F5 M3 Consolidated Financial Statements

control

generally means owning more than 50% of the investee’s voting stock; this creates a parent-subsidiary relationship, so the parent prepares consolidated financial statements; means the parent owns 50% plus one share

consolidation

the accounting process of combining a parent company’s financial statements with those of a subsidiary it controls so the group is presented as one economic entity; do NOT do this when a significant doubt exists regarding the parent’s ability to control the subsidiary such as when subsidiary is on legal reorganization or bankruptcy ad/or subsidiary operates under severe foreign restrictions

controlling interest

an investor owning more than 50% of a subsidiary, this gives the investor (parent) control over the subsidiary

noncontrolling interest (NCI)

(minority interest0, is the portion of the equity (net assets) that is not attributable to the parent; is reported at FV in the equity section of the consolidated balance sheet, separately from the parent’s equity

acquisition method

is used when the investor (parent) obtains control; record 100% of the subsidiary’s identifiable net assets at FV on acquisition date (regardless of % owned) with an unallocated balance creating goodwill; when companies are consolidated, the subsidiary’s entire equity (common stock, APIC, and retained earnings) is eliminated; record NCI if necessary and eliminate the parent’s investment in subsidiary (get rid of equity method) when consolidation occurs

parent’s basis

is in the subsidiary and is the acquisition price, recorded in the parent’s books as the investment in subsidiary account

*parent’s basis = acquisition price = investment in subsidiary

CAR elimination

when consolidating, the subsidiary’s common stock, APIC, and retained earnings is eliminated in its entirety (not by parent’s % owned); make a debit to eliminate these accounts; consolidated equity at the time acquisition will be equal to the parent’s equity balance (plus any NCI)

IN elimination/addition

when consolidating, the investment in subsidiary is eliminated in its entirety and the amount is the investment balance on parent’s books at the consolidation date; the noncontrolling interest is created for the portion of the subsidiary owned by outside shareholders (% leftover after accounting for parent’s %) at FV and an NCI equity section is created for it, separately from parent’s equity; to eliminate/add, credit both account

BIG adjustments

represents the adjustments needed to report the subsidiary’s acquired net assets at FV; BV adjustments, identifiable intangible assets, and goodwill; increase the adjustments with a debit (unless under BV whether the adjustment increases or decreases net assets, could be a credit if it decreases)

(B) balance sheet of subsidiary is adjusted to FV

bring the subsidiary’s existing assets and liabilities from BV to acquisition-date FV; this adjustment is done regardless of the amount paid to acquire the subsidiary and adjustment is for 100% of the FV subsidiary’s assets and liabilities even if parent acquires subsidiary for less than 100%; debit when asset FV greater than BV & liability must be decreases and credit when asset FV lower than BV & liability must be increased

(I) identifiable intangible assets of subsidiary recorded at FV

are recorded in consolidation at their FV on the acquisition date, even if they were not recorded on the subsidiary’s own books; adjustments is made for 100% of the subsidiary’s identifiable intangible assets, regardless of parents ownership %

(G) goodwill (or gain) is required

if there is an excess of FV of the subsidiary, acquisition cost plus any NCI, over the FV of the subsidiary’s net assets; remaining excess is a debit to goodwill (not separately recorded) and credit a gain

*consideration transferred (acquisition price) + FV of NCI - FV of identifiable net assets = negative amount (bargain purchase gain) & positive amount (goodwill)

consolidated workpapers eliminating journal entry

a debit to common stock-subsidiary, a debit to APIC-subsidiary, a debit to retained earnings-subsidiary, a credit to investment in subsidiary, a credit to NCI, a debit to balance sheet adjustments to FV, a debit to identifiable intangible assets at FV, and a debit to goodwill

goodwill calculation

*(acquisition price + NCI at FV) - FV of subsidiary net assets

asset FV differences

*FV of subsidiary net assets - BV of subsidiary net assets

pushdown accounting

is an irrevocable, entity-level election by an acquired subsidiary to restate its stand-alone financial statements using the FV and purchase price allocation determined by the parent at acquisition; option is available whenever a change in control occurs and the election must b made in first reporting period in which change in control occurs

pushdown accounting key account consequences

the acquire entity (subsidiary) remeasures its identifiable assets and liabilities to acquisition date FV; records any resulting goodwill on the subsidiary’s books; if purchase price is less than FV of net assets, the difference is recognized in APIC as a bargain purchase gain (will not be recognized on income statement)

goodwill

is the excess of the acquisition-date value transferred (purchase price), including FV of NCI when applicable, over the FV of the subsidiary’s identifiable net assets

presentation of pushdown accounting

all cumulative revelation impacts, including goodwill or bargain purchase gain amounts, are recorded in “pushdown capital” account within equity; subsequent depreciation, amortization, and impairment testing follow the normal post-acquisition guidance applicable to remeasured balances; deferred taxes are recognized on any temporary differences created by FV adjustments

bargain purchase gain

occurs when the consideration paid (purchase price) to acquire a subsidiary is less than the FV of identifiable net assets

disclosures of pushdown accounting

the fact that the subsidiary elected and applied pushdown accounting; date of the change-in-control event; valuation techniques and significant assumptions used to measure major classes of assets and liabilities; amount of goodwill (or bargain purchase gain) recognized in pushdown capital; qualitative and quantitative information about any measurement uncertainty

pushdown accounting not elected

subsidiary continues to present its historical cost basis while summarizing parent company purchase price allocation information sufficient for users to reconcile to consolidated amounts; does not remeasure its assets or liabilities to acquisition-date FV and does not record goodwill or bargain purchase gain related to the parent’s acquisition information

FV of identifiable net assets (pushdown)

*FV of identifiable assets - FV of liabilities (100% parent ownership)

goodwill (pushdown)

*consideration transferred - FV of identifiable net assets (100% parent ownership)

pushdown entry

a debit to identifiable tangible and intangible assets (FV), a debit to goodwill, a credit to liabilities assumed (FV) for the amount stated, and a credit to pushdown equity (reflects parent’s investment in subsidiary) for purchase price amount (make sure 100% parent ownership)

eliminating intercompany transactions

means removing transactions between a parent and its subsidiary, or between subsidiaries, when preparing consolidated financials; 100% of intercompany transactions must be eliminated even if parent owns less than 100%, makes the group’s financial statement appear as if the parent and subsidiary were one economic entity, not entries recorded by either company; lack “arm’s length”

arm’s length

means a transaction between independent, unrelated parties, where ach party acts in its own interest and agrees to normal market terms; consolidating entities are not considered this because both entities are apart of the same economic group

eliminate AR & AP

a debit to accounts payable and a credit to accounts receivable; eliminate 100% regardless of parent ownership

eliminate bonds

a debit to bonds payable (intercompany portion only) and a credit to bond investment (in affiliate); eliminate 100% regardless of parent ownership

eliminate bond interest

a debit to accrued bond interest payable and a credit to accrued bond interest receivable; eliminate 100% regardless of parent ownership

eliminate dividends

a debit to dividends payable (affiliate portion only) and a credit to dividends receivable (from affiliate); eliminate 100% regardless of parent ownership

eliminate interest (bond)

a debit to interest income and a credit to interest expense; eliminate 100% regardless of parent ownership

intercompany inventory/merchandise transactions

it is common for affiliated entities to sell inventory/merchandise to one another; intercompany sales revenue, COGS, unrealized profit in ending inventory, and profit from beginning inventory through retained earnings is eliminated in full regardless of parent’s ownership %

inventory sold intercompany (reversal of original transaction)

when inventory is sold to outsides from either subsidiary or parent, correct COGS; when inventory is still on hand, correct ending inventory; may be a combination of the two

record sale by parent to subsidiary (inventories)

a debit to accounts receivable for selling price and a credit to intercompany sales; a debit to intercompany COGS for original cost of inventories and a credit to inventory

record purchase by subsidiary from parent (inventories)

a debit to inventory for purchase price and a credit to accounts payable

intercompany profit on sale (inventories)

*selling price - original cost

BASE for intercompany inventories

*beginning inventory
+ purchases
—————————————
= costs of goods available
- ending inventory
—————————————
= COGS

intercompany profit to COGS/ending inventory

intercompany profit x (COGS or ending inventory/selling or purchase price)

eliminate inventories

a debit to intercompany sales-parent (seller) for selling price, a credit to intercompany COGS-parent (seller) for original cost of inventories, a credit to COGS-subsidiary (buyer) for intercompany profit to COGS, and a credit to inventory-subsidiary (buyer) for intercompany profit to ending inventory

intercompany bond transactions

occurs when one member of a consolidated group acquires another member’s bonds from an outside investor; bonds are treated as retired; the consolidation recognized a gain or loss based on the difference between the debt’s carrying value and price paid to acquire it; the gain or loss is not reported on either company’s books, but it is recorded through an eliminating entry and all intercompany account balance are also eliminated

record sale of bonds on parent’s books

a debit to cash for bond’s carrying value as of the current date, a credit to bonds payable for face (par) value, and a credit to premium on bonds payable for bond’s carrying value minus face (par) value

record the purchase of bonds on subsidiary’s books

a debit to investment in parent’s bonds and a credit to cash for the original purchasers price (selling/purchase price)

eliminate intercompany bonds

a debit to bonds payable for face (par) value, a debit to premium for difference between bond’s carrying value and face (par) value, a credit to investment in parent’s bonds for original purchasers price, and a credit to gain on extinguishment of bonds for plug

intercompany bonds elimination in subsequent years

elimination for realized by unrecorded gain or loss on extinguishment of bonds would be adjusted in retained earnings in years to come; NCI would be adjusted if bonds were originally issued by subsidiary

intercompany sale of land

occurs when one company in the consolidated group sells land to another group member, treated as if it had never happened until sold to an outside party; the intercompany gain or loss on it remains unrealized until it is sold to an outsider; the elimination eliminates intercompany gain or loss and adjusted the land its original cost

record the sale on parent’s books (land)

a debit to cash for selling price amount, a credit to land for original cost amount, and a credit to intercompany gain on sale of land for plug

record the purchase on subsidiary’s books (land)

a debit to land a credit to cash for purchase price (parent’s selling price)

eliminate land

a debit to intercompany gain on sale of land and a credit to land for selling price minus original cost

elimination of intercompany land in subsequent years

until it is sold to a third-party, retained earnings (parent) would be debited and land would be credited to eliminate the intercompany profit; retained earnings are debited because a gain would have been closed to this account (no need to divide intercompany gain between retained earnings and NCI)

intercompany profit on sale of depreciable fixed asset

the gain or loss on this is unrealized from a consolidated financial statement perspective until fixed asset is sold to outside; the elimination eliminates intercompany gain or loss and adjusts the asset and accumulated depreciation to their original balance on the date of sale and in the period of sale

record sale on subsidiary’s books (fixed asset)

a debit to cash for selling price, a debit to accumulated depreciation for original cost minus net book value, a credit to machinery at original cost, and a credit to intercompany gain on sale of machinery for selling price minus net book value

record purchase on parent’s books (fixed asset)

a debit to machinery and a credit to cash for purchase price amount

depreciation on parent’s books (fixed asset)

a debit to depreciation expense and a credit to accumulated depreciation for purchase price divided by remaining useful life

eliminate fixed asset

a debit to intercompany gain on sale of machinery for selling price minus net books value, a credit to machinery for selling price minus original cost, and a credit to accumulated depreciation for original cost minus net book value (built up depreciation)

eliminate excess depreciation (subsequent years)

a debit to accumulated depreciation and a credit to depreciation expense for excess depreciation amount

*intercompany gain on sale/remaining useful life = excess depreciation

adjusts fixed assets in subsequent years

a debit to retained earnings for current unrealized (intercompany) gain minus excess depreciation, a credit to machinery for selling price minus original cost, and a credit to accumulated depreciation for accumulated depreciation already taken minus excess depreciation

goodwill for elimination

*net book value
- (shares bought x FV price
- NCI
- balance sheet adjustment
- identifiable intangible assets

acquisition-date eliminating entry

(CAR) a debit to common stock, APIC, and retained earnings for subsidiary’s equity at acquisition date; (IN) a credit to investment in subsidiary for shares bought times FV price of those shares (no NCI here); (BIG) a debit to balance sheet adjustment FV for which FV exceeded BV amount, a debit to identifiable intangible assets for amount given, and a debit to goodwill

year-end eliminating entry

(CAR) a debit to common stock, APIC, and retained earnings or subsidiary’s equity at year-end; (NI) a credit to investment in subsidiary for purchase price plus net income minus dividends (no NCI here); (BIG) a debit to all BIG accounts at their acquisition-date amounts (unless something changes during the year)

consolidated balance sheet

includes 100% of the parent’s and subsidiary’s assets and liabilities (after eliminating intercompany transactions), but does NOT include the subsidiary’s equity; NCI is presented as part of equity, but separately from the equity of the parent company

identification of a consolidated statement

either the title includes “consolidated” or look for the NCI in equity or goodwill (eliminating entry)

consolidated income statement

includes 100% of the parent’s revenue and expenses and all of the subsidiary’s revenues and expenses after the date of acquisition (pre-acquisition revenue and expenses of subsidiary are not included); it should show separately consolidated net income, net income attributable to NCI, and net income attributable to parent company; eliminate intercompany gain and correct depreciation expense

consolidated comprehensive income

should show, separately, consolidated comprehensive income, comprehensive income attributable to NCI, and comprehensive income attributable to the parent company

consolidated statement of changes in equity

NCI is presented here and specifically shows a total amount that includes NCI’s shares of subsidiary’s adjusted income, OCI, and dividends; should present a reconciliation of beginning-of-period and end-of-period carrying amount of total equity and equity attributable to the parent

payment for acquisition for subsidiary (net of ash acquired)

*purchase price of subsidiary - subsidiary’s cash on date of sale

consolidated cash flows (notes payable)

*beginning parent’s notes payable
+ acquisition-date subsidiary’s notes payable
- ending consolidated notes payable balance
—————————————————————
= cash outflow

consolidated statement of cash flows

net cash spent or received in the acquisition must be reported in the investing section; the assets and liabilities of the subsidiary on acquisition date must be added to parent’s assets and liabilities at beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period; should present cash inflows and outflows of consolidated entity, excluding cash flows between parent and subsidiary

consolidated statement of cash flow (subsequent years)

process are similar to unconsolidated statement of cash flow except when reconciling net income to net cash provided by operating activities (total consolidated net income should be used), financing section should report dividends paid to subsidiary to NCI (dividends paid to parent from subsidiary should not be recorded), and investing section may report acquisition of additional subsidiary shares by the acquisition of additional subsidiary shares by the parent if acquisition was an open-market purchase