Ch3 An Introduction to Consolidated Financial Statements

1. Ch3 An Introduction to ConsolidatedFinancial Statements

2. Parent–subsidiary Relationship • a parent–subsidiary relationship is created • Acquire controlling interest in voting stock • Usually more than 50% • May have control through indirect ownership(Ch9)

3. Consolidated financial statements • Parent and subsidiary continue to function as separate entities and maintain accounting records on a separate basis. • Separate parent and subsidiary financial statements are converted into consolidated financial statements that reflect the financial position and the results of operations of the combined entity.

4. Consolidated financial statements • More meaningful than separate financial statements • Necessary for a fair presentation • A consolidated entity is a fictitious (conceptual) reporting entity.

5. Consolidated Statements • Prepared by the parent company • Fiscal year end • Use parent's fiscal year end, but • P&S Difference <=3 months, Disclose(adjust) intervening material events • P&S Difference >3months, adjusted as closely as possible to the fiscal period of the parent company.

6. Parent Acquires 100 Percent of Subsidiary at Book Value p92 • P acquires 100% of S at its book value and fair value of $40,000 on 1/1 2011. - P’s “Investment in S” appears in the separate balance sheet of P, but not in the consolidated balance sheet for P and S - We eliminate reciprocal accounts in the process of consolidation and combine only nonreciprocal accounts.

7. Parent Acquires 100 Percent of Subsidiary at Book Value p92

8. Parent Acquires 100 Percent of Subsidiary—With Goodwill p93 • P acquires all of S’s stocks for $50,000, there will be a $10,000 excess of investment cost over book value acquired ($50,000 investment cost less $40,000 stockholders’ equity of S). • In the absence of evidence that identifiable net assets are undervalued, this asset is assumed to be goodwill.

9. Parent Acquires 100 Percent of Subsidiary—With Goodwill E3-3 p94

10. Parent Acquires 100 Percent of Subsidiary—With Goodwill p93

11. Parent Acquires 90 Percent of Subsidiary—With Goodwill p93 • Under the acquisition method, all assets and liabilities of the subsidiary are reported using 100 percent of fair valuesat the combination date, based on the price paid by the parent for its controlling interest, even when the parent acquires less than a 100 percent interest.

12. Parent Acquires 90 Percent of Subsidiary—With Goodwill p93 • Both the controlling and noncontrolling interests will be reported based on fair values (that is, including goodwill) at the acquisition date. • That is, GAAP requires measurement of noncontrolling interests at fair values (including goodwill).

13. Parent Acquires 90 Percent of Subsidiary—With Goodwill p93 P paid $45,000 for a 90 percent interest. • implies that the total fair value of S is $50,000 ($45,000 / 90%). Controlling interest(90%)->$45,000(P買90%花的錢) Noncontrolling interest(10%)->$5,000 (如果這10%今天要買要花多少錢) • the excess of total fair value over book value of S’s net identifiable assets and liabilities is $10,000 ($50,000-($30,000+$10,000)) =>Goodwill • Goodwill belong to P is $9,000($45,000-$40,000x90%) Goodwill belong to S is $1,000($5,000-$40,000x10%)

14. P Acquires 90% of S—With Goodwill E3-4 p94

15. Parent Acquires 90 Percent of Subsidiary—With Goodwill

16. Parent Acquires 90 Percent of Subsidiary—With Goodwill (IFRS) • For noncontrolling interests, The IFRS will permit acquirers either fair value (that is, with goodwill, GAAP 做法) or measurement of the proportional interest in the fair value of the subsidiary’s identifiable net assets (that is, without goodwill) for each acquisition

17. Parent Acquires 90 Percent of Subsidiary—With Goodwill (IFRS) Noncontrolling interests-measurement of the proportional interest in the fair value of the subsidiary’s net assets • Controlling interest - $45,000(原本花的錢) • Noncontrolling interest - ($30,00+$10,000)*10%=$4,000 可辨認淨資產公允價值*非控制股權比例

18. Parent Acquires 90 Percent of Subsidiary—With Goodwill (IASB) • Goodwill =$45,000+$4,000-($30,00+$10,000)=$9,000 屬於非控制股權的商譽為 $0 • Goodwill 另一種看法 Controlling interest’s goodwill =$45,000- ($30,00+$10,000)x90%=$9,000 Noncontrolling interest’s goodwill =$4,000-($30,00+$10,000)x10%=$0

