高级会计学英文版资料：Chap003 CONSOLIDATIONS-SUBSEQUENT TO the Date of acquisition

1、Chapter 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 method to account for th

2、e investment in the acquired company.1. Three alternatives are availablea.Initial value method (also known as the cost method) b.Equity methodc.Partial equity method2.Depending upon the method applied, the acquiring company will record earnings from its ownership of the acquired company. This total

3、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 statements and be replaced by the subsidiarys assets

4、and liabilities.II.For combinations subsequent to the acquisition date, certain procedures are required. If the parent applies the equity method, the following process is appropriate.A.Assuming that the acquisition was made during the current fiscal period1.The parent adjusts its own Investment acco

5、unt to reflect the subsidiarys income and dividend declarations 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 establish consolidated figures for reporting purposes.a.Entry S offsets the

6、 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 accounts and/or to goodwill.c.Entry I eliminates the investment income balanc

7、e accrued by the parent. d.Entry D removes intra-entity dividend declarationse.Entry E recognizes the current excess amortization expenses on the excess fair over book value allocations. f.Entry P eliminates any intra-entity payable/receivable balances.B.Assuming that the acquisition was made during

8、 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 removed in Entry S will differ each period to reflect the balance as of th

9、e 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 entry.III.For a combination where the parent has applied an accounting m

10、ethod 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 intra-entity dividends eliminated in Entry I will only consist of the dividends transferred from the subsidiary. No separate Entry D i

11、s needed.B.If the partial equity method is in use, the intra-entity income to be removed in Entry I is the equity accrual only; no amortization expense is included. Intra-entity dividends are eliminated through Entry D.C.In any time period after the year of acquisition.1.The initial value method rec

12、ognizes neither income in excess of dividend declarations nor excess 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 this purpose; it converts all prior amounts to equity method balances

13、.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.Bargain purchasesA.As discussed in Chapter Two, bargain purchases occur

14、when the parent company transfers consideration less than net fair values of the subsidiarys assets acquired and liabilities assumed.B.The parent recognizes an excess of net asset fair value over the consideration transferred as a “gain on bargain purchase.”V.Goodwill ImpairmentA.When is goodwill im

15、paired?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 impairment at the reporting unit level (operating segment or lower identifiable level).Goodwill should be tested for imp

16、airment at least annually.Interim impairment testing is necessary in the presence of negative indicators such as an adverse change in the business climate or market, legal factors, regulatory action, an introduction of competition, or a loss of key personnel.B.How is goodwill tested for impairment?A

17、ll 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 units. Goodwill may be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the co

18、mbination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit.Goodwill is tested for impairment through an optional assessment process followed by a two-step approach (if necessary).Entities are allowed the option of conducting a qualitative asse

19、ssment of goodwill to assess whether the two-step testing procedure is required. Under the qualitative assessment, management evaluates relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is

20、more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity performs the two-step testing procedure. Otherwise, no further tests are required.The first step simply compares the fair value amount of a reporting unit to its carrying amount. If the fai

21、r value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired and no further analysis is necessary.The second step is a comparison of goodwill to its carrying amount. If the implied value of a reporting units goodwill is less than its carrying value, goodwill is cons

22、idered impaired and a loss is recognized. The loss is equal to the amount by which goodwill exceeds its implied value.The implied value of goodwill should be calculated in the same manner that goodwill is calculated in a business combination. That is, an entity should allocate the fair value of the

23、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 and the fair value of the reporting unit was the value assigned at a subsidiarys acquisition date. The excess “acquisit

24、ion-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 impairment and does not require entities to record the “step-up” in net assets or any unrecognized intangible assets.C.How

25、 is the impairment recognized in financial statements?The aggregate amount of goodwill impairment losses should be presented as a separate line item in the operating section of the income statement unless a goodwill impairment loss is associated with a discontinued operation.A goodwill impairment lo

26、ss associated with a discontinued operation should be included (on a net-of-tax basis) within the results of discontinued operations.VI.Contingent considerationA.The fair value of any contingent consideration is included as part of the consideration transferred. B.If the contingency results in a lia

27、bility (typically a cash payment), changes in the fair value of the contingency are recognized in income as they occur.C.If the contingency calls for an additional equity issue at a later date, the acquisition-date fair value of the contingency is not adjusted over time. Any subsequent shares issued

28、 as a consequence of the contingency are simply recorded at the original acquisition-date fair value. This treatment is similar to other equity issues (e.g., common stock, preferred stock, etc.) in the parents owners equity section.VII.Push-down accountingA.A subsidiary may record any acquisition-da

29、te 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 subsidiary at the amount the ne

30、w 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 entries.Answers to Discussi

31、on QuestionsHow Does a Company Really Decide which Investment Method to Apply?Students can come up with dozens of factors that Pilgrim should consider in choosing its internal method of accounting for its subsidiary, Crestwood Corporation. The following is only a partial list of possible points to c

32、onsider.Use of the information. If Pilgrim does not monitor its subsidiarys income levels closely, applying the equity method may be not be fruitful. A company must plan to use the data before the task of accumulation becomes worthwhile. For example, Crestwood may use the information for evaluating

33、the performance of the subsidiarys managers.Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important. Income levels would probably be significant. However, if the subsidiary is actually quite small in relation to the paren

34、t, the impact might not be material enough to warrant the extra effort.Size of dividend declarations. If Crestwood distributes most of its income as dividends, that figure will approximate equity income. Little additional information would be accrued by applying the equity method. In contrast, if di

35、vidends are small or not declared on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination.Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book value, its annual amortization charges are high,

36、 and use of the equity method might be preferred to show the amortization effect each reporting period. In this case, waiting until year end and recognizing all of the expense at one time through a worksheet entry might not be the best way to reflect the impact of the expense.Amount of intra-entity

37、transactions. As with amortization, the volume of transfers can be an important element in deciding which accounting method to use. If few intra-entity sales are made, monitoring the subsidiary through the application of the equity method is less essential. Conversely, if the amount of these transac

38、tions IS significant, the added data can be helpful to company administrators evaluating operations.Sophistication of accounting systems. If Pilgrim and Crestwood both have advanced accounting systems, application of the equity method may be relatively easy. Unfortunately, if these systems are primi

39、tive, the cost and effort necessary to apply the equity method may outweigh any potential benefits.The timeliness and accuracy of income figures generated by Crestwood. If the subsidiary reports operating results on a regular basis (such as weekly or monthly) and these figures prove to be reliable,

40、equity totals recorded by Pilgrim may serve as valuable information to the parent. However, if Crestwoods reports are slow and often require later adjustment, Pilgrims use of the equity method will provide only questionable results.Answers to Questions1.a.CCES Corp., for its own recordkeeping, may a

41、pply the equity method to its Investment in Schmaling. Under this approach, the parents records parallel the activities of the subsidiary. The parent accrues income as it is earned by the subsidiary. Dividends declared by Schmaling reduce its book value; therefore, CCES reduces the investment accoun

42、t. In addition, any excess amortization expense associated with CCESs acquisition-date fair value allocations is recognized through a periodic adjustment. By applying the equity method, both the parents income and investment balances accurately reflect consolidated totals. The equity method is espec

43、ially helpful in monitoring the income of the business combination. This method can be, however, rather difficult to apply and a time consuming process.b.The initial value method. The initial value method can also be utilized by CCES Corporation. Any dividends declared are recognized as income but n

44、o other investment entries are made. Thus, the initial value method is easy to apply. However, the resulting account balances of the parent may not provide a reasonable representation of the totals that result from consolidating the two companies.c.The partial equity method combines the advantages o

45、f the previous two techniques. Income is accrued as earned by the subsidiary as under the equity method. Similarly, dividends reduce the investment account. However, no other entries are recorded; more specifically, amortization is not recognized by the parent. The method is, therefore, easier to ap

46、ply than the equity method but the subsidiarys individual totals will still frequently approximate consolidated balances.2.a.The consolidated total for equipment is made up of the sum of Maguires book value, Williams book value, and any unamortized excess acquisition-date fair value over book value

47、attributable to Williams equipment.b.Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is intra-entity in nature. Thus, the entire amount is eliminated in arriving at consolidated financial statements.c.Only dividends d

48、eclared to outside parties are included in consolidated statements. Because Maguire owns 100 percent of Williams, all of the subsidiarys dividends are intra-entity. Consequently, only the dividends declared by the parent company will be reported in the financial statements for this business combinat

49、ion.d.Any acquisition-date goodwill must still be reported for consolidation purposes. Reductions to goodwill are made if goodwill is determined to be impaired. e.Unless intra-entity revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together.

50、f.Consolidated expenses are determined by combining the parents and subsidiary amounts including any amortization expense associated with the acquisition-date fair value allocations. As discussed in Chapter Five, intra-entity expenses can also require elimination in arriving at consolidated figures.

51、g.Only the parents common stock outstanding is included in consolidated totals.h.The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses.3.Under the equity method, the parent accrues subsidiary earnings and amortization expens

52、e (associated with acquisition-date fair value allocations) in the same manner as in the consolidation process. The equity method parallels consolidation. Thus, the parents net income and retained earnings each year will equal the consolidated totals.4.In the consolidation process, excess amortizati

53、ons must be recognized annually for any portion of the acquisition-date fair value allocations to specific assets or liabilities (other than indefinite-lived assets). Although this expense can be simulated in total on the parents books by an equity method entry, the actual amortization of each alloc

54、ated fair value adjustment is appropriate for consolidation. Hence, the effect of the parents equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e.g., depreciation) can be recognized (in consolidation Entry E).5.When a parent applies the ini

55、tial value method, no accrual is recorded to reflect the subsidiarys change in book value subsequent to acquisition. Recognition of excess amortizations relating to the acquisition is also omitted by the parent. The partial equity method, in contrast, records the subsidiarys book value increases and

56、 decreases but not amortizations. Consequently, for both of these methods, a technique must be employed in the consolidation process to recognize the omitted figures. Entry *C simply brings the parents figures (more specifically, the beginning retained earnings balance and the investment account) up

57、-to-date as of the first day of the current year. If the acquirer applies the initial value method, changes in the subsidiarys book value in previous years are recognized on the worksheet along with the appropriate amount of amortization expense. For the partial equity method, only the amortization

58、relating to these prior years needs to be recognized.No similar entry to *C is needed when the parent applies the equity method. The parent will record changes in the subsidiarys book value as well as excess amortization each year. Thus, under the equity method, the parents investment and beginning

59、retained earnings balances are both correctly established and need no further adjustment.6.Lamberts loan payable and the receivable held by Jenkins are intra-entity accounts. The consolidation process offsets these reciprocal balances. The $100,000 is neither a debt to nor a receivable from an unrel

60、ated (or outside) party and is, therefore, not reported in consolidated financial statements. Any interest income/expense recognized on this loan is also intra-entity in nature and must likewise be eliminated.7.Because Benns applies the equity method, the $920,000 is composed of four balances:a.The