CONSOLIDATION CONSOLIDATION AFTER ACQUISITION • •
Effect of Internal Accounting Method Acquisition Method Treatments − − −
• •
Consolidation (Basic Example) Acquisition Method Treatments (continued) − − −
• •
Receivables / Payables Sales / Inventory Investment / Subsidiary Equity
“After Consolidation” refers to entries in the years after
Income Reported by the Subsidiary Dividends Paid to the Parent Excesses between Subsidiary BV and FMVs
Push Down Accounting Consolidation (More Complex Example) − −
Assuming Equity Method Internally Assuming Initial Value Method Internally
EFFECT OF INTERNAL ACCOUNTING METHOD Parent will use one of the following for internal accounting: • • •
Initial Value (Cost) Method Equity Method Partial Equity Method
Effect: Each method requires different elimination entries. Result: All methods yield same result after consolidation.
Partial Equity Method : • • •
Parent recognizes reported subsidiary income. Dividends reduce investment balance. No other equity adjustments are made.
Consolidation after Acquisition
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ACQUISITION METHOD TREATMENTS Treatment of Receivables / Payables Problem – Inappropriate for company to “owe money to itself”
Treatment: Eliminate: − −
Payable of borrower Receivable of lender
Example: Parent makes a loan to the subsidiary for $100,000. Elimination Entry: Note Payable Note Receivable
Consolidation after Acquisition
100,000 100,000
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ACQUISITION METHOD TREATMENTS Treatment of Sales / Inventory Problem – Inappropriate for company to make a profit by “selling to itself”
Treatment: Eliminate: Profit related to intercompany sale from retained earnings of seller Profit related to the intercompany sale of inventory of the buyer Sale from revenue on consolidated income statement −
−
−
Example: Parent sells inventory that cost $200 to a subsidiary for $220. The subsidiary has not sold the inventory externally. Parent Entry: Cash Sales CoGS Inventory
220 220 200 200
Subsidiary Entry: Inventory Cash
220 220
Elimination Entry: Sales CoGS Inventory
220 200 20
Or if closed:
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Retained Earnings Inventory
20 20
ACQUISITION METHOD TREATMENTS Treatment of Investment / Subsidiary Equity Problem – Inappropriate to report an “investment in itself”
Treatment: Eliminate: Investment in the subsidiary Subsidiary common stock , APIC, and retained earnings (removes subsidiary equity − −
from consolidated statements)
Example: Parent obtains ownership of a subsidiary. Elimination Entry: Common Stock (of Sub) 200,000 Retained Earnings (of Sub) 300,000 Investment in Subsidiary (of Parent) 500,000 Note: This entry is made each
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CONSOLIDATION Basic Example Mother, Corp. purchases all the common stock of Daughter, Co. at their book values.
Other information: Daughter owes Mother $200 on account Last year, Daughter purchased $2,000 in inventory from Mother. The original inventory cost to Mother was $1,500 (profit of $500). Daughter had not sold the inventory by year end.
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CONSOLIDATION Basic Example (Continued) Accounts Prior to Elimination
Balance Sheet Assets Cash Receivables Inventory Fixed Assets Investment in Daughter Total Assets
Mother Daughte Corp. r, Co. 2,000 30,000 32,000 127,000
100,000 291,000
1,000 10,000 20,000 86,000 0 117,000
Equities Payables Debt Common Stock Retained Earnings Total Equities
20,000 70,000 150,000 51,000 291,000
2,000 15,000 70,000 30,000 117,000
The following eliminations are necessary for the consolidated balance sheet. Eliminate: the $200 intercompany receivable / payable unrealized profit of $500 from intercompany sale from the buyer inventory and seller retained earnings the $100,000 investment by Mother and the equity of (c) Daughter. (a) (b)
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CONSOLIDATION Basic Example (Continued) Elimination Entries Balance Sheet
Eliminations Mother
Daughte r
Debit
Credit
Consolidat ed
Assets Cash
2,000
1,000
Receivables
30,000
10,000
(a) 200
39,800
Inventory
32,000
20,000
(b) 500
51,500
Fixed Assets
127,000
86,000
Investment in Daughter
100,000
0
Total Assets
291,000
3,000
213,000
(c) 100,000
117,000
0 307,300
Equities (a) 200
Payables
20,000
2,000
Debt
70,000
15,000
150,000
70,000
(c) 70,000
150,000
51,000
30,000
(c) 30,000
50,500
Common Stock Retained Earnings
21,800 85,000
(b) 500 Total Equities
291,000
117,000
100,700
100,700
307,300
(a) (b)
the $200 intercompany receivable / payable unrealized profit of $500 from intercompany sale from the buyer inventory and seller retained earnings (c) the $100,000 investment by Mother and the equity of Daughter. Thought Question: Do any of the entries need to be repeated in
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ACQUISITION METHOD TREATMENTS Income Reported by the Subsidiary Problem – Equity method recorded subsidiary income as an increase in the value of the investment.
Treatment: Eliminate: − −
Investment of parent Income from Subsidiary of parent
Example: During the year, the subsidiary informed the parent of earnings of $400,000. The parent uses the equity or partial equity method. Original Entry by Parent : Investment in Subsidiary (BS) 400,000 Equity in Subsidiary Income (IS) 400,000
Elimination Entry: Equity in Subsidiary Income (IS) 400,000 Investment in Subsidiary 400,000
Reason for Entry: Consolidated statements should include 100% of subsidiary sales and expenses (not proportional amount as a separate line called “Equity in Subsidiary Income”)
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ACQUISITION METHOD TREATMENTS Dividends Paid to the Parent Problem – Equity method recorded dividend from subsidiary as a decrease in the value of the investment.