19. Note • 將課本的商譽(即總商譽)乘上非控制權益比率即可得到非控制權益所擁有的商譽 (1)將課本的商譽扣除非控制權益所擁有的商譽即可 得到IFRS第二種作法的商譽 (2)將課本的非控制權益扣除非控制權益所擁有的 商譽即可得到IFRS第二種作法的非控制權益 • Total fair value of S is different from the fair value of all identifiable net assets of S 子公司的公允價值與子公司的可辨認淨資產之公允價值是不同的

20. Noncontrolling interest • A noncontrolling interest in a subsidiary should be displayed and labeled in the consolidated balance sheet as a separate component of equity. • Income attributable to the noncontrolling interest is not an expense or a loss but a deduction from consolidated net income to compute income attributable to the controlling interest.

21. Consolidated Balance Sheet after acquisition p96 1. P acquired 90% of S for $45,000 on 1/1 2011 S’s net assets was $40,000 (see E3-4 p95). 2. The accounts payable of S include $5,000 owed to P. 3. During 2011, S had income of $20,000 and declared $10,000 in dividends.

22. The balance sheets of P and S at 12/31 2011, one year after acquisition, p88 • P S

23. P’s Investment account balance12/31 2011 p96 • Investment in S, 1/1 2011 $45,000 + 90% of S’ net income 18,000 - 90% of S’s dividend (9,000) Investment in S,12/31 2011 $54,000 • Noncontrolling Interest, 1/1 2011 $ 5,000 + 10% of S’ net income 2,000 - 10% of S’s dividend (1,000) Noncontrolling Interest,12/31 2011 $6,000

24. E3-5 p97

25. Working paper entries p97

26. Effect of Assignment on Consolidated Balance Sheet at Acquisition 98 • P purchases 90% of for $5,200,000 cash plus 100,000 shares of P’s $10 par common stock with a market value of $5,000,000 on 12/31 2011 • P paid additional costs of combination $200,000 in cash, P pays these additional costs in cash (expense it)

27. E3-6 p99

28. Effect of Assignment on Consolidated Balance Sheet at Acquisition p98

29. Allocation E3-7 p99

30. P99 p100 p101 also see E3-8

31. see E3-8 p100

32. IFRS 另一種作法 • 可辨認資產及負債的分攤與課本一樣 (既然非控制權益為可辨認淨資產乘上非控制比例) • 但商譽改為 $10,200-$7,000(可辨認淨資產公允價值)x90% =$3,900 兩個商譽的差別 =$4,333 - $3,900 =$433 課本總商譽 $4,333x0.9 $4,333x0.1 • 非控制權益 = $7,000x10%=$700 (課本$1,133-$433) • 若有使用Unamortized excess科目,該科目也扣除$433

33. IFRS 另一種作法 5,000 700 3,900 5,000

34. Effect of Amortization on Consolidated Balance Sheet After Acquisition p101 • The effect of amortizing the $5,433,000 excess on the 12/31,2012 is based on

35. Effect of Amortization on Consolidated Balance Sheet After Acquisition p101 • Using an equity method perspective, we calculate P’s income from S as follows • Investment balance at 12/31 = $10,200+$571.5-$270=$10,501.5

36. Effect of Amortization on Consolidated Balance Sheet After Acquisition p102 • Alternatively, 2010 2010

37. Effect of Amortization on Consolidated Balance Sheet After Acquisition p102 • verify the noncontrolling interest at 12/31 2012

38. Effect of Amortization on Consolidated Balance Sheet After Acquisition p95

39. Effect of Amortization on Consolidated Balance Sheet After Acquisition p103

40. Effect of Amortization on Consolidated Balance Sheet After Acquisition p102

41. Consolidated income statement p105

42. IFRS 第二種作法 4,835 733.5 3,900 4,835

43. 其他補充說明 • 合併商譽在母公司或子公司帳上均未記錄，僅出現於工作底稿及合併資產負債表中。 (但歸屬於母公司之商譽之數額仍會存在在投資科 目中) • 在收購日合併資產負債表上子公司之淨資產雖係按公允價值衡量，母公司之淨資產則仍依原帳面金額衡量。 • 收購日之後年度之合併資產負債表上子公司之淨資產(有高低估資產部分)仍按收購日之公允價值衡量(調整折舊後)

44. 其他補充說明 • 合併資產負債表上之股本、資本公積、保留盈餘均等於母公司本身資產負債表上各項目之金額。 • 非控制權益應列示於合併資產負債表之權益中，與母公司權益分別列示，無須區分股本、資本公積及保留盈餘 (或累積虧損) 等。