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Transcript Slide 1

Chapter 5

Consolidation Subsequent To Acquisition (No Intercompany Profits)

Conceptual Alternatives

Sales Income Statements (Ponto Owns 70 Percent of Sonto) Cost Of Goods Sold Other Expenses Total Expenses Net Income Ponto Sonto $500,000 $200,000 $300,000 $110,000 80,000 40,000 $380,000 $150,000 $120,000 $50,000 © 2009 Clarence Byrd Inc.

Consolidated Income Statement

Proprietary Solution

Sales [$500,000 + (70%)($200,000)] Cost Of Goods Sold [$300,000 + (70%)($110,000)] Other Expenses [$80,000 + (70%)($40,000)] Total Expenses Consolidated Net Income $640,000 $377,000 108,000 $485,000 $155,000 © 2009 Clarence Byrd Inc.

Consolidated Income Statement

Parent Company Solution

Sales ($500,000 + $200,000) Cost Of Goods Sold ($300,000 + $110,000) Other Expenses ($80,000 + $40,000) Total Expenses Combined Income Non-Controlling Interest [(30%)($50,000)] Net Income $700,000 $410,000 120,000 $530,000 $170,000 15,000 $155,000 © 2009 Clarence Byrd Inc.

Consolidated Income Statement

Entity Solution

Sales ($500,000 + $200,000) Cost Of Goods Sold ($300,000 + $110,000) Other Expenses ($80,000 + $40,000) Total Expenses Consolidated Net Income Note – entity approach views NCI as an additional class of owner’s equity therefore not on the income statement © 2009 Clarence Byrd Inc.

$700,000 $410,000 120,000 $530,000 $170,000 5

CICA Solution

 Section 1582, 1601,1602 – basically mirror IAS.

• Section 1602 specifically indicates that NCI should be shown as a separate item within Shareholders’ equity (balance sheet) • Section 1602 is not as clear on the income statement (in conflict with IFRS regulations if full adoption is not done).

• For purposes of this text – NCI will be presented in the income statement as a distribution of consolidated Net income rather than an expense.

Consolidated Income Statement

Current CICA solution

Sales ($500,000 + $200,000) Cost Of Goods Sold ($300,000 + $110,000) Other Expenses ($80,000 + $40,000) Total Expenses Consolidated Net Income of the Enterprise Non-Controlling interest (30%)($50,000) Controlling interest in Consolidated Net Income $700,000 $410,000 120,000 $530,000 $170,000 (15,000) $155,000 © 2009 Clarence Byrd Inc.

Classification of Problems

Step A Procedures

    Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account.

Step A-2 Procedure Eliminate 100 percent of all the balances in the subsidiary’s common shareholders’ equity that are present on the acquisition date. Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of fair value change on the identifiable assets, liabilities and goodwill (Bargain Purchase Gain). Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on management’s choice, the amount to be recorded will be either the non controlling interest’s share of the fair value of the subsidiary’s identifiable assets or, alternatively, the fair value of the non-controlling interest © 2009 Clarence Byrd Inc.

Step A Procedures

Step B Procedures

  Chapter 4 Coverage • Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities.

Step C

Transition Problems: 2009-2011

 Depending on the choices made, a given Canadian company might prepare consolidated financial statements under 3 different sets of standards • Company may choose early adoption of full set of IFRS • Company may choose early adoption of Section 1582, 1601, 1602, while continuing to use other Sections of existing CICA Handbook • Company may choose to continue using all Sections of the exisitng CICA Handbook until convergence is required in 2011.

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Step B(2) Realization of Fair Value Changes

Basic Concept • Acquisition amounts recorded in Step A • As assets are sold or used, the recorded fair value changes become realized • As the fair value changes become realized, the Step A amounts must be reduced, with the changes taken into income © 2009 Clarence Byrd Inc.

Step B(2) – Current Assets

On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has Inventories with a carrying value of $550,000 and a fair value of $600,000.

