadversechangeinthebusinessclimateormarket,legalfactors,regulatoryaction,anintroductionofcompetition,oralossofkeypersonnel.

B.Howisgoodwilltestedforimpairment?

1.Allacquiredgoodwillshouldbeassignedtoreportingunits.Itwouldnotbeunusualforthetotalamountofacquiredgoodwilltobedividedamonganumberofreportingunits.Goodwillmaybeassignedtoreportingunitsoftheacquiringentitythatareexpectedtobenefitfromthesynergiesofthecombinationeventhoughotherassetsorliabilitiesoftheacquiredentitymaynotbeassignedtothatreportingunit.

2.Goodwillistestedforimpairmentusingatwo-stepapproach.

a.Thefirststepsimplycomparesthefairvalueofareportingunittoitscarryingamount.Ifthefairvalueofthereportingunitexceedsitscarryingamount,goodwillisnotconsideredimpairedandnofurtheranalysisisnecessary.

b.Thesecondstepisacomparisonofgoodwilltoitscarryingamount.Iftheimpliedvalueofareportingunit’sgoodwillislessthanitscarryingvalue,goodwillisconsideredimpairedandalossisrecognized.Thelossisequaltotheamountbywhichgoodwillexceedsitsimpliedvalue.

3.Theimpliedvalueofgoodwillshouldbecalculatedinthesamemannerthatgoodwilliscalculatedinabusinesscombination.Thatis,anentityshouldallocatethefairvalueofthereportingunittoalloftheassetsandliabilitiesofthatunit（includinganyunrecognizedintangibleassets）asifthereportingunithadbeenacquiredinabusinesscombinationandthefairvalueofthereportingunitwasthevalueassignedatasubsidiary’sacquisitiondate.Theexcess“acquisition-date”fairvalueovertheamountsassignedtoassetsandliabilitiesistheimpliedvalueofgoodwill.Thisallocationisperformedonlyforpurposesoftestinggoodwillforimpairmentanddoesnotrequireentitiestorecordthe“step-up”innetassetsoranyunrecognizedintangibleassets.

C.Howistheimpairmentrecognizedinfinancialstatements?

A.Theaggregateamountofgoodwillimpairmentlossesshouldbepresentedasaseparatelineitemintheoperatingsectionoftheincomestatementunlessagoodwillimpairmentlossisassociatedwithadiscontinuedoperation.

B.Agoodwillimpairmentlossassociatedwithadiscontinuedoperationshouldbeincluded（onanet-of-taxbasis）withintheresultsofdiscontinuedoperations.

VI.Push-downaccounting

A.Asubsidiarymayrecordanyacquisition-datefairvalueallocationsdirectlyontoitsownfinancialrecordsratherthanthroughtheuseofaworksheet.Subsequentamortizationexpenseontheseallocationscouldalsoberecordedbythesubsidiary.

B.Push-downaccountingreportstheassetsandliabilitiesofthesubsidiaryattheamountthenewownerpaid.Italsoassiststhenewownerinevaluatingtheprofitabilitythatthesubsidiaryisaddingtothebusinesscombination.

C.Push-downaccountingcanalsomaketheconsolidationprocesseasiersinceallocationsandamortizationneednotbeincludedasworksheetentries.

VII.Contingentconsideration

A.UnderSFAS141R,thefairvalueofanycontingentconsiderationisincludedaspartoftheconsiderationtransferred.

B.Ifthecontingencyisbasedonearningsorotherfinancialperformancemeasures,changesinthefairvalueofthecontingencyarerecognizedinincomeastheyoccur.

C.Ifthecontingencyrequiresadditionalstocktobeissuedatalaterdate（oranyotherequityissues）,theacquisition-datefairvalueofthecontingencyisnotadjustedovertime.Anysubsequentsharesissuedasaconsequenceofthecontingencyaresimplyrecordedattheoriginalacquisition-datefairvalue.

LearningObjectives

HavingcompletedChapterThree,“Consolidations—SubsequenttotheDateofAcquisition,”studentsshouldbeabletofulfilleachofthefollowinglearningobjectives:

1.Identifyanddescribethethreebasicmethodsthatanacquiringcompanycanuseinaccountingforitsinvestmentinanacquiredcompany.

2.Discusstheadvantagesanddisadvantagesofeachofthethreeaccountingmethodsthatanacquiringcompanycanuseinrecordingitsinvestment.

3.Determineconsolidatedbalancesattheendoftheyearinwhichabusinesscombinationoccursiftheparentuseseithertheinitialvaluemethod,theequitymethod,orthepartialequitymethod.

4.Determineconsolidatedbalancesforanyperiodsubsequenttotheyearinwhichapurchasecombinationisformediftheparentuseseithertheinitialvaluemethod,theequitymethod,orthepartialequitymethod.

5.Understandthenecessityforconsolidationpurposesofconvertingparentcompanyfigurestotheequitymethodwhenanothermethodhasbeenusedduringpreviousyears.

6.Understandtheprocessofgoodwillimpairmentandthetechniquesneededtocalculateagoodwillimpairmentforareportingunitofabusinesscombination.

7.Accountforadditionalamountspaidbyaparentcompanyoradditionalsharesofstockissuedsubsequenttothecreationofabusinesscombination.

8.Explaintheprocessofpush-downaccounting,identifyit