chapter 4 consolidated balance sheet at acquisition

Chapter 4 Consolidated Balance Sheet At Acquisition

2009 Clarence Byrd Inc.2 The Objective Of Consolidation Parent Sub A Sub B Parent And Subs As If One Entity Therefore One Set Of Financial Statements

2009 Clarence Byrd Inc.3 User Needs Creditors Creditors Consolidated Entity Legal Entity Consolidated Entity Legal Entity Creditors must look to single entity parent or subsidiary Creditors must look to single entity parent or subsidiary

2009 Clarence Byrd Inc.4 User Needs Taxation Authorities Taxation Authorities U.S. has consolidated tax return U.S. has consolidated tax return In Canada the single legal entities must file therefore the consolidated statement is essentially ignored In Canada the single legal entities must file therefore the consolidated statement is essentially ignored

2009 Clarence Byrd Inc.5 User Needs Non-Controlling Shareholders Non-Controlling Shareholders Must look to single entity statements to evaluate their investment Must look to single entity statements to evaluate their investment

2009 Clarence Byrd Inc.6 User Needs Majority Shareholders Majority Shareholders The major users of consolidated financial statements The major users of consolidated financial statements

2009 Clarence Byrd Inc.7 Consolidation Policy

2009 Clarence Byrd Inc.8 Terminology The correct term is Non-Controlling Interest The correct term is Non-Controlling Interest Control may not required holding a majority share of voting shares. Control may not required holding a majority share of voting shares. Consolidation is still required Consolidation is still required Minority Interest is still widely used Minority Interest is still widely used In most cases, control requires a majority of the voting shares In most cases, control requires a majority of the voting shares In these situations, Minority Interest is an appropriate description of the Non-Controlling Interest In these situations, Minority Interest is an appropriate description of the Non-Controlling Interest

2009 Clarence Byrd Inc.9 Conceptual Alternatives In Consolidation Controlling Interest Non-Controlling Interest What Is The Nature Of This Interest?

2009 Clarence Byrd Inc.10 Conceptual Alternatives In Consolidation Entity Approach Entity Approach The Non-Controlling Interest is an equity interest in the consolidated entity. Differs from controlling only in terms of size. The Non-Controlling Interest is an equity interest in the consolidated entity. Differs from controlling only in terms of size. Section 1582: Entity is one of the acceptable choices) Section 1582: Entity is one of the acceptable choices)

2009 Clarence Byrd Inc.11 Entity Approach Procedures Assets: Includes 100 percent of subsidiary fair values (Identifiable assets and goodwill) Assets: Includes 100 percent of subsidiary fair values (Identifiable assets and goodwill) Non-controlling interest Non-controlling interest In assets: With shareholders equity In assets: With shareholders equity In income: Shown as distribution of income (like preferred dividends) on the Statement of Retained Earnings In income: Shown as distribution of income (like preferred dividends) on the Statement of Retained Earnings Unrealized Profits: Eliminate 100 percent (upstream and downstream) Unrealized Profits: Eliminate 100 percent (upstream and downstream)

2009 Clarence Byrd Inc.12 Conceptual Alternatives In Consolidation Proprietary Approach Proprietary Approach The Non-Controlling Interest is not part of the consolidated entity The Non-Controlling Interest is not part of the consolidated entity Like proportionate consolidation Like proportionate consolidation

2009 Clarence Byrd Inc.13 Proprietary Approach Procedures Assets: Only the parents share of identifiable assets and goodwill Assets: Only the parents share of identifiable assets and goodwill Non-controlling interest Non-controlling interest In assets: None disclosed In assets: None disclosed In income: None disclosed In income: None disclosed Unrealized Profits: Eliminate parents share Unrealized Profits: Eliminate parents share

2009 Clarence Byrd Inc.14 Conceptual Alternatives In Consolidation Parent Company Approach Parent Company Approach The Non-Controlling Interest is a debt-like interest in the consolidated entity The Non-Controlling Interest is a debt-like interest in the consolidated entity The old CICA approach. The old CICA approach.

2009 Clarence Byrd Inc.15 Parent Company Approach Procedures Assets: Includes 100% of subsidiary carrying values, plus the parents share of fair value changes Assets: Includes 100% of subsidiary carrying values, plus the parents share of fair value changes Non-controlling interest Non-controlling interest In assets: With the long-term liabilities In assets: With the long-term liabilities In income: Deducted in the determination of income (like interest) In income: Deducted in the determination of income (like interest) Unrealized Profits: Eliminate parents share Unrealized Profits: Eliminate parents share

2009 Clarence Byrd Inc.16 Why Study? Aids in understanding the current rules and their inconsistencies Aids in understanding the current rules and their inconsistencies Will assist with the changeover to IFRSs (will use two different approaches) Will assist with the changeover to IFRSs (will use two different approaches) For Students: It can be examinable Sections 1582, 1601 and 1602 will be the focus of the text For Students: It can be examinable Sections 1582, 1601 and 1602 will be the focus of the text Conceptual Alternatives In Consolidation

2009 Clarence Byrd Inc.17 Conceptual Alternatives Under Section 1582 (And IFRS 3) Provides For Alternative Measures Provides For Alternative Measures Alternative 1 NCI = Proportionate share of the fair value of the Identifiable Net Assets of Subsidiary This approach recognizes 100 percent of the fair values of identifiable assets, but only the parents share of goodwill (not a consistent appraoch)

2009 Clarence Byrd Inc.18 Conceptual Alternatives Under Section 1582 (And IFRS 3) Provides For Alternative Measures Provides For Alternative Measures Alternative 2 NCI based on its fair value measured directly or based on investment cost This approach recognizes 100 percent of the fair values of identifiable assets and 100 percent of goodwill (Entity Approach)

2009 Clarence Byrd Inc.19 Procedural Approaches Every text has a different approach Every text has a different approach Everyone who has ever taught the subject believes that they have a better way Everyone who has ever taught the subject believes that they have a better way Difficult to move between alternatives Difficult to move between alternatives

2009 Clarence Byrd Inc.20 Procedural Approaches Work Sheets Work Sheets A mechanistic approach that is easy to use, provided a proper format is provided A mechanistic approach that is easy to use, provided a proper format is provided Provides no understanding of the underlying concepts Provides no understanding of the underlying concepts In our view: Consolidations for Dummies In our view: Consolidations for Dummies

2009 Clarence Byrd Inc. 21 Procedural Alternatives Direct Calculations Of Required Balances Direct Calculations Of Required Balances The most efficient approach The most efficient approach Requires complete understanding of concepts Requires complete understanding of concepts Consolidations for the gifted Consolidations for the gifted

2009 Clarence Byrd Inc.22 _________ ___________ _________ ___________ _________ ___________ _________ ___________ Procedural Alternatives Journal Entries into direct calculations Journal Entries into direct calculations Stresses an understanding of concepts Stresses an understanding of concepts Provides for movement towards direct calculations of required balances Provides for movement towards direct calculations of required balances Is not dependent on the format of the problem Is not dependent on the format of the problem Supported by a large quantity of problem material in this text Supported by a large quantity of problem material in this text

2009 Clarence Byrd Inc.23 General Approach Eliminate the investment account against the subsidiary Shareholders Equity at time of acquisition Allocate the excess of the investment cost over the carrying values of the subsidiary assets to fair value changes and goodwill Establish the Non-Controlling Interest At Acquisition

2009 Clarence Byrd Inc.24 General Approach Various adjustments and eliminations Only intercompany asset eliminations in this chapter Others in chapters 5 and 6

2009 Clarence Byrd Inc.25 General Approach Allocate the subsidiarys Retained Earnings since acquisition To Controlling Interest To Non-Controlling Interest

2009 Clarence Byrd Inc. 26 Investment Analysis Schedule Example Investment Cost Investment Cost$1,000,000 Add: Non-controlling interest (Two Alternative Approaches)) 200,000 Subtotal Subtotal$1,200,000 Less: Fair Value of Subsidiary Net Identifiable Assets Less: Fair Value of Subsidiary Net Identifiable Assets1,000,000 Goodwill $ 200,000 This type of analysis is required in almost every consolidation problem. The basic rules are as shown in this example. The numbers were created for this example.

2009 Clarence Byrd Inc.27 ______ ____________ _ __________ ______ ____________ _ __________ ______ ____________ _ __________ ______ ____________ _ __________ Example Consolidation At Acquisition Parco purchases 80 percent of the outstanding voting shares of Subco for cash of $2,000,000. Subcos identifiable assets have a fair value of $1,800,000 (net fair value equals $1,000,000). ParcoSubco Assets$3,500,000$2,000,000 Liabilities$1,300,000 $ 800,000 Shareholders Equity Common Stock Common Stock900,000200,000 Retained Earnings Retained Earnings1,300,0001,000,000 Total Equities $3,500,000$2,000,000

2009 Clarence Byrd Inc.28 Example Investment Analysis Schedule based on identifiable net assets Investment Cost (Consideration transferred) $2,000,000 Non-Controlling interest (20% of $1,000,000) 200,000 Subtotal$2,200,000 Less: Fair Value of Subcos Identifiable net assets 1,000,000 Goodwill$1,200,000

2009 Clarence Byrd Inc.29 Example Investment Analysis Schedule based on fair value Investment Cost (Consideration transferred) $2,000,000 Non-Controlling interest (20%)($2,000,000/80%) 500,000 Subtotal$2,500,000 Less: Fair Value of Subcos Identifiable assets 1,000,000 Goodwill$1,500,000

2009 Clarence Byrd Inc.30 NCI On Identifiable Assets Assets ($3,500,000 - $2,000,000 + $1,800,000) $3,300,000 Goodwill1,200,000 Total Assets $4,500,000 Liabilities Regular ($1,300,000 + $800,000) Regular ($1,300,000 + $800,000)$2,100,000 Non-Controlling Interest [(20%)($1,000,000)] Non-Controlling Interest [(20%)($1,000,000)]200,000 Total Liabilities $2,300,000 Shareholders Equity Common Stock (Parcos) Common Stock (Parcos)900,000 Retained Earnings (Parcos) Retained Earnings (Parcos)1,300,000 Total Equities $4,500,000 Consolidated Balance Sheet

2009 Clarence Byrd Inc.31 NCI On Fair Value Assets ($3,500,000 - $2,000,000 + $1,800,000) $3,300,000 Goodwill1,500,000 Total Assets $4,800,000 Liabilities ($1,300,000 + $800,000) $2,100,000 Shareholders Equity Non-Controlling Interest [(20%)($2,000,000/80%)] Non-Controlling Interest [(20%)($2,000,000/80%)]500,000 Common Stock (Parcos) Common Stock (Parcos)900,000 Retained Earnings (Parcos) Retained Earnings (Parcos)1,300,000 Total Equities $4,800,000 Consolidated Balance Sheet

2009 Clarence Byrd Inc.32 International Convergence Chapter 4 based on Section 1582, 1601, 1602 Chapter 4 based on Section 1582, 1601, 1602 These sections are consistent with IFRS No. 3 and IAS No. 27 These sections are consistent with IFRS No. 3 and IAS No. 27

2009 Clarence Byrd Inc.33 ______ _ ______ _________ ______ _ ______ _________ ______ _ ______ _________ ______ _ ______ _________ Summary Of Chapter 4 Procedures Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-2 Procedure Eliminate 100 percent of all the acquisition date balances in the subsidiarys common shareholders equity (includes both contributed capital and retained earnings). Step A-2 Procedure Eliminate 100 percent of all the acquisition date balances in the subsidiarys common shareholders equity (includes both contributed capital and retained earnings). Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of the fair value changes on identifiable assets, 100 percent of the fair value changes on identifiable liabilities, and Goodwill (or a Bargain Purchase Gain). The amount allocated to Goodwill is dependent on the measurement used for non-controlling interest. Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of the fair value changes on identifiable assets, 100 percent of the fair value changes on identifiable liabilities, and Goodwill (or a Bargain Purchase Gain). The amount allocated to Goodwill is dependent on the measurement used for non-controlling interest. Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on managements choice, the amount to be recorded will be either the non-controlling interests share of the fair value of the subsidiarys net identifiable assets or, alternatively, the fair value of the non-controlling interest. Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on managements choice, the amount to be recorded will be either the non-controlling interests share of the fair value of the subsidiarys net identifiable assets or, alternatively, the fair value of the non-controlling interest. Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities. Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities.

