Chapter 03students.docx

1、Chapter 03studentsChapter 3ConsolidationsSubsequent to the Date of acquisitionI. Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition. In all combinations within its own internal records the acquiring company will utilize a specific metho

2、d to account for the investment in the acquired company.1. Three alternatives are availablea. Initial value method (formerly called the cost method prior to SFAS 141R)b. Equity methodc. Partial equity method2. Depending upon the method applied, the acquiring company will record earnings from its own

3、ership of the acquired company. This total must be eliminated on the consolidation worksheet and be replaced by the subsidiarys revenues and expenses.3. Under each of these three methods, the balance in the Investment account will also vary. It too must be removed in producing consolidated statement

4、s and be replaced by the subsidiarys assets and liabilities.II. For combinations being consolidated after the acquisition date, certain procedures are required. If the acquiring company has applied the equity method, the following process is appropriate.A. Assuming that the acquisition was made duri

5、ng the current fiscal period1. The parent adjusts its own Investment account to reflect the subsidiarys income and dividend payments as well as any amortization expense relating to excess acquisition-date fair value over book value allocations and goodwill.2. Worksheet entries are then used to estab

6、lish consolidated figures for reporting purposes.a. Entry S offsets the subsidiarys stockholders equity accounts against the book value component of the Investment account (as of the acquisition date).b. Entry A recognizes the excess fair over book value allocations made to specific subsidiary accou

7、nts and/or to goodwill.c. Entry I eliminates the investment income balance accrued by the parent. d. Entry D removes intercompany dividend paymentse. Entry E records the current excess amortization expenses on the excess fair over book value allocations. f. Entry P eliminates any intercompany payabl

8、e/receivable balances.B. Assuming that the acquisition was made during a previous fiscal period1. Most of the consolidation entries described above remain applicable regardless of the time that has elapsed since the combination was formed.2. The amount of the subsidiarys stockholders equity to be re

9、moved in Entry S will differ each period to reflect the balance as of the beginning of the current year3. The allocations established by entry A will also change in each subsequent consolidation. Only the unamortized balances remaining as of the beginning of the current period are recognized in this

10、 entry.III. For a combination where the parent has applied an accounting method other than the equity method, the consolidation procedures described above must be modified.A. If the initial value method is applied by the parent company, the intercompany dividends eliminated in Entry I will only cons

11、ist of the dividends transferred from the subsidiary. No separate Entry D is needed.B. If the partial equity method is in use, the intercompany income to be removed in Entry I is the equity accrual only; no amortization expense is included. Intercompany dividends are eliminated through Entry D.C. In

12、 any time period after the year of acquisition.1. The initial value method recognizes neither income in excess of dividend payments nor amortization expense. Thus, for all years prior to the current period, both of these figures must be entered directly into the consolidation. Entry*C is used for th

13、is purpose; it converts all prior amounts to equity method balances.2. The partial equity method does not recognize excess amortization expenses. Therefore, Entry*C converts the appropriate account balances to the equity method by recognizing the expense that relates to all of the past years.IV. Bar

14、gain purchasesA. As discussed in Chapter Two, bargain purchases occur when the parent company transfers consideration less than net fair values of the subsidiarys assets acquired and liabilities assumed.B. According to SFAS 141R, the parent recognizes an excess of net asset fair value over the consi

15、deration transferred as a “gain on bargain purchase.”V. Goodwill Impairment SFAS No. 142 A. When is goodwill impaired?1. Goodwill is considered impaired when the fair value of its related reporting unit falls below its carrying value. Goodwill should not be amortized, but should be tested for impair

16、ment at the reporting unit level (operating segment or lower identifiable level).2. Goodwill should be tested for impairment at least annually.3. Interim impairment testing may be necessary in the presence of negative indicators such as an adverse change in the business climate or market, legal fact

17、ors, regulatory action, an introduction of competition, or a loss of key personnel.B. How is goodwill tested for impairment?1. All acquired goodwill should be assigned to reporting units. It would not be unusual for the total amount of acquired goodwill to be divided among a number of reporting unit

18、s. Goodwill may be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit.2. Goodwill is tested for impairment using a two-step ap

19、proach.a. The first step simply compares the fair value of a reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired and no further analysis is necessary.b. The second step is a comparison of goodwill to its carr

20、ying amount. If the implied value of a reporting units goodwill is less than its carrying value, goodwill is considered impaired and a loss is recognized. The loss is equal to the amount by which goodwill exceeds its implied value. 3. The implied value of goodwill should be calculated in the same ma

21、nner that goodwill is calculated in a business combination. That is, an entity should allocate the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination an

22、d the fair value of the reporting unit was the value assigned at a subsidiarys acquisition date. The excess “acquisition-date” fair value over the amounts assigned to assets and liabilities is the implied value of goodwill. This allocation is performed only for purposes of testing goodwill for impai

23、rment and does not require entities to record the “step-up” in net assets or any unrecognized intangible assets.C. How is the impairment recognized in financial statements?A. The aggregate amount of goodwill impairment losses should be presented as a separate line item in the operating section of th

24、e income statement unless a goodwill impairment loss is associated with a discontinued operation.B. A goodwill impairment loss associated with a discontinued operation should be included (on a net-of-tax basis) within the results of discontinued operations.VI. Push-down accountingA. A subsidiary may

25、 record any acquisition-date fair value allocations directly onto its own financial records rather than through the use of a worksheet. Subsequent amortization expense on these allocations could also be recorded by the subsidiary.B. Push-down accounting reports the assets and liabilities of the subs

26、idiary at the amount the new owner paid. It also assists the new owner in evaluating the profitability that the subsidiary is adding to the business combination.C. Push-down accounting can also make the consolidation process easier since allocations and amortization need not be included as worksheet

27、 entries.VII. Contingent considerationA. Under SFAS 141R, the fair value of any contingent consideration is included as part of the consideration transferred. B. If the contingency is based on earnings or other financial performance measures, changes in the fair value of the contingency are recogniz

28、ed in income as they occur.C. If the contingency requires additional stock to be issued at a later date (or any other equity issues), the acquisition-date fair value of the contingency is not adjusted over time. Any subsequent shares issued as a consequence of the contingency are simply recorded at

29、the original acquisition-date fair value.Learning ObjectivesHaving completed Chapter Three, “ConsolidationsSubsequent to the Date of Acquisition,” students should be able to fulfill each of the following learning objectives:1. Identify and describe the three basic methods that an acquiring company c

30、an use in accounting for its investment in an acquired company.2. Discuss the advantages and disadvantages of each of the three accounting methods that an acquiring company can use in recording its investment.3. Determine consolidated balances at the end of the year in which a business combination o

31、ccurs if the parent uses either the initial value method, the equity method, or the partial equity method. 4. Determine consolidated balances for any period subsequent to the year in which a purchase combination is formed if the parent uses either the initial value method, the equity method, or the

32、partial equity method.5. Understand the necessity for consolidation purposes of converting parent company figures to the equity method when another method has been used during previous years.6. Understand the process of goodwill impairment and the techniques needed to calculate a goodwill impairment for a reporting unit of a business combination.7. Account for additional amounts paid by a parent company or additional shares of stock issued subsequent to the creation of a business combination.8. Explain the process of push-down accounting, identify it