· pdf filechapter 3 business ... application of the acquisition method . . 72 acquisition...

CHAPTER 1Introduction

Abbreviations Used In This Text . . . . . . 1

What Is “Advanced” Financial Accounting? . 1A Definition Based On Tradition . . . . . . 1

The Coverage Of This Text . . . . . . . . 1

Overview Of InvestmentsIn Equity Securities AndBusiness Combination Transactions . . . 2Our Objective . . . . . . . . . . . . . 2

Investments In Equity Securities . . . . . . 2

Business Combinations . . . . . . . . . . 4

The Overlap . . . . . . . . . . . . . . 5

International Convergence . . . . . . . . . 6The Problem . . . . . . . . . . . . . 6

The Solution: International Financial ReportingStandards . . . . . . . . . . . . . . 7

The AcSB’s Strategic Plan . . . . . . . . . . 9Background . . . . . . . . . . . . . . 9

Strategy For Publicly Accountable Enterprises 10

Strategy For Non-Publicly AccountableEnterprises . . . . . . . . . . . . . 11

Strategy For Not-For-Profit Organizations . . 12

Strategy For Public Sector Entities . . . . . 12

Relevant IASB and AcSB Standards ForPublicly Accountable Enterprises . . . . 13Introduction . . . . . . . . . . . . . 13

Business Combinations . . . . . . . . . 14

Investments In Equity Securities . . . . . . 14

Summary Of Relevant Standards . . . . . 16

Additional Points On IASB and AcSB Standards 16

CHAPTER 2Investments In Equity Securities

Introduction . . . . . . . . . . . . . . . . 17Types Of Investments . . . . . . . . . . 17

Accounting Methods . . . . . . . . . . 17

Relevant Standards . . . . . . . . . . . 18

The Conceptual Basis For Classification . . 19

Held-For-Trading Investments(a.k.a. Investments At Fair ValueThrough Profit Or Loss) . . . . . . . . . 20Definition . . . . . . . . . . . . . . 20

Required Accounting Procedures . . . . . 21

Fair Value Method With Changes In Net Income 22

Held-For-Trading Investments - InternationalConvergence . . . . . . . . . . . . 23

Available-For-Sale Investments . . . . . . 23Definition . . . . . . . . . . . . . . 23


Available-For-Sale Investments With KnownMarket Values (Fair Value Method WithChange In Comprehensive Income) . . . 24

Available-For-Sale Investments WithoutKnown Market Values (Cost Method) . . . 25

Available-For-Sale Investments - InternationalConvergence . . . . . . . . . . . . 27

Subsidiaries . . . . . . . . . . . . . . . . . 28Definition . . . . . . . . . . . . . . 28

The Concept Of Control . . . . . . . . 28

Required Accounting Procedures For Subsidiaries 31

Consolidation Described . . . . . . . . 32

Variable Interest Entities . . . . . . . . . 32

Subsidiaries - International Convergence . . 33

(continued)

ix

CONTENTSCONTENTS

CHAPTER 2, continued

Significantly Influenced Companies(a.k.a. Associated Companies) . . . . . . 34Definition . . . . . . . . . . . . . . 34


Equity Method . . . . . . . . . . . . 36

Impairment . . . . . . . . . . . . . 43

Gains And Losses On The Sale OfSignificantly Influenced Companies . . . . 44

Disclosure For Significantly InfluencedCompanies . . . . . . . . . . . . . 44

Significantly Influenced Companies -International Convergence . . . . . . . 45

Joint Ventures . . . . . . . . . . . . . . . . 46Definition . . . . . . . . . . . . . . 46

Required Accounting ProceduresFor Joint Ventures . . . . . . . . . . 46

Proportionate Consolidation Described . . . 47

Joint Ventures - International Convergence . 47

Accounting Methods Summarized . . . . . 47

Standards For Non-Publicly AccountableEnterprises . . . . . . . . . . . . . . . . 48

Differential Reporting For Investments . . 49Held-For-Trading And Available-For-Sale

Investments . . . . . . . . . . . . . 49

Subsidiaries . . . . . . . . . . . . . 49

Significantly Influenced Companies . . . . 50

Joint Ventures . . . . . . . . . . . . 51

References . . . . . . . . . . . . . . . . . 52Official Pronouncements - Canada . . . . 52

Official Pronouncements - International . . 53

Problems For Self Study . . . . . . . . . . 54

CHAPTER 3Business Combinations

A Note On Relevant Accounting Standards 59

Business Combinations Defined . . . . . . 59

Legal Avenues To Combination . . . . . . 60Example . . . . . . . . . . . . . . . 61