2009 Clarence Byrd Inc.34 Definitional Calculations Identifiable Assets And Liabilities The amount to be included in the consolidated Balance Sheet for any identifiable asset or liability is calculated as follows: Identifiable Assets And Liabilities The amount to be included in the consolidated Balance Sheet for any identifiable asset or liability is calculated as follows: 100 percent of the carrying value of the identifiable asset (liability) on the books of the parent company at the Balance Sheet date; plus 100 percent of the carrying value of the identifiable asset (liability) on the books of the parent company at the Balance Sheet date; plus 100 percent of the carrying value of the identifiable asset (liability) on the books of the subsidiary company at the Balance Sheet date; plus (minus) 100 percent of the carrying value of the identifiable asset (liability) on the books of the subsidiary company at the Balance Sheet date; plus (minus) 100 percent of the fair value increases (decreases) on the identifiable assets (liabilities) of the subsidiary company at the Balance Sheet date. 100 percent of the fair value increases (decreases) on the identifiable assets (liabilities) of the subsidiary company at the Balance Sheet date.

2009 Clarence Byrd Inc.35 Definitional Calculations Goodwill (Bargain Purchase Gain) The Goodwill to be recorded in the consolidated balance sheet is equal to: Goodwill (Bargain Purchase Gain) The Goodwill to be recorded in the consolidated balance sheet is equal to: The sum of the consideration transferred (investment cost) plus the measured value of Non-Controlling Interest; less The sum of the consideration transferred (investment cost) plus the measured value of Non-Controlling Interest; less The fair value of the identifiable net assets of the subsidiary The fair value of the identifiable net assets of the subsidiary Non-Controlling Interest - Balance Sheet there are 2 alternatives: Non-Controlling Interest - Balance Sheet there are 2 alternatives: The Non-Controlling Interest can be based on the non- controlling shareholders percentage interest in the fair value of the identifiable net assets in the subsidiary The Non-Controlling Interest can be based on the non- controlling shareholders percentage interest in the fair value of the identifiable net assets in the subsidiary The Non-Controlling Interest can be based on the fair value of the non-controlling shareholders interest in the enterprise. The estimate of this value can be based on the fair value of the controlling interest as measured by the investment cost or, alternatively, through some form of separate measurement The Non-Controlling Interest can be based on the fair value of the non-controlling shareholders interest in the enterprise. The estimate of this value can be based on the fair value of the controlling interest as measured by the investment cost or, alternatively, through some form of separate measurement

2009 Clarence Byrd Inc.36 Definitional Calculations Contributed Capital The Contributed Capital to be recorded in the consolidated Balance Sheet is equal to the contributed capital from the single entity Balance Sheet of the parent company. Contributed Capital The Contributed Capital to be recorded in the consolidated Balance Sheet is equal to the contributed capital from the single entity Balance Sheet of the parent company. Retained Earnings Consolidated Retained Earnings will be equal to the Retained Earnings balance that is included in the Balance Sheet of the parent company. Retained Earnings Consolidated Retained Earnings will be equal to the Retained Earnings balance that is included in the Balance Sheet of the parent company.

2009 Clarence Byrd Inc.37

chapter 4 consolidated balance sheet at acquisition

Documents

consolidated entity

entity legal entity

clarence byrd

single entity statements

goodwill noncontrolling

single entity parent

subsidiary slide

investment slide