Kế toán, kiểm toán - Chapter three: Consolidations – Subsequent to the date of acquisition

Chapter ThreeConsolidations – Subsequent to the Date of AcquisitionCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 3-1Recognize the complexities inpreparing consolidated financialreports that emerge fromthe passage of time.3-2Consolidation – The Effects of the Passage of TimeThe passage of time creates complexities for internal record keeping and the balance of the investment account varies due to the accounting method used.A worksheet and consolidation entries are used to eliminate the investment account and record the subsidiary’s assets and liabilities to create a single set of financial statements for the combined business entity.3-3Learning Objective 3-2Identify and describe the various methods available to a parent company in order tomaintain its investment in subsidiaryaccount in its internal records.3-4Investment Accounting by Acquiring Company The acquiring company selects one of these three methods have emerged as the most prominent to account for its investment:3-5Equity MethodInitial Value MethodPartial Equity MethodFor each subsidiary owned, an asset, the investment account, and an income account are created to record the earnings on the investment. Investment Accounting by Acquiring CompanyWhat is the advantage of each?Equity Method: The acquiring company totals give a true representation of consolidation figures.Initial Value (or “Cost”) Method: It is easy to apply and gives a good measurement of cash flows generated by the investment.Partial Equity Method: Usually gives balances approximating consolidation figures, but is easier to apply than equity method 3-6Investment Accounting by Acquiring CompanyComparison of internal reporting of investment methods.3-7MethodInvestmentIncome AccountEquityContinually adjusted to reflect ownership of acquired company.Income accrued as earned; amortization and other adjustments are recognized.Initial ValueRemains at Initially-Recorded costDividends declared recorded as Dividend IncomePartial EquityAdjusted only for accrued income and dividends declared by acquired company.Income accrued as earned; no other adjustments recognized.Learning Objective 3-3Prepare consolidated financial statements subsequent to acquisition when the parent has applied in its internal records: a. the equity method. b. the initial value method. c. the partial equity method.3-8During the year, the parent will adjust its investment account for the Subsidiary under application of the equity method. The original investment, recorded at the date of acquisition, is adjusted for:Subsequent Consolidation – Equity MethodFMV adjustments and other intangible assets,The parent’s share of the sub’s income (loss), The receipt of dividends from the sub.3-9LO 3 -3aParrot Company obtains all of the outstanding common stock of Sun Company on January 1, 2014. Parrot acquires this stock for $800,000 in cash. Sun Company’s balances are shown below.Subsequent Consolidation - Equity Method Example3-10 Book Values Fair Values 1/1/14 1/1/14 DifferenceCurrent assets . . . . . . . . . . . . . . . . . . $320,000 $ 320,000 –0–Trademarks (indefinite life) . . . . . . . . 200,000 220,000 20,000Patented technology (10-year life) . . . 320,000 450,000 130,000Equipment (5-year life) . . . . . . . . . . . 180,000 150,000 (30,000)Liabilities . . . . . . . . . . . . . . . . . . . . . . .(420,000) (420,000) –0–Net book value . . . . . . . . . . . . . . . . . . $600,000 $ 720,000 $120,000Common stock—$40 par value . . . .$(200,000)Additional paid-in capital . . . . . . . . . . (20,000)Retained earnings, 1/1/14 . . . . . . . . . .(380,000)Subsequent Consolidation - Equity Method Example3-11FV of consideration transferred by Parrot Company. $ 800,000Net Book Value of Sun Company. . . . . . . . . . . . . . . . . . .(600,000) Excess of fair value over book value . . . . . . . . . . 200,000Allocation to specific accounts based on fair values:Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 20,000Patented technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000Equipment (overvalued) . . . . . . . . . . . . . . . . . . . . . . . . . (30,000) 120,000Excess FV not specifically identified—goodwill. . . . . . $ 80,000PARROT COMPANY100 Percent Acquisition of Sun CompanyAllocation of Acquisition-Date Subsidiary Fair ValueJanuary 1, 2014Subsequent Consolidation - Equity Method Example3-12Amortization computation: Useful Annual Account Allocation Life AmortizationTrademarks $ 20,000 Indefinite –0–Patented technology 130,000 10 years $13,000Equipment (30,000) 5 years (6,000)Goodwill 80,000 Indefinite –0– $ 7,000Amortization will be $7,000 annually for five years until the equipment fair value reduction is fully removed. Subsequent Consolidation - Equity Method Example3-13Assume Sun Company earns income of $100,000 in 2014 and pays a $40,0000 cash dividend on August 1, 2014.Subsequent Consolidation - Worksheet EntriesS) Eliminates the subsidiary’s Stockholders’ equity account beginning balances and the book value component within the parent’s investment account.Recognizes the unamortized Allocations as of the beginning of the current year associated with the adjustments to fair value. I) Eliminates the subsidiary Income accrued by the parent. D) Eliminates the subsidiary Dividends.E) Recognizes excess amortization Expenses for the current period on the allocations from the original adjustments to fair value.3-14For the first year, the parent prepares five entries on the workpapers to consolidate the two companies. Subsequent Consolidation Equity Method Example Entry SNote: If this is the first year of the investment, and the investment was made at a time other than the beginning of the fiscal year, then pre-acquisition income of the sub must be accounted for in the retained earnings balance. 3-15Subsequent Consolidation Equity Method Example Entry ANote: In the first year, FV adjustments are calculated in the allocation computation. In subsequent years, FV adjustments must be reduced by any depreciation taken in prior consolidations.3-16Subsequent Consolidation Equity Method Example Entries I & DNote: Entry I removes Sun’s income recognized by Parrot during the year so Sun’s revenue and expense accounts (and current amortization expense) can be brought into the consolidated totals.Note: Entry D removes the intra-entity transfer of cash for the dividends distributed to Parrot from Sun. 3-17Subsequent Consolidation Equity Method Example Entry E3-18Note that depreciation expense is reduced for the tangible asset equipment (fair value was less than book value). Patented Technology amortization expense was recognized for the year.Applying the Initial Value Method3-19The parent company can use the initial value method or the partial equity method for internal record-keeping. Application of either alternative changes the balances recorded by the parent over time and the consolidation process, but neither of these approaches affect any of the final consolidated balances reported. Just three parent’s accounts vary because of the method applied:• Investment account.• Income recognized from the subsidiary.• Parent’s retained earnings (periods after year of combination).LO 3-3bApplying the Initial Value Method3-20If the Initial Value Method is used by the parent to account for the investment in the first year, the consolidation entries will change slightly.The parent will record the sub’s activity differently under this method, so the accounts will differ from the Equity Method. No adjustments are recorded in the Investment account for current year income, dividends paid by the subsidiary, or amortization of purchase price allocations.Dividends received from the subsidiary are recorded as Dividend Revenue.Consolidation Entries - Initial Value MethodTwo entries for the initial value method are different than those for the equity method.Entry S is the same as the Equity Method. Entry A is the same as the Equity Method. Entry I is different using Initial Value Method: It eliminates the Parent’s Dividend Income account and the Sub’s Dividends Paid account. There is no Entry D.Entry E is the same as the Equity Method.3-21Consolidation Entries – Partial Equity MethodThe same two entries differ for the Partial Equity Method . Entry S is the same as the Equity Method. Entry A is the same as the Equity Method. Entry I is different using Partial Equity Method: It eliminates the Parent’s equity in the sub’s income and reduces the investment account. Entry D eliminates the dividend income account.Entry E is the same as the Equity Method. 3-22LO 3-3cConsolidation Entries – Other than Equity MethodEntries S, A, and E are the same for all three methods. The parent’s record-keeping is limited to two periodic journal entries: annual accrual of subsidiary income and receipt of dividends. So, the Investment and Income account balances differ for the other methods, and so will the worksheet Entries I and D.3-23Remember . . .Consolidation Entries – Subsequent YearsNeither the Initial Value or Partial Equity Method provides a full-accrual-based measure of the subsidiary activities on the parent’s income. The initial value method uses the cash basis for income recognition. The partial equity method only partially accrues subsidiary income.A new worksheet adjustment is needed to convert the parent’s beginning of the year retained earnings balance to a full-accrual basis. 3-24Consolidation Entries – Subsequent YearsFor consolidation purposes, the beginning retained earnings account must be increased (Initial Value Method) or decreased (Partial Equity Method) to create the same effect as the equity method.Entry *C. The C refers to the Conversion being made to equity method (full accrual) totals. The asterisk indicates that this entry relates solely to transactions of prior periods. Entry *C should be recorded before other worksheet entries to align the beginning balances for the year.3-25Other Consolidation Entries In addition to the Entries S, A, I, D, E, and *C, intercompany debt (payables and/or receivables) must be eliminated in entry P.No matter which method the Parent chooses to record the Sub’s activity, the consolidated totals are always the same! This is because all the entries that were made during the year are eliminated regardless of the method used or the amount!3-26Consolidated Totals Subsequent to Acquisition3-27Learning Objective 3-4Understand that a parent’s internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.3-28Investment Accounting by Acquiring Company A parent’s choice of internal accounting method for subsidiary investments has no effect on the resulting consolidated financial statements. The selection of a particular method does not affect the totals ultimately reported for the combined companies.The internal accounting method used does require distinct procedures for consolidation of the financial information from the separate organizations.3-29Learning Objective 3-53-30Discuss the rationale for the goodwill impairment testing approach.Goodwill and Other Intangible Assets (ASC Topic 350)3-31FASB ASC Topic 350, “Intangibles-Goodwill and Other,” provides accounting standards for reporting income statement effects of impairment of intangibles acquired in a business combination. In accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization. Learning Objective 3-63-32Describe the procedures for conducting a goodwill impairment test.Goodwill and Other Intangible Assets (ASC Topic 350)3-33Once goodwill has been recorded, the value will remain unchanged until:All or part of the related subsidiary is sold, There has been a permanent decline in value in which case we test for impairment and record an impairment loss if the item is impaired.ORGoodwill Impairment –Two-Step TestStep 1Fair value (with