Step B(2) - Inventories

 Required Adjustment 2009

Cost Of Goods Sold Inventories

Step B(2) - Inventories

 Required adjustment 2010

Cost Of Goods Sold Inventories

Step B(2) - Depreciable Assets

On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has a factory building with a carrying value of $810,000 and a fair value of $900,000.

The building will be used for 3 years and retired on December 31, 2011 with no salvage value. It is subject to straight line amortization at the rate of $270,000 per year.

Step B(2) - Depreciable Assets

 Required Adjustment 2009 Year Ending December 31, 2009

Amortization Expense ($90,000 ÷ 3) Building (Net)

$30,000 $30,000  Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $60,000.

Step B(2) - Depreciable Assets

 Required adjustment 2010 Year Ending December 31, 2010

Retained Earnings (Opening) Amortization Expense Building (Net)

$30,000 30,000 $60,000  Reduces the opening Retained Earnings to reflect the 2009 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $30,000.

Step B(2) - Depreciable Assets

 Required adjustment 2011 Year Ending December 31, 2011

Retained Earnings (Opening) Amortization Expense Building (Net)

$60,000 30,000 $90,000  Reduces the opening Retained Earnings to reflect the 2009 and 2010 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to Nil.

Step B(2) Depreciable Assets

 Required adjustment 2012

Retained Earnings Building (Net)

Step B(2) - Land

On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has Land with a carrying value of $450,000 and a fair value of $600,000.

Sub sells this parcel of Land on December 31, 2012 for $700,000.

Step B(2) - Land

As Land does not depreciate, no entry is required in 2009, 2010, or 2011 .

Step B(2) - Land

 Sub’s entry when Land is sold

Cash

Year Ending December 31, 2012 $700,000

Gain On Sale Of Land Land

Step B(2) - Land

 Required Consolidation Adjustment • Reduce gain to $100,000 ($700,000 - $600,000) • Reverse the Step A allocation to Land

Gain On Sale Of Land Land

Step B(3) – Goodwill Impairment

Step B(4) – Intercompany Expenses and Revenues

  Must be eliminated for purposes of consolidation Unless an unrealized profit is involved, the elimination does not change controlling interest in Net Income or the Non Controlling Interest in income © 2009 Clarence Byrd Inc.

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Step B(4) – Intercompany Expenses and Revenues

During 2009, a subsidiary pays interest of $50,000 to its parent Required adjustment: Year Ending December 31, 2009

Interest Revenue (Parent’s) Interest Expense (Subsidiary’s)

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Step B(5) – Intercompany Dividends

Required Adjustments • Eliminate the Dividend Revenue recorded by the parent • Eliminate 100 percent of the Dividends Declared by the subsidiary  Statement Of Retained Earnings contains parent company approach income (doesn’t include minority share)  This means minority dividends cannot be shown in the Statement of Retained Earnings • Minority share of dividends debited to the Non-Controlling Interest in the Balance Sheet © 2009 Clarence Byrd Inc.

Step C – Concepts

   Step A: Eliminate the non controlling share of Retained Earnings At Acquisition Step B: Make adjustments to the balance of Retained Earnings since acquisition Step C: Allocate the balance since acquisition to Non-Controlling Interest and consolidated Retained Earnings © 2009 Clarence Byrd Inc.

Step C Schedule

Beginning Balance Of Retained Earnings Step A Elimination Balance Since Acquisition Step B Adjustments (Fair Value Changes and Goodwill Impairment) Balance To Be Distributed To Non-Controlling Interest (20%) To Consolidated Retained Earnings *Numbers created for this example $1,200,000 ( 800,000) $ 400,000 ( 120,000) $ 280,000 ( 56,000) $ 224,000 © 2009 Clarence Byrd Inc.

Step C Schedule

Preparing The Statements

Definitional Calculations

Consolidated Net Income – Definitional Calculation

Parent Company Income Less: Intercompany Dividends Balance Subsidiary Net income Fair Value and Goodwill adjustments Consolidated Net Income Of The Enterprise Non-Controlling interest (20%)(95,000) Consolidated Net Income *Numbers created for this example $220,000 ( 125,000) $1,000,000 ( 60,000) $ 940,000 $95,000 $1,035,000 ( 19,000) $1,016,000 © 2009 Clarence Byrd Inc.

Consolidated Retained Earnings – Definitional Calculation

Parent Company Closing Retained Earnings Add: Parent’s Share Of Subsidiary Retained Earnings Since Acquisition adjusted for fair value and goodwill adjustments (Step B) Consolidated Retained Earnings *Numbers created for this example $3,500,000 440,000 $3,940,000 © 2009 Clarence Byrd Inc.

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Non-Controlling Interest Calculation - Balance Sheet

Using the procedures • Add: Step A Allocation • Subtract: non-controlling dividends • Add: Non-controlling interest in income • Add: Step C allocation Direct Calculation May Be Easier • If NCI on identifiable, multiply NCI percent times the subsidiary’s Shareholder’s Equity after Step B adjustments.

• Doesn’t work if NCI based on its fair value.

Subsidiary Preferred Shares

Application of the Equity Method

  Paragraph 3051.08 Investment income as calculated by the equity method should be the amount necessary to increase or decrease the investor's income to that which would have been recognized if the results of the investee's operations had been consolidated with those of the investor. (August, 1978) “One Line Consolidation”: • All consolidation adjustments are treated as adjustments of investment income • No elimination of intercompany assets, liabilities, expenses, or revenues © 2009 Clarence Byrd Inc.

Investment Income Under The Equity Method

Reported Investment Income (All Sources) Less: Intercompany Dividends Parent’s Equity In Subsidiary Net Income adjusted for fair value and goodwill adjustments for current year Equity Method Investment Income *Numbers created for this example $200,000 ( 80,000) $120,000 105,000 $225,000 © 2009 Clarence Byrd Inc.

Investment Account Balance Under The Equity Method

$1,200,000 Investment Cost Investor’s Equity In Investee Retained Earnings Since Acquisition adjusted for fair value and goodwill adjustments Equity Method Investment Account Balance *Numbers created for this example 175,000 $1,375,000 © 2009 Clarence Byrd Inc.

Consolidated Statement Of Cash Flows

  In general, the procedures are the same for consolidated Cash Flow Statements as for single entity Cash Flow Statements Preparation requires a consolidated Net Income figure © 2009 Clarence Byrd Inc.

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Consolidated Statement Of Cash Flows

Differences • Cash flows from operation must included controlling and non-controlling interests.

• The dividend figure in this statement (all dividends of parent and sub) will be different than the dividend figure in the Statement Of Retained Earnings (excludes dividends to non-controlling interest) © 2009 Clarence Byrd Inc.

Consolidated Statement Of Cash Flows

  Parent acquires additional subsidiary shares • For cash from sub: an intercompany transaction that would be eliminated • For cash from non-controlling shareholders: an outflow of consolidated cash Similar analysis for sales of shares © 2009 Clarence Byrd Inc.

Section 1540 on Business Combinations

 Paragraph 1540.42 The aggregate cash flows arising from each of business combinations accounted for using the purchase method (acquisition method) and disposals of business units should be presented separately and classified as cash flows from investing activities. (August, 1998) © 2009 Clarence Byrd Inc.

Section 1540 on Business Combinations

      Paragraph 1540.43 An enterprise should disclose, in aggregate, in respect of both business combinations accounted for using the purchase method and disposals of business units during the period each of the following: (a) the total purchase or disposal consideration; (b) the portion of the purchase or disposal consideration composed of cash and cash equivalents; (c) the amount of cash and cash equivalents acquired or disposed of; and (d) the total assets, other than Cash or cash equivalents, and total liabilities acquired or disposed of. (August, 1998) • IAS 7 P40 essentially contains the same basic requirements © 2009 Clarence Byrd Inc.

Step Acquisitions

  Section 1582 (based on IFRSs) requires a completely different approach.

Paragraphs 1582.41 and 1582.42

Step Acquisition

 When Control Acquired • Re-measure existing investment at fair value • Record gain or loss resulting from re-measurement • If amounts have been allocated to comprehensive income – treat as you normally would on disposal © 2009 Clarence Byrd Inc.

Step Acquisition

 When control is acquired, account for total investment as a new business combination • Recognize 100 percent of fair value changes on identifiable assets • Recognize NCI under either acceptable alternative © 2009 Clarence Byrd Inc.

Summary Of Consolidation Procedures

 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 subsidiary’s shareholders’ equity (includes both contributed capital and retained earnings).

  Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of fair value changes on identifiable assets, liabilities and Goodwill (Bargain Purchase Gain). The amount allocated to Goodwill or Bargain Purchase Gain is dependent on the measurement used for the non-controlling interest.

Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on management’s choice, the amount to be recorded will be either the non-controlling interest’s share of the fair value of the subsidiary’s identifiable net assets or, alternatively, the fair value of the non-controlling interest.

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Summary Of Consolidation Procedures

Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities.

 Step B-2 Procedure Give recognition to the post-acquisition realization of acquisition date fair value changes on assets and liabilities that have been used up or sold during the post-acquisition period. To the extent that this realization occurred in prior periods, recognition will require an adjustment of the opening retained earnings of the subsidiary. Alternatively, if the realization occurred in the current period, the adjustment will be to the subsidiary’s current period expenses, revenues, gains, or losses.

 Step B-3 Procedure Recognize current and cumulative goodwill impairment losses that have been measured since the acquisition of the subsidiary and the initial recognition of the goodwill balance. To the extent that the impairment took place during the current period, the measured amount will be charged to Goodwill Impairment Loss. To the extent that it occurred in prior periods, it will be charged to retained earnings.

Summary Of Consolidation Procedures

 Step B-4 Procedure Eliminate 100 percent of all intercompany expenses and revenues.

 Step B-5 Procedure Eliminate 100 percent of subsidiary dividends declared. The parent’s share of this amount will be deducted from the revenues of the parent company and the non-controlling interest’s share of this amount will be deducted from the Non-Controlling Interest in the Balance Sheet.

Summary Of Consolidation Procedures

 Step C-1 Procedure Eliminate the subsidiary’s adjusted Retained Earnings since acquisition and allocate the appropriate amounts of this balance to the Non-Controlling interest in the Balance sheet and to Consolidated Retained Earnings.

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Summary Of 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: • 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 acquisition date fair value increase (decrease) on the asset (liability); minus (plus) • amortization or realization of the fair value increase (decrease) on the asset (liability) for the period since acquisition to the current Balance Sheet date.

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Summary Of Definitional Calculations

Goodwill The Goodwill to be recorded in the consolidated Balance Sheet is equal to: • The sum of the consideration paid for the controlling interest and the value assigned to the acquisition date non-controlling interest; minus • The acquisition date fair value of the subsidiary’s identifiable net assets © 2009 Clarence Byrd Inc.

Summary Of Definitional Calculations

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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 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.

Summary Of 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.

Summary Of Definitional Calculations

 Retained Earnings The Retained Earnings amount to be included in the consolidated Balance Sheet is calculated as follows: • 100 percent of the Retained Earnings of the parent company; plus (minus) • the parent company’s share of the subsidiary’s Retained Earnings (Deficit) since acquisition. The adjustments to this balance would be for the accumulated amounts of fair value changes that have been realized since the acquisition date through use or sale. In addition, if the acquisition date non controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized since acquisition.

• If the acquisition date non-controlling interest was measured on the basis of identifiable assets only, any goodwill impairment would be subtracted in full against the sum fo the first two items.

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Summary Of Definitional Calculations

Revenue The amount of any revenue to be included in the consolidated Income Statement is calculated as follows: • 100 percent of the amount reported in the parent company’s financial statements; plus • 100 percent of the amount reported in the subsidiary’s financial statements; minus • 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) • 100 percent of any fair value changes realized during the period through usage or sale of subsidiary assets. It would be unusual for fair value realizations to be related to revenues. However, it could happen. For example, amortization of a fair value change on a long-term receivable would be treated as an adjustment of interest revenue. © 2009 Clarence Byrd Inc.

Summary Of Definitional Calculations

 Expense The amount of any expense to be included in the consolidated Income Statement is calculated as follows: • 100 percent of the amount reported in the parent company’s financial statements; plus • 100 percent of the amount reported in the subsidiary’s financial statements; minus • 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) • 100 percent of any fair value changes realized during the period through usage or sale of subsidiary assets.

Summary Of Definitional Calculations

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Goodwill Impairment Loss

If the required annual test of goodwill for impairment determines that any impairment has occurred during the current period, this amount will be recorded as a Goodwill Impairment Loss.

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Summary Of Definitional Calculations

Consolidated Net Income Of The Enterprise

Consolidated Net Income Of The Enterprise can be calculated as follows: • 100 percent of the parent company’s Net Income, excluding dividends received from the subsidiary; plus (minus) • 100 percent of the adjusted Net Income of the subsidiary. The adjustments are for 100 percent of the amounts charges to income for fair value changes realized during the period through use or sale. In addition, if the acquisition date non controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized during the period.

• If the acquisition date non-controlling interest was measured on the basis of identifiable assets only, any goodwill impairment recognized during the period would be subtracted in full against the sum of the first two items.

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Summary Of Definitional Calculations

Non-Controlling Interest - Income Statement

The non-controlling interest in the consolidated Income Statement is an amount equal to the non-controlling interest’s ownership percentage of the adjusted Net Income of the subsidiary.

 The adjustments are for 100 percent of the amounts charged to income for fair value changes realized during the period through use or sale. In addition if the acquisition date non-controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized during the period © 2009 Clarence Byrd Inc.

Summary Of Definitional Calculations

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Controlling Interest - Income Statement

The controlling interest in consolidated Net Income is simply the Consolidated Net Income Of The Enterprise, less the Non-Controlling Interest in that income.

International Convergence

 Standards • IFRS No. 3, Business Combinations • IAS No. 27, Consolidated And Separate Financial Statements  CICA Sections 1582, 1601, 1602 largely converge with these standards.

Slide 1

Transcript Slide 1

Chapter 5

Conceptual Alternatives

Consolidated Income Statement

Consolidated Income Statement

Consolidated Income Statement

CICA Solution

Consolidated Income Statement

Classification of Problems

Classification of Problems

Classification of Problems

Step A Procedures

Step A Procedures

Step B Procedures

Step C

Transition Problems: 2009-2011

Step B(2) Realization of Fair Value Changes

Step B(2) – Current Assets

Step B(2) - Inventories

Step B(2) - Inventories

Step B(2) - Depreciable Assets

Step B(2) - Depreciable Assets

Step B(2) - Depreciable Assets

Step B(2) - Depreciable Assets

Step B(2) Depreciable Assets

Step B(2) - Land

Step B(2) - Land

Step B(2) - Land

Step B(2) - Land

Step B(3) – Goodwill Impairment

Step B(4) – Intercompany Expenses and Revenues

Step B(4) – Intercompany Expenses and Revenues

Step B(5) – Intercompany Dividends

Step C – Concepts

Step C Schedule

Step C Schedule

Preparing The Statements

Definitional Calculations

Consolidated Net Income – Definitional Calculation

Consolidated Retained Earnings – Definitional Calculation

Non-Controlling Interest Calculation - Balance Sheet

Subsidiary Preferred Shares

Application of the Equity Method

Investment Income Under The Equity Method

Investment Account Balance Under The Equity Method

Consolidated Statement Of Cash Flows

Consolidated Statement Of Cash Flows

Consolidated Statement Of Cash Flows

Section 1540 on Business Combinations

Section 1540 on Business Combinations

Step Acquisitions

Step Acquisition

Step Acquisition

Summary Of Consolidation Procedures

Summary Of Consolidation Procedures

Summary Of Consolidation Procedures

Summary Of Consolidation Procedures

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

Summary Of Definitional Calculations

International Convergence

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