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Consolidation (Financial Reporting Methods (Consolidation - > 50%…
Consolidation
Financial Reporting Methods
Fair Value - 20% or less Ownership
Accounted for as a purchase
If amount paid < Fair value -= Bargain Purchase
Results in a GAIN in the current period
Equity Method
21 to 50% Ownership
Gives " Significant Influence"
Purchase Price - Par Value = Good will
Par Value Price = Ownshiper % X Total Par value
Ex: Fair Value 100k, Purchase Price = 33k
Shares purchased = 30%, 30% X 100k =30K
Goodwill = 33k -30k = 3k
Dividends reduce Investment account and are not income
Changing to Equity Method
New with Simplification Initative
Recognize Unrealized Holding G/L in Earnings
Prospective F/S Treatment
Consolidation - > 50% Ownership
Investment accounts are eliminated
Exceptions for consolidation
Majority owner does not "Control"
Bankruptcy
Foreign Bureaucracy
Only parent company prepares the consolidated statement, not the subsidiary
Majority shares are purchased, but separate legal entities continue to exist
Acquired assets and liabilities are recorded at their Fair Value on Acquisition Date
Elimination Entries
Intercompany sales
Inventory
PPE
Note: Under newly-tested ASU 2016-16, tax effects of Intercompany sales except Inventory, must be recognized immediately
Subsidiary A has a Gain on sale/transfer of Subsidairy B
Sub A = Current Tax Expense
Sub B = Deferred Tax Asset
Intercompany investment transfers are eliminated
Step Acquisition
Acquirer held previous shares accounted for under Fair Value or Equity Method and now re-valued to Fair Value
Results in a Gain or Loss in the current period
Acquisition Vs. Merger
Acquired companies continue to exist as a legal entity
their books are just consolidated with the parent ocmpany in the parent's finala statements
Merged companies cease to exists and only the parent remains
Acquisition Costs
Expensed in period incurred (NOT capitalized)
Accounting
Legal
Valuation
Consulting
Professional
Amount netted against Stock Proceeds
Stock registration
Stock issuance costs