Cpa Review- Far 3-6 (Acquisition Method)

Front 1

Acquisition Method

Back 1

Investment is valued at the FV of the consideration given or received, whichever is more evident. Accounting for an acquisition begins at the date of acquisition.

Hint 1

DR. Investment in Sub
CR. Cash
or
CR. Common Stock (parent at par)
CR. APIC (Parent/FV - par)

Front 2

Accounting Characteristics

Back 2

1. 100% of the net assets acquired (regardless of % acquired) are recorded at FV with any unallocated balance remaining creating goodwill.

Hint 2

2. When the companies are consolidated, the sub's entire equity (common stock, APIC, and R/E's) is eliminated.

Front 3

Eliminating Journal Entry- CAR

Back 3

-Common Stock, A.P.I.C., and Retained Earnings of the subsidiary are eliminated by debiting each of the sub's equity accounts in the Eliminating Journal Entry (EJE) on the consolidating workpapers.

Hint 3

Consolidating equity will be equal to the parent's equity balance plus any noncontrolling interest.

Front 4

Eliminating Journal Entry- IN

Back 4

1. The "Investment in Subsidiary" b/s account will be eliminated by crediting its balance on the consolidated workpapers.

Hint 4

2. Noncontrolling Interest (NCI) is created. Represents the FV of any portion of the sub that isn't acquired by the parent. Reported as NCI in the equity section of the consolidated F/S's.

Front 5

Eliminating Journal Entry- BIG

Back 5

1. B/S of Sub is Adjusted to FV on the acquisition date. Done regardless of the amount paid. Adjustment is for the 100% FV of the sub's assets and liabilities regardless of the % acquired by the parent.

Hint 5

2. Identifiable Intangible Assets of the Sub are Recorded at their FV.
3. Goodwill (or Gain) is Required. Any excess of the FV of the sub (acquisition cost plus any NCI) over the FV of the sub's net assets is debited to create goodwill. If there is a shortage/negative amount, it is credited and recorded as a gain.

Front 6

Consolidating Workpaper Eliminating J/E

Back 6

DR. Common Stock- Sub
DR. APIC- Sub
DR. Retained Earnings- Sub
CR. Investment in Sub
CR. NCI (if not 100% owned)
DR. B/S Adjustment to FV
DR. Identifiable Intangible Assets to FV
DR. Goodwill

Hint 6

-1st 3 debits eliminate sub's (old owner's) equity.
-2 credits eliminate parent's investment account and create NCI if not 100% owned.
-Last 3 debits adjust "old" sub's B/S to FV and create goodwill

Front 7

Acquisition Date Calculation

Back 7

(of CAR) The determination between BV and FV is computed as of the acquisition date. When the sub's F/S's are provided for a subsequent period, it is necessary to reverse the activity (income & dividends) in the sub's R/E's to get back to the BV at acquisition date.

Hint 7

Use the BASE formula:

B- Beginning R/E's
A- Add Net Income
S- Subtract Dividends
E- Ending R/E's

Front 8

Investment in Subsidiary

Back 8

-Original carrying amount is original cost. Measured by the FV of the consideration given.
-Direct out-of-pocket costs (finder's fee, legal fees) and indirect costs are expensed as incurred (DR. Expense).

Hint 8

-Stock registration and issuance costs (SEC filing fees) are a direct reduction to the value of the stock issued (DR. APIC account of the parent).
-Bond issue costs are capitalized and amortized (DR. Bond Issue Costs).

Front 9

Consolidated Balance Sheet

Back 9

-Will include 100% of the sub's assets and liabilities.
-NCI's share of net assets also presented here as part of S/E (separately from equity of parent)

Front 10

Noncontrolling Interest (NCI)

Back 10

-This results in business combinations that don't establish 100% ownership of a sub. NCI must be reported at FV in the equity section of the consolidated B/S, separately from parent's equity.

Hint 10

-This will include the noncontrolling interest's share of any goodwill (even though there is no cost basis)

Front 11

NCI Computations- B/S

Back 11

1. Acquisition Date Computation: Total FV of Sub x NCI % = NCI (in consolidated equity)
2. NCI after Acquisition Date: accounted for using the equity method*

Hint 11

*B: Beginning NCI
A: + NCI share of Sub Net Income
S: - NCI share of Sub Dividends
E: Ending NCI
3. Sub's net losses are allocated to NCI (even if negative carrying balance)

Front 12

Consolidated Income Statement

Back 12

-Will include 100% of the sub's revenues and expenses after the date of acquisition.

Hint 12

-Should show separately, consolidated net income, net income attributable to the NCI, and net income attributable to the parent.

Front 13

NCI Computation of Net Income

Back 13

-Reported on the I/S
1. Sub's Income - Sub's Expenses = Sub's Net Income*

Hint 13

*x NCI % = Net Income attributable to the noncontrolling interest (goes to NCI - R/E's)

Front 14

IFRS vs. U.S. GAAP- NCI

Back 14

-Under IFRS, NCI (& goodwill) can be calculated using the partial or full goodwill method. Partial goodwill method is preferred.

Hint 14

1. Full Goodwill Method: used under GAAP (NCI = FV of Sub x NCI %)
2. Partial Goodwill Method: NCI = FV of Sub's net identifiable assets x NCI %

Front 15

In Process Research & Development

Back 15

1. Recognize as an intangible asset separately from goodwill at the acquisition date (need valuation)
2. Do not immediately write off
3. Meets the definition of an asset if it has probable future economic benefit.

Hint 15

4. Expense "continuing" R&D to complete project

-Later: (1) Project Success (amortize IP R&D) or (2) Project Failure (impair/write off IP R&D)

Front 16

Determining Acquisitions with Goodwill

Back 16

1. Step 1- B/S Adjusted to FV (recalculate depreciation)
2. Step 2- Identifiable Intangible Assets to FV*
3. Step 3- Goodwill (not amortized but subject to impairment testing. If found to be impaired, written down and charged as an expense against income on the I/S in that period)

Hint 16

*Separated into 2 categories:
(1) Finite Life- amortize over remaining life, subject to the 2 step impairment test
(2) Indefinite Life- don't amortize, subject to the 1 step impairment test.

Front 17

IFRS vs. U.S. GAAP- Goodwill

Back 17

-Under IFRS, goodwill can be calculated using the full or partial goodwill methods.
1. Full Goodwill Method (Same as GAAP): Goodwill = FV of Sub - FV of Sub's net assets

Hint 17

2. Partial Goodwill Method: Goodwill = Acquisition Cost - FV of Sub's net assets acquired.
-Partial and full goodwill methods will differ only when the parent owns less than 100% of the sub.

Front 18

Consolidated Statement of CF's

Back 18

-Period of Acquisition
1. Net cash spent or received must be reported in the investing section of the statement of CF's (take acquisition price of the sub into account & the amount of cash the sub had on hand when they were acquired)
2. The assets and liabilities of the sub on the acquisition date must be added to the parents assets and liabilities at the beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period.

Hint 18

-Subsequent Periods: Consolidated statement of CF's should present the cash inflows and outflows of the consolidated entity, excluding CF's between the parent and sub. Should be similar to a nonconsolidated entity except for-
1. When reconciling net cash provided by operating activities, total consolidated net income should be used.
2. The financing section should report dividends paid by the Sub to noncontrolling shareholders (to parent not reported).
3. THe investing section may report the acquisition of additional shares by the parent if the acquisition was an open market purchase.