Kế toán, kiểm toán - Chapter two: Consolidation of financial information

Chapter TwoConsolidation of Financial InformationMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Reasons Firms CombineVertical integrationCost savings Quick entry into new marketsEconomies of scaleMore attractive financing opportunitiesDiversification of business risk Business ExpansionIncreasingly competitive environmentLO 12Business CombinationsSeparate 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 FASB’s increasing emphasis on fair value for measuring and assessing business activity.3The Consolidation ProcessConsolidated 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. “There is a presumption that consolidated statements are more 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 24Subsidiaries’ financial dataPrepare a single set of consolidated financial statements.Parent’s financial dataConsolidation of Financial Information2-*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. . .brought together5Business 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.LO 36Business Combinations7The Acquisition Method Used to account for business combinations.Requires recognizing and measuring at fair value:Consideration transferred for the acquired business Noncontrolling interestSeparately identified assets and liabilitiesGoodwill or gain from a bargain purchaseAny contingent considerations.LO 48Fair ValueAsset valuations established usingThe 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.LO 59How does consolidation affect the accounting records?If dissolution occurs:Dissolved company’s records are closed out.Surviving company’s 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.10Acquisition 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 the Assets acquired, the difference is attributed to GOODWILLLO 611Related 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 costs expensed as incurred.Costs to register and issue securities related to the acquisition reduce their fair value.12Acquisition MethodSeparate Incorporation MaintainedDissolution does not occur.Consolidation process is similar to previous example.Fair value is the basis for initial consolidation of subsidiary’s net assets. Subsidiary is a legally incorporated separate entity.Consolidation of financial information is simulated.Acquiring company does not physically record the transaction. LO 713Acquisition Method – Consolidation Workpaper Example14Acquisition Date Fair-Value Allocations – Additional IssuesIntangibles are assets 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 company’s 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.LO 815Legacy Methods – Purchase and Pooling of Interests MethodsThe acquisition method is applied to business combinations beginning in 2009, but previous accounting methods used are still in effect today.2002 to 2008: Purchase MethodValuation 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 company’s stock – using its own stock as consideration (no cash!)LO 916