Treatment: Eliminate: − −
Investment of parent Dividends Paid or RE of subsidiary
Example: During the year, the subsidiary paid the parent $50,000 in dividends. The parent uses the equity or partial equity method. Subsidiary Entry: Dividends Paid Cash
50,000 50,000
Parent Entry: Cash Investment in Subsidiary
50,000 50,000
Elimination Entry: Investment in Subsidiary Dividends Paid
Consolidation after Acquisition
50,000 50,000
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ACQUISITION METHOD TREATMENTS Excesses between Subsidiary BV and FMVs Problem – Assets of subsidiary must be adjusted to fair market value
Treatment: − −
Eliminate Investment of parent Increase Value of Assets of Subsidiary
Example: A parent acquires a subsidiary whose land was undervalued by $1,000. Elimination Entry: Land Investment in Subsidiary
1,000 1,000
Note: Entry not needed if “Push Down” accounting is used by subsidiary.
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PUSH DOWN ACCOUNTING What it does: does Subsidiary restates assets and liabilities on OWN books at FMV. (Goodwill determined in same manner.) Justification: Justification Change in ownership justifies new basis of reporting. Controversy: Controversy Is difference income or equity to the subsidiary? Typically net assets are increased. Example: Equipment 500 APIC or RE or Revaluation due to Consolidation 500
Current Requirements Not required by the FASB, but the SEC required when subsidiary is “substantially wholly owned” (> 95%, NCI < 5%) encourages if subsidiary is publicly-traded discourages if ownership is < 80% •
• •
NOTE: This is mostly an internal issue unless: The subsidiary is substantially wholly owned, but NCI is publicly traded.
SAB 54 and 73
Advantages: Advantages Push down eliminates several consolidation entries: recognition of FMV of assets, and amortization of excess •
•
Consolidation after Acquisition
“Push down” accounting saves me from having to repeat several entries each year.
amounts
12
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COMPREHENSIVE EXAMPLE Gander Inc. obtains 100% of Gosling Co. on Jan 1, 2009 for $490,000 in cash. Gander uses the equity method for internal purposes.
Cash Accounts Receivable Inventory Equipment (5 year life) Buildings Land Investment in Gosling, Co. Accounts Payable LT Liabilities Common Stock Retained Earnings
Gander, Inc. 120,000 270,000 550,000 800,000
Gosling, Co. 60,000 40,000 100,000 200,000
600,000 170,000 490,000
120,000 80,000
50,000 150,000 300,000 100,000
On Jan 1, 2009, Gosling’s assets had fair market value of Land Building Equipment
86,000 144,000 200,000
Gosling income and dividends: 2009 2010 Income 80,000 110,000 Dividends 30,000 10,000 The difference between BV and FMV follows: FMV BV Difference Land 86,000 80,000 6,000 Building 144,000 120,000 24,000 30,000
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Fair Value Allocation and Annual Amortization: Consideration (Acquisition FV) ................. $490,000 Book value (assets minus equities) .......... (400,000) Excess fair value over book value ............ $90,000 Excess fair value assigned Excess Land Buildings Goodwill Total
$6,000 24,000 Total 60,000 $90,000
Life indefinite 4 yrs. 30,000 Indefini te
CS + RE = $300,000 + $100,000 = $400,000
Annual Amortizati on -0$6,000 -0-
Plug to find Goodwill
$6,000
Consolidation Entries as of December 31, 2009 Elimination of Subsidiary Equity Common Stock—Gosling................................ 300,000 Retained Earnings—1/1/09 ........................... 100,000 Investment in Gosling ..............................
400,000
Allocation of FMV Excess (not needed if Push-Down is used) 6,000 Land .............................................................. Buildings ....................................................... 24,000 Goodwill ........................................................ 60,000 90,000 Investment in Gosling .............................. Record Amortization of Excess (not needed if Push-Down is used) Depreciation expense.................................... Buildings...................................................
Eliminate Subsidiary Income Equity in Subsidiary Income (IS).................... Investment in Gosling ..............................
6,000 6,000 74,000 74,000
push-down is used, Income – Amortization of Excess = $80,000 - $6,000 = If74,000
Eliminate Subsidiary Dividend Investment in Gosling ................................... Dividends Paid .........................................
Consolidation after Acquisition
Gosling would report $74,000 in income.
10,000
10,000
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Consolidation Entries as of December 31, 2010 Elimination of Subsidiary Equity Common Stock—Gosling ............................... Retained Earnings—1/1/10 *.......................... Investment in Gosling ..............................
300,000 170,000 470,000
* Beginning Balance + Net Income + Dividends = 100,000 + 80,000 – 10,000 = 1 70,000
Allocation of FMV Excess (not needed if Push-Down is used) Land .............................................................. 6,000 Buildings *..................................................... 18,000 Goodwill ........................................................ 60,000 Investment in Gosling .............................. 84,000 *
Original excess – prior year depreciation = $24,000 - $6,000 = $18,000
Record Amortization of Excess (not needed if Push-Down is used) Depreciation expense.................................... Buildings...................................................
Eliminate Subsidiary Income Equity in Subsidiary Income (IS)................... Investment in Gosling ..............................
6,000 6,000 104,000 104,000
* Income – Amortization of Excess = $110,000 - $6,000 = 104,000
Eliminate Subsidiary Dividend Investment in Gosling ................................... Dividends Paid .........................................
Consolidation after Acquisition
30,000 30,000
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