Chapter Three

Consolidations -
Subsequent to the
Date of
Acquisition
Copyright 2013 by The McGraw-Hill Companies, I nc. All rights reserved.
McGraw-Hill/I rwin
Consolidation The Effects
of the Passage of Time
The 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 subsidiarys assets and liabilities to create a
single set of financial statements for the
combined business entity.
LO 1
3-2
Investment Accounting by
Acquiring Company
The acquiring company selects one of
these three methods to account for its
investment:
LO 2
Equity Method
Initial Value Method
Partial Equity Method
For each subsidiary owned, there is an asset, the
investment account, and an income account to
record the earnings on the investment.
3-3
Investment Accounting by
Acquiring Company
Comparison of internal reporting of
investment methods.
Method Investment Income Account
Equity

Continually adjusted to
reflect ownership of
acquired company.
Income accrued as
earned; amortization
and other adjustments
are recognized.
Initial Value Remains at Initially-
Recorded cost
Cash received is
recorded as Dividend
Income
Partial Equity Adjusted only for
accrued income and
dividends received from
acquired company.
Income accrued as
earned; no other
adjustments recognized.
3-4
Investment Accounting by
Acquiring Company
A parents 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.
LO 3
3-5
During 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 Method
1. FMV adjustments and other intangible assets,
2. The parents share of the subs income (loss),
3. The receipt of dividends from the sub.
LO 4a
3-6
Applying the Initial Value Method
If 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 subs activity differently
under this method, so the accounts will differ from the
Equity Method.
1. No adjustments are recorded in the Investment
account for current year income, dividends paid
by the subsidiary, or amortization of purchase
price allocations.
2. Dividends received from the subsidiary are
recorded as Dividend Revenue.
LO 4b
3-7
Consolidation Entries -
Initial Value Method
Two 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 Parents Dividend Income account
and the Subs Dividends Paid account.
There is no Entry D.
Entry E is the same as the Equity Method.





3-8
Consolidation Entries
Partial Equity Method
The 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 Parents equity in the subs income and
reduces the investment account.
Entry D eliminates the dividend income account.
Entry E is the same as the Equity Method.



LO 4c
3-9
Consolidation Entries
Subsequent Years
Neither the Initial Value or Partial Equity Method
provides a full-accrual-based measure of the
subsidiary activities on the parents 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
parents beginning of the year retained earnings
balance to a full-accrual basis.
3-10
Consolidation Entries
Subsequent Years
For 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.

3-11
Other 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 Subs 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!


3-12
Goodwill and Other Intangible Assets
(ASC Topic 350)
FASB ASC Topic 350, Intangibles-Goodwill
and Other, provides accounting standards
for reporting income statement effects of
either amortization or 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.
LO 5
3-13
Goodwill and Other Intangible Assets
(ASC Topic 350)
Once goodwill has been recorded, the value
will remain unchanged until:

1. All or part of the related subsidiary is sold,


2. There has been a permanent decline in
value in which case we test for impairment
and record the impairment as an
impairment loss if the item is impaired.

LO 6
3-14
Contingent Consideration
in Business Combinations
If 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.
LO 7
3-15
Push Down Accounting
Push-down accounting permits an acquired subsidiary
to record fair value allocations and subsequent
amortization in its accounting records.
SEC requires push-down accounting for separate
subsidiary statements when no substantial outside
ownership exists.
Generally limited for external reporting, but
increasingly popular internally.
Simplifies the consolidation process.
Provides better information for internal evaluation.
LO 8
3-16