allocated goodwill) is compared to the carrying value (including goodwill) of the consolidated entity’s reporting unit. Does fair value of the reporting unit exceed carrying value?3-34Goodwill is NOT impaired. No further testing is required.A second step must be taken to test for impairment. NOYESDetermination of Implied Fair Value of GoodwillAllocate the fair value of the reporting unit to all its identifiable assets and liabilities.Subtract the fair value of the net assets from the fair value of the reporting unit. The excess is “implied goodwill”.Compare the resulting “implied goodwill” to the “recorded goodwill” on the books.The implied value of goodwill is calculated similar to the initial determination of goodwill in a business combination.3-353-36StopGoodwill Impairment—Qualitative Assessment: Goodwill Impairment Test - Step OneGoodwill Impairment –Two-Step TestImplied value of the related goodwill can be determined using quoted market prices, similar businesses, or present value of future cash flows.Step 2Is “implied goodwill” less than “recorded goodwill”?3-37An impairment loss is recorded for the excess carrying value over implied fair value.Goodwill is NOT impaired. No further testing is required.NOYES3-38StopGoodwill Impairment—Qualitative Assessment: Goodwill Impairment Test -Step TwoGoodwill Impairment Test Example3-39 Newcall’s Acquisition Fair ValueReporting Units Goodwill January 1, 2015DSM Wired $ 22,000,000 $950,000,000DSM Wireless 155,000,000 748,000,000Vision Talk 38,000,000 502,000,000Newcall tests for goodwill impairment of DSM Wireless. The implied fair value of goodwill is compared to its carrying value using the following allocation of the fair value of DSM Wireless at year endGoodwill Impairment Test Example3-40DSM Wireless Dec. 31, 2015, fair value $600,000,000Fair values of DSM Wireless net assets at Dec. 31, 2015: Current asset $ 50,000,000 Property 125,000,000 Equipment 265,000,000 Subscriber list 140,000,000 Patented technology 185,000,000 Current liabilities (44,000,000) Long-term debt (125,000,000)Value assigned to identifiable net assets 596,000,000Value assigned to goodwill 4,000,000Carrying value before impairment 155,000,000Impairment loss $151,000,000Goodwill Impairment Test Example3-41Goodwill is now valued at $4,000,000. Newcall reports a $151,000,000 separate line item goodwill impairment loss in the operating section of its consolidated income statement.Additional disclosures required: (1) the facts and circumstances leading to the impairment(2) the method used to determine fair value of the associated reporting unit.The reported values for all of DSM Wireless’ remaining assets and liabilities do not change.The ASC requires special application of testing procedures if a reporting unit has a zero or negative carrying amount.In that case, the ASC permits an entity to forego step 2 of impairment test unless it is more likely than not that goodwill is impaired.The entity must consider the same factors as in the qualitative assessment for individual reporting units.3-42Zero or Negative Carrying AmountsComparison of U.S. GAAP and International Accounting StandardsUnder US GAAP: Goodwill is allocated to reporting units, usually operating segments, expected to benefit from it.A two-step process is used to test for impairment.If the carrying amount of goodwill is more than its implied value, an impairment loss is recognized.IFRS Under IAS 36: Goodwill is allocated to cash-generating units – at a level much lower than an operating segment.A one-step process is used to test for impairment.Goodwill is reduced for any excess carrying value, down to zero, and then other assets are reduced pro-rata.3-43Other Intangibles3-44All identified intangible assets with finite lives should be amortized over their economic useful life that reflects the pattern of decline in the economic usefulness of the asset.Factors that should be considered in determining the useful life of an intangible asset include• Legal, regulatory, or contractual provisions.• The effects of obsolescence, demand, competition, industry stability, rate of technological change, and expected changes in distribution channels.Other Intangibles3-45Intangible assets with indefinite lives (extends beyond the foreseeable future) are tested for impairment on an annual basis. An entity has the option to first perform qualitative assessments to determine whether “it is more likely than not” the asset is impaired. If so, a quantitative test must be performed. The asset’s carrying value is compared to its fair value. If fair value is less than carrying value, the intangible asset is considered impaired and an impairment loss is recognized. The asset’s carrying value is reduced accordingly. Learning Objective 3-73-46Understand the accounting and reporting for contingent consideration subsequent to a business acquisition.Contingent Consideration in Business CombinationsIf part of the consideration to be transferred in an acquisition is contingent on a future event:The acquiring firm estimates the fair value of a cash contingency and records a liability equal to the present value of the future payment. The liability will continue to be measured at fair value with adjustments recognized in income.Contingent stock payments are reported as a component of stockholders’ equity, and are not remeasured at fair value.3-47Learning Objective 3-83-48Understand in general the requirements of push-down accounting and when its useis appropriate.Push Down Accounting3-49Push-down accounting permits acquired subsidiary to record fair value allocations and subsequent amortization in its accounting records. SEC requires push-down accounting for separate subsidiary statements if no substantial outside ownership exists. Generally limited for external reporting, also used internally.Method simplifies the consolidation process and provides better information for internal evaluation.