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Chapter Two: Mcgraw-Hill/Irwin

Advanced Accounting Chapter 2

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65 views16 pages

Chapter Two: Mcgraw-Hill/Irwin

Advanced Accounting Chapter 2

Uploaded by

John Rey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter Two

Consolidation
of Financial
Information

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO 1

Reasons Firms Combine


Vertical

integration
Cost savings
Quick entry into new markets
Economies of scale
More attractive financing opportunities
Diversification of business risk
Business Expansion
Increasingly competitive environment
2-2

Business Combinations

Separate organizations tied together through


common control under common management are
combined into a single entity.

FASB Accounting Standards Codification (ASC)


Business Combinations (Topic 805) and
Consolidation (Topic 810) provide guidance using
the acquisition method.

The acquisition method embraces a fair value


measurement attribute that reflects the FASBs
increasing emphasis on fair value for measuring
and assessing business activity.
2-3

LO 2

The Consolidation Process


There
Thereisisaapresumption
presumptionthat
thatconsolidated
consolidatedstatements
statements
are
aremore
moremeaningful..
meaningful..and
andthat
thatthey
theyare
areusually
usually
necessary
necessaryfor
foraafair
fairpresentation
presentationwhen
whenone
oneof
ofthe
the
companies
companiesin
inthe
thegroup
grouphas
hasaacontrolling
controllingfinancial
financial
interest..
interest.. FASB
FASBASC
ASC(810-10-10-1)
(810-10-10-1)

Consolidated financial statements provide more


meaningful information than separate statements.

Consolidated financial statements more fairly


present the activities of the consolidated companies.

Consolidated companies may retain their legal


identities as separate corporations.
2-4

2-5

Consolidation of Financial
Information
Parents
financial data

Subsidiaries
financial data

brought together
To report the financial position, results of operations,
and cash flows for the combined entity.

Reciprocal accounts and intra-entity transactions


are adjusted or eliminated to. . .
Prepare a single set of consolidated financial statements.
2-5

LO 3

Business Combinations
Business combinations . . .
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.
2-6

Business Combinations

2-7

LO 4

The Acquisition Method

Used to account for business combinations.

Requires recognizing and measuring at fair


value:
Consideration transferred for the acquired
business
Noncontrolling interest
Separately identified assets and liabilities
Goodwill or gain from a bargain purchase
Any contingent considerations.
2-8

LO 5

Fair Value

Asset valuations established using


The Market Approach fair value can be
estimated referencing similar market trades.

The Income Approach 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.
2-9

How does consolidation affect the


accounting records?
If dissolution occurs:
Dissolved companys 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 accounting systems.
2-10

LO 6

Acquisition Method
What if the consideration transferred does
NOT EQUAL the Fair Value of the Assets
acquired?
If the consideration is MORE than the
Fair Value of the Assets acquired, the
difference is attributed to GOODWILL
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!!
2-11

Related Costs of Business Combinations

Direct 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 costs expensed as incurred.

Costs to register and issue securities related


to the acquisition reduce their fair value.
2-12

LO 7

Acquisition Method
Separate Incorporation Maintained
Dissolution does not occur.
Consolidation process is similar to 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.
2-13

Acquisition Method
Consolidation Workpaper Example

2-14

Acquisition Date Fair-Value


Allocations Additional Issues

LO 8

Intangibles are assets that:


Lack physical substance (excluding financial
instruments)
Arise from contractual or other legal rights
Can be sold or otherwise separated from the acquired
enterprise

Preexisting goodwill recorded in the acquired companys


accounts is ignored in the allocation of the purchase
price.
IPR&D that has reached technological feasibility is
capitalized as an intangible asset at fair value with an
indefinite life that is reviewed for impairment.
Ongoing R&D is expensed as incurred.
2-15

LO 9

Legacy Methods Purchase and


Pooling of Interests Methods
The acquisition method is applied to business
combinations beginning in 2009, but previous
accounting methods used are still in effect today.
2002 to 2008: Purchase Method
Valuation basis was cost
Purchase cost allocated proportionately to net assets
based on their fair values, excess to goodwill.
Prior to 2002: Purchase Method
Or The Pooling Of Interests Method
Only used when a company acquired all of another
companys stock using its own stock as
consideration (no cash!)
2-16

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