高級會計學英文版資料：Chap002 Consolidation of Financial Information

1、Chapter TwoConsolidation of Financial InformationYou will know the truth, and the truth will set you free.(John8:32)Business CombinationsMost organizations, large and small, hold ownership in other companies. FASB Accounting Standards Codification (ASC) Business Combinations (Topic 805) and Consolid

2、ation (Topic 810) provide guidance using the “acquisition method”.The acquisition method embraces the fair value measurement for measuring and assessing business activity.2-2You will know the truth, and the truth will set you free.(John8:32)Business CombinationsFinancial statements that represent a

3、parent and its subsidiaries as a SINGLE ENTITY are known as “consolidated” financial statements.Ownership can exist through a majority voting interest or with a lesser percentage of ownership through governance contracts, leases, or agreements with other stockholders.2-3You will know the truth, and

4、the truth will set you free.(John8:32)Reasons Firms CombineVertical integrationCost savings Quick entry into new marketsEconomies of scaleMore attractive financing opportunitiesDiversification of business risk Business ExpansionIncreasingly competitive environmentLO 12-4You will know the truth, and

5、the truth will set you free.(John8:32)Recent Notable Business Combinations ACQUIRER TARGETDeal Value MerckSchering-Plough $41.1 billionComcastNBC Universal 24.1 billionCentury LinkQwest Communications 22.1 billionMetLifeAmerican Life Insurance 16.0 billionThe Coca-Cola CompanyCoca-Cola Enterprises 1

6、3.1 billionIntelMcAfee 7.7 billionOracleSun Microsystems7.4 billionUnited Airlines Continental Airlines 7.0 billionWal-Mart Massmart 2.3 billionNikeUmbro 565 million2-5You will know the truth, and the truth will set you free.(John8:32)The Consolidation ProcessConsolidated financial statements provid

7、e more meaningful information than separate statements.Consolidated financial statements more fairly present the activities of the consolidated companies.Yet, consolidated companies may retain their legal identities as separate corporations. “There is a presumption that consolidated statements are m

8、ore meaningful. and that they are usually necessary for a fair presentation when one of the companies in the group has a controlling financial interest.” FASB ASC (810-10-10-1)LO 22-6You will know the truth, and the truth will set you free.(John8:32)Business Combinations Business combinations . . .

9、can be achieved through transactions or events in which an acquirer obtains control over one or more businesses. Create single economic entities. Can be formed by a variety of events but can differ widely in legal form. Require consolidated financial statements.LO 32-7You will know the truth, and th

10、e truth will set you free.(John8:32)Business Combinations2-8You will know the truth, and the truth will set you free.(John8:32)FASB Control ModelThe FASB provides guidance and defines control when accounting for business combinations with this control model: “A reporting entity has the power to dire

11、ct the activities of another entity when it has the current ability to direct the activities of the entity that significantly affect the entitys returns.”The power criterion defines control both operationally through “majority voting shares” and conceptually through contractual rights.2-9You will kn

12、ow the truth, and the truth will set you free.(John8:32)Subsidiaries financial dataPrepare a single set of consolidated financial statements.Parents financial dataConsolidation of Financial Information2-10To report the financial position, results of operations, and cash flows for the combined entity

13、.Reciprocal accounts and intra-entity transactions are adjusted or eliminated to. . .brought together2-10You will know the truth, and the truth will set you free.(John8:32)Legal Form and ConsolidationLegal characteristics of a business combination have a significant impact on the consolidation appro

14、ach.The acquired company (or companies) is (are) legally dissolved, All companies retain incorporation, You will know the truth, and the truth will set you free.(John8:32)What is to be consolidated?If dissolution occurs:All account balances are actually consolidated in the financial records of the s

15、urvivor.If separate incorporation maintained:Financial statement information (on work papers, not the actual records) is consolidated.2-12You will know the truth, and the truth will set you free.(John8:32)When does consolidation occur?If dissolution occurs:Permanent consolidation occurs at the combi

16、nation date.If separate incorporation maintained:Consolidation occurs at regular intervals, whenever financial statements are prepared.2-132-13You will know the truth, and the truth will set you free.(John8:32)How does consolidation affect the accounting records?If dissolution occurs:Dissolved compa

17、nys records are closed out.Surviving companys accounts are adjusted to include all balances of the dissolved company.If separate incorporation is maintained:Each company continues to retain its own records.worksheets facilitates the periodic consolidation process without disturbing individual accoun

18、ting systems.2-14You will know the truth, and the truth will set you free.(John8:32)The Acquisition Method Used to account for business combinations.Requires recognizing and measuring at fair value:Consideration transferred for the acquired business Noncontrolling interestSeparately identified asset

19、s and liabilitiesGoodwill or gain from a bargain purchaseAny contingent considerations.LO 42-15You will know the truth, and the truth will set you free.(John8:32)Fair ValueAsset valuations established usingThe Market Approach fair value can be estimated referencing similar market trades.The Income A

20、pproach fair value can be estimated using the discounted future cash flows of the asset.The Cost Approach estimates fair values by reference to the current cost of replacing an asset with another of comparable economic utility.LO 52-16You will know the truth, and the truth will set you free.(John8:3

21、2)Acquisition Method What if the consideration transferred does NOT EQUAL the Fair Value of the Assets acquired?If the consideration is LESS than the Fair Value of the Assets acquired, we got a BARGAIN! And we will record a GAIN on the acquisition!If the consideration is MORE than the Fair Value of

22、the Assets acquired, the difference is attributed to GOODWILL2-17You will know the truth, and the truth will set you free.(John8:32)Acquisition Method Example Purchase Price = Fair ValueBigNet pays $2,550,000 ($550,000 cash and 20,000 unissued shares of its $10 par value common stock that is current

23、ly selling for $100 per share) for all of Smallports assets and liabilities. Smallport then dissolves as a legal entity. As is typical, the $2,550,000 fair value of the consideration transferred by BigNet represents the fair value of the acquired Smallport business.Dissolution of Subsidiary2-18You w

24、ill know the truth, and the truth will set you free.(John8:32)Consideration Transferred = Net Identified Asset Fair ValuesBigNet Companys Financial RecordsDecember 31Current Assets . . . . . . . . . . . . . . . . . . . . . . . 300,000Computers and Equipment . . . . . . . . . . . . . 600,000Capitaliz

25、ed Software . . . . . . . . . . . . . . . . .1,200,000Customer Contracts . . . . . . . . . . . . . . . . . . . 700,000Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000Cash (paid by BigNet) . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000Common Stock (

26、20,000 shares issued at $10 par value) 200,000Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . 1,800,000To record acquisition of Smallport Company. Assets acquired and liabilities assumed are recorded at fair value.Dissolution of SubsidiaryLO 62-19You will know the truth, and t

27、he truth will set you free.(John8:32)Purchase Price Fair ValueSynergiesHistory of profitabilityReputationThe quality of its personnelEconomic condition of the industryetc.You will know the truth, and the truth will set you free.(John8:32)Acquisition Method Example Purchase Price Fair ValueBigNet pay

28、s $3,000,000 ($1,000,000 cash and 20,000 unissued shares of its $10 par value common stock that is currently selling for $100 per share) for all of Smallports assets and liabilities. Smallport then dissolves as a legal entity. The $3,000,000 fair value of the consideration transferred by BigNet is g

29、reater than the fair value of the acquired Smallport business.Dissolution of Subsidiary2-21You will know the truth, and the truth will set you free.(John8:32)Acquisition Method ExamplePurchase Price Fair ValueBigNet Companys Financial RecordsDecember 31Current Assets . . . . . . . . . . . . . . . .

30、. . . . . 300,000Computers and Equipment . . . . . . . . . . . 600,000Capitalized Software . . . . . . . . . . . . . . .1,200,000Customer Contracts . . . . . . . . . . . . . . . . . 700,000Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .450,000Notes Payable . . . . . . . . . . . . . . .

31、. . . . . . . . . . . . . . . . 250,000Cash (paid by BigNet) . . . . . . . . . . . . . . . . . . . . . . 1,000,000Common Stock (20,000 shares at $10 par value) . . . . 200,000Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . 1,800,000To record acquisition of Smallport Company. Asset

32、s acquired and liabilities assumed are recorded at fair value.Dissolution of Subsidiary2-22You will know the truth, and the truth will set you free.(John8:32)Bargain purchaseForced or distressed salesThe fair values of the assets received and all liabilities assumed in a business combination are con

33、sidered more relevant for asset valuation than the consideration transferred. You will know the truth, and the truth will set you free.(John8:32)Acquisition Method Example Purchase Price Fair ValueBigNet pays $2,000,000 by issuing 20,000 unissued shares of its $10 par value common stock that is curr

34、ently selling for $100 per share for all of Smallports assets and liabilities. Smallport then dissolves as a legal entity. The $2,000,000 fair value of the consideration transferred by BigNet is less than the fair value of the acquired Smallport business.Dissolution of Subsidiary2-24You will know th

35、e truth, and the truth will set you free.(John8:32)Acquisition Method ExamplePurchase Price Fair ValueDissolution of Subsidiary2-25BigNet Companys Financial RecordsDecember 31Current Assets . . . . . . . . . . . . . . . . . . . . . . . 300,000Computers and Equipment . . . . . . . . . . . . . 600,000

36、Capitalized Software . . . . . . . . . . . . . . . . .1,200,000Customer Contracts . . . . . . . . . . . . . . . . . . . 700,000Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000Common Stock (20,000 shares issued at $10 par value) 200,000Additional Paid-In Capital

37、 . . . . . . . . . . . . . . . . . . . . . . 1,800,000Gain on Bargain Purchase . . . . . . . . . . . . . . . . . . . . . . 550,000To record acquisition of Smallport Company. Assets acquired and liabilities assumed are recorded at fair value.You will know the truth, and the truth will set you free.(J

38、ohn8:32)Related Costs of Business CombinationsDirect Costs of the acquisition (attorneys, appraisers, accountants, investment bankers, etc.) are NOT part of the fair value received, and are immediately expensed.Indirect or Internal Costs of acquisition (secretarial and management time) are period co

39、sts expensed as incurred.Costs to register and issue securities related to the acquisition reduce their fair value.2-26You will know the truth, and the truth will set you free.(John8:32)Acquisition MethodSeparate Incorporation MaintainedDissolution does not occur.Consolidation process is similar to

40、previous example.Fair value is the basis for initial consolidation of subsidiarys net assets. Subsidiary is a legally incorporated separate entity.Consolidation of financial information is simulated.Acquiring company does not physically record the transaction. LO 72-27You will know the truth, and th

41、e truth will set you free.(John8:32)The Consolidation WorksheetConsolidation worksheet entries (adjustments and eliminations) are entered on the worksheet only. Steps in the process:Prior to constructing a worksheet, the parent prepares a formal allocation of the acquisition date fair value similar

42、to the equity method procedures.2.Financial information for Parent and Sub is recorded in the first two columns of the worksheet (with Subs prior revenue and expense already closed).LO 72-28You will know the truth, and the truth will set you free.(John8:32)The Consolidation Worksheetcontinued. . .3.

43、 Remove the Subs equity account balances.Remove the Investment in Sub balance.Allocate Subs Fair Values, including any excess of cost over Book Value to identifiable assets or goodwill.Combine all account balances and extend into the Consolidated totals column.Subtract consolidated expenses from rev

44、enues to arrive at net income.2-29You will know the truth, and the truth will set you free.(John8:32)Acquisition Method Consolidation Workpaper Example2-30You will know the truth, and the truth will set you free.(John8:32)Acquisition Date Fair-Value Allocations Additional IssuesIntangibles are asset

45、s that:Lack physical substance (excluding financial instruments)Arise from contractual or other legal rightsCan be sold or otherwise separated from the acquired enterprisePreexisting goodwill recorded in the acquired companys accounts is ignored in the allocation of the purchase price. LO 82-31You w

46、ill know the truth, and the truth will set you free.(John8:32)Purchase Price Allocations - Additional IssuesIn-Process R&DIPR&D that has reached technological feasibility, may be capitalized as an intangible assetDetermination of fair value is criticalIPR&D is considered to have an indefinite life,

47、and is reviewed for impairment.Ongoing R&D is expensed as incurred.2-32You will know the truth, and the truth will set you free.(John8:32)Convergence between U. S. and International StandardsIASB International Financial Reporting Standard 3 (IFRS 3) Revised and FASB ASC topics 805, Business Combinat

48、ions, and 810, Consolidation, effectively converged accounting for business combinations.In 2011, the IASB issued IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities - effective beginning in 2013. New definition of control focuses on the power to direct the activities of an entity, exposure to variable returns, and a linkage between power and returns.2-33You will know the truth, and the truth will set you free.(John8:32)Legacy Methods Purchase and Pooling of Interests Methods