Basic Alternatives . . . . . . . . . . . 62

Acquisition Of Assets By Alpha Company . . 62

Acquisition Of Assets By Sigma Company . . 64

Acquisition Of Shares By Alpha Company . . 65

Acquisition Of Shares By Sigma Company . . 66

Legal Avenues And Tax Considerations . . 68Acquisition Of Assets . . . . . . . . . . 68

Acquisition Of Shares . . . . . . . . . . 69

Alternative Accounting Methods . . . . . . 70The AcSB’s Choice . . . . . . . . . . . 71

A Potential Problem . . . . . . . . . . 72

Application Of The Acquisition Method . . 72Acquisition Date . . . . . . . . . . . 72

Identification Of An Acquirer . . . . . . . 72

Determining The Cost Of The Acquisition . . 76

Contingent Consideration . . . . . . . . 77

Recognition Of Acquired Assets . . . . . . 80

Measurement Of Identifiable AssetsAnd Liabilities . . . . . . . . . . . . 81

Exceptions To Recognition And MeasurementPrinciples . . . . . . . . . . . . . . 82

Tax Considerations In AllocatingThe Investment Cost . . . . . . . . . 83

Measurement Of The Non-Controlling Interest 84

Acquisition Method and Net Income . . . . 87

Acquisition Method And Shareholders’ Equity 87

Goodwill . . . . . . . . . . . . . . . . . . 87The Concept . . . . . . . . . . . . . 87

Measurement Under Section 1582 . . . . 88

General Accounting Procedures . . . . . . 89

Differential Reporting Option . . . . . . 90

Goodwill Impairment Losses . . . . . . . 90

Goodwill Presentation and Disclosure . . . 91

Evaluation of Goodwill Procedures . . . . 92

Bargain Purchase (a.k.a., Negative Goodwill) . 92

Step Acquisitions . . . . . . . . . . . 93

International Convergence . . . . . . . . 94

Acquisition Method Example . . . . . . . . 94


x Table Of Contents

CHAPTER 4Consolidated Balance Sheet

At Acquisition

Introduction To Consolidations . . . . . . 105The Objective Of Consolidation . . . . . 105

Consolidated Financial Statements AndUser Needs . . . . . . . . . . . . 105

Consolidation Policy . . . . . . . . . 106

A Note On Terminology . . . . . . . . 106

Conceptual Alternatives In Consolidation 106Basis For Alternatives . . . . . . . . . 106

The Entity Concept . . . . . . . . . . 107

The Proprietary Concept . . . . . . . . 110

The Parent Company Concept . . . . . . 111

Evaluation Of The Conceptual Alternatives . 113

Conceptual Approach Of The CICA Handbook 114

A Procedural Approach To PreparingConsolidated Financial Statements . . 116Use Of Worksheets . . . . . . . . . . 116

Direct Definitional Calculations AndJournal Entries . . . . . . . . . . . 116

General Approach Outlined . . . . . . . 117

Consolidated Balance Sheet At Acquisition 117Consolidations And Business Combinations . 117

Examples To Be Used . . . . . . . . . 118

Example One - 100 Percent OwnershipWith No Fair Value Changes . . . . . . 118

Example Two - 100 Percent OwnershipWith Fair Value Changes And Goodwill . 122

Example Three - Fractional OwnershipWith No Fair Value Changes Or Goodwill . 127

Example Four - Fractional OwnershipWith Fair Value Changes And Goodwill . 131

Summary Of Consolidation Procedures . 135Chapter 4 . . . . . . . . . . . . . . 135

Summary Of Definitional Calculations . . 136Balance Sheet . . . . . . . . . . . . 136


Appendix A: Push-Down Accounting . . 138

Appendix B: Reverse Acquisitions . . . . 144

Walk Through Problem . . . . . . . . . . 151


CHAPTER 5Consolidation Subsequent ToAcquisition (No Unrealized

Intercompany Profits)

Procedures Subsequent To Acquisition . . 159

Conceptual Alternatives For TheConsolidated Income Statement . . . . 160Proprietary Concept Solution . . . . . . 160

Parent Company Concept Solution . . . . 161

Entity Concept Solution . . . . . . . . 162

CICA Handbook Requirements . . . . . 162

General Approach To Problem Solving . . 164

Comprehensive Example -Open Trial Balance, Investment At Cost 169Step A Procedures . . . . . . . . . . 170

Step B Procedures . . . . . . . . . . 170

Summary Of Step B Adjustments . . . . 177

Step C - Distribution Of TheSubsidiary Retained Earnings . . . . . . 177

Consolidated Income Statement . . . . . 179

Consolidated Statement Of Retained Earnings 180

Non-Controlling Interest . . . . . . . . 181

Consolidated Balance Sheet . . . . . . . 182

Comprehensive Example -Closed Trial Balance, Investment At Cost 183

Application Of The Equity Method . . . . 189Basic Concepts . . . . . . . . . . . . 189

Application To Comprehensive Example . . 189

Consolidated Cash Flow Statement . . . 193Differences In Procedures . . . . . . . 193

Section 1540 On Business Combinations . . 193

Example - Consolidated Cash Flow Statement 194

Step Acquisitions . . . . . . . . . . . . . 200Basic Approaches . . . . . . . . . . . 200

Accounting Recommendations . . . . . . 201

Example - Available-For-Sale To Control . . 201

Example - Significant Influence To Control . 203

Summary Of Consolidation Procedures . 205

Summary Of Definitional Calculations . . 206




Table Of Contents xi

CHAPTER 6Consolidation Subsequent To

Acquisition (Including UnrealizedIntercompany Profits)

Unrealized Intercompany Profits . . . . . 223Basic Concepts . . . . . . . . . . . . 223

Types Of Unrealized Intercompany Profits . 224

Conceptual Alternatives For TheConsolidated Income Statement . . . . 224Downstream Unrealized Profits . . . . . 224

Upstream Unrealized Profits . . . . . . 224

Proprietary Concept Solution . . . . . . 225

Parent Company Concept Solution . . . . 225

Entity Concept Solution . . . . . . . . 226

CICA Handbook Requirements . . . . . 227

Comprehensive Example -Open Trial Balance, Investment At Cost 229Basic Data . . . . . . . . . . . . . 229

Procedural Approach . . . . . . . . . 230

Step A Procedures . . . . . . . . . . 231

Step B(1) to B(5) Procedures . . . . . . . 231

Step B(6) - Unrealized Intercompany Profits 232

Step C - Distribution Of The SubsidiaryRetained Earnings . . . . . . . . . . 242




Comprehensive Example -Closed Trial Balance, Investment At Cost 247

Application Of The Equity Method . . . . 254Basic Concepts . . . . . . . . . . . . 254

Application To Comprehensive Example . . 255

Consolidated Cash Flow Statement . . . . 258

Step Acquisitions . . . . . . . . . . . . . 261

Summary Of Consolidation Procedures . 262

Summary Of Definitional Calculations . . 264




CHAPTER 7Advanced TopicsIn Consolidations

Introduction To Advanced Topics . . . . 283

Multiple Investment Situations . . . . . . 284Multi-Company Affiliation . . . . . . . 284

Multi-Level Affiliation . . . . . . . . . 284

Reciprocal Holdings . . . . . . . . . . 285

Multi-Level Affiliations . . . . . . . . . . 285Approach . . . . . . . . . . . . . . 285

Basic Data . . . . . . . . . . . . . 285

Case One . . . . . . . . . . . . . . 286

Case Two . . . . . . . . . . . . . . 290

Reciprocal Shareholdings . . . . . . . . . 293The Basic Problem . . . . . . . . . . 293

Case One . . . . . . . . . . . . . . 293

Case Two . . . . . . . . . . . . . . 295

Case Three . . . . . . . . . . . . . 296

Intercompany Bondholdings . . . . . . . 300Comprehensive Example . . . . . . . . 301

Subsidiary Preferred Stock . . . . . . . . 314Classification Of Preferred Stock . . . . . 314

Issues Raised By Consolidation . . . . . 314

Example One - Non-Cumulative Case . . . 316

Example Two - Cumulative Case . . . . . 319

Example Three - Participating Case . . . . 322

Subsidiary Share Transactions . . . . . . 326Internationally Converged Standards . . . 326

Basic Concepts . . . . . . . . . . . . 326

Accounting Standards . . . . . . . . . 327

Comprehensive Example . . . . . . . . 330

Case One - Parent Purchases Additional Shares 333

Case Two - Parent Sells Subsidiary Shares . 334

Case Three - Subsidiary Sells Additional Shares 335

Case Four - Loss Of Control . . . . . . . 336

Consolidation With Investment At Equity 337Basic Data . . . . . . . . . . . . . 337

Equity Method Data . . . . . . . . . . 339

Preparation Of ConsolidatedFinancial Statements . . . . . . . . . 344





xii Table Of Contents

CHAPTER 8Interests In

Joint Ventures

Introduction . . . . . . . . . . . . . . . . 365Coverage . . . . . . . . . . . . . . 365

Purpose And Scope Of Section 3055 . . . 365

Joint Ventures Defined . . . . . . . . . . 366General Rules . . . . . . . . . . . . 366

Forms Of Organization . . . . . . . . 367

Classification Example . . . . . . . . . 368

Accounting Methods . . . . . . . . . . . 368Joint Venture Recommendations . . . . . 368

Proportionate Consolidation InAlternative Legal Forms . . . . . . . . 369

Cessation Of Joint Control . . . . . . . 370

Differential Reporting . . . . . . . . . 370

Non-Cash Capital Contributions . . . . . 371The Problem . . . . . . . . . . . . 371

Relevant Handbook Sections . . . . . . 372

Losses On Non-MonetaryCapital Contributions . . . . . . . . 375

Gains On Non-MonetaryCapital Contributions . . . . . . . . 376

Transactions Between A Venturer AndA Joint Venture . . . . . . . . . . . . . 380Background . . . . . . . . . . . . . 380

Section 3055 Recommendations . . . . . 381

Comprehensive Example . . . . . . . . . 388

Disclosure . . . . . . . . . . . . . . . . . 393

International Convergence . . . . . . . . 394Standards . . . . . . . . . . . . . . 394

Current Differences In Standards . . . . . 394

IFRS Exposure Draft, Joint Arrangements . . 395


CHAPTER 9Translation of

Foreign Currency Transactions

Introduction ToForeign Currency Translation . . . . . 403The Need For Translation . . . . . . . 403

Foreign Exchange Rate Terminology . . . 404

Methods of Translation . . . . . . . . . . 405Alternative Methods . . . . . . . . . . 405

Temporal Method . . . . . . . . . . 406

CICA Handbook Recommendations . . . 407

Exchange Gains And Losses . . . . . . . . 409Nature Of Exchange Gains And Losses . . . 409

Required Treatment- Foreign Currency Transactions . . . . 410

Required Treatment- Foreign Currency Financial Statements . 411

Disclosure . . . . . . . . . . . . . . . . . 411

Specific Types Of Transactions . . . . . . 412Foreign Currency Purchases And Sales . . . 412

Foreign Currency Capital Transactions . . . 414

Non-Strategic Investments . . . . . . . 415

Hedging Foreign Currency Risk . . . . . . 418A Word Of Caution . . . . . . . . . . 418

Hedging Relationships . . . . . . . . . 419

Hedged Items . . . . . . . . . . . . 419

Hedging Items . . . . . . . . . . . . 420

Derivatives . . . . . . . . . . . . . 421

Forward Exchange Contracts . . . . . . 423

Hedge Accounting . . . . . . . . . . 425

Hedges Of Exposed Monetary Balances . 426Treatment Without Hedging . . . . . . 426

Hedging With A Monetary Asset . . . . . 427

Hedging With A Forward Exchange Contract 428

Hedges Of Anticipated Transactions . . . 430Applicability Of Hedge Accounting . . . . 430

Hedge Of An Anticipated Transaction . . . 431

Hedge Of Net InvestmentsIn Self-Sustaining Foreign Operations . . 433

Discontinuance Of Hedge Accounting . . 435



Table Of Contents xiii

CHAPTER 10Translation Of Foreign Currency

Financial Statements

Introduction . . . . . . . . . . . . . . . . 443

Accounting Principles . . . . . . . . . . . 445

Classification Of Foreign Operations . . . 446Current Canadian Approach . . . . . . 446

Functional Currency Approach - IAS No. 21 447

Methods Of Translation . . . . . . . . . . 449Integrated Foreign Operations . . . . . . 449

Self-Sustaining Foreign Operations . . . . 452

Exchange Gains And Losses . . . . . . . . 457Integrated Foreign Operations . . . . . . 457

Self-Sustaining Foreign Operations . . . . 458

Calculation Of Exchange Gains And Losses . 459

Foreign Currency Financial Statements- Example . . . . . . . . . . . . . . . . 460Basic Data . . . . . . . . . . . . . 460

Integrated Foreign Operation . . . . . . 462

Self-Sustaining Foreign Operation . . . . 464

Consolidated Financial Statements . . . . 466

Changes In Classification OfForeign Operations . . . . . . . . . . . 468

Disclosure And Financial StatementPresentation . . . . . . . . . . . . . . 469

Translation Of An InvestmentAccounted For By The Equity Method . 469

Other Issues . . . . . . . . . . . . . . . . 470Transactions Of Foreign Operations

Denominated In Another Currency . . . 470

Intercompany Balances . . . . . . . . 470

Elimination Of Intercompany Profits . . . 470

Differences In Financial Statement Dates . . 471

Non-Controlling Interest . . . . . . . . 471

Preference Shares . . . . . . . . . . 471

Application Of Lower Of Cost And Market . 471

Future Income Tax Assets And Liabilities . . 472

Cash Flow Statement . . . . . . . . . 472

International Convergence . . . . . . . . 472AcSB Strategic Plan . . . . . . . . . . 472

Differences . . . . . . . . . . . . . 473


CHAPTER 11Accounting For

Not-For-Profit Organizations

The Way Ahead . . . . . . . . . . . . . . 485The Current Situation . . . . . . . . . 485

International Convergence . . . . . . . 486

Not-For-Profit Organizations Defined . . 487

GAAP For Not-For-Profit Organizations . 487General Approach . . . . . . . . . . 487

Overview Of Handbook Sections ForNot-For-Profit Organizations . . . . . . 488

Fund Accounting . . . . . . . . . . . . . 490Basic Concepts . . . . . . . . . . . . 490

Example . . . . . . . . . . . . . . 491

The Need For Fund Accounting . . . . . 492

CICA Recommendations . . . . . . . . 492

Revenue Recognition- Handbook Section 4410 . . . . . . . 493The Matching Principle Revised . . . . . 493

Recognition Alternatives ForNot-For-Profit Organizations . . . . . . 494

Revenues Of Not-For-Profit Organizations . 495

Application Of The Deferral Method . . . 496

Application Of The Restricted Fund Method 497

Contributions Receivable (Section 4420) . . 498

Non-Monetary Contributions . . . . . . 499

Revenue Related Disclosure . . . . . . . 499

Financial Statement Presentation- Handbook Section 4400 . . . . . . . 500Required Financial Statements . . . . . . 500

Statement Of Financial Position . . . . . 501

Statement Of Operations . . . . . . . . 502

Statement Of Changes In Net Assets . . . 503

Statement Of Cash Flows . . . . . . . . 503

Example 1 (No Capital Assets) . . . . . . 504Basic Data . . . . . . . . . . . . . 504

Case One - No Fund Accounting . . . . . 505

Case Two - Restricted Fund Accounting . . 507

Case Three - Fund Accounting On Other Basis 510

(continued)

xiv Table Of Contents


Capital Assets Of Not-For-Profit Organizations -Handbook Sections 4430 And 4440 . . 513Background To The Problem . . . . . . 513

Exceptions To Capital Assets Rule . . . . 513

Recognition And Measurement . . . . . 514

Presentation And Disclosure . . . . . . 516

Example 2 (Includes Capital Assets) . . . 517Basic Data . . . . . . . . . . . . . 517

Case One - No Fund Accounting . . . . . 518

Case Two - Restricted Fund Accounting . . 520

Case Three - Fund Accounting On Other Basis 523

Reporting Controlled And Related Entities -Handbook Section 4450 . . . . . . . . 527Background . . . . . . . . . . . . . 527

Related Entities Defined . . . . . . . . 527

Controlled Not-For-Profit Organizations . . 529

Controlled Profit Oriented Enterprises . . . 530

Joint Ventures . . . . . . . . . . . . 530

Significantly Influenced Not-For-ProfitOrganizations . . . . . . . . . . . 531

Significantly Influenced Profit OrientedEnterprises . . . . . . . . . . . . . 531

Disclosure Of Economic Interest . . . . . 531

Information At Different Dates . . . . . . 531


Related Party Transactions (Not-For-ProfitOrganizations) - Handbook Section 4460 532Purpose . . . . . . . . . . . . . . 532

Definitions . . . . . . . . . . . . . 532

Identification Of Related Parties . . . . . 532

Disclosure . . . . . . . . . . . . . 533

Disclosure Of Allocated Expenses- Handbook Section 4470 . . . . . . . 534Purpose And Scope . . . . . . . . . . 534

Background . . . . . . . . . . . . . 534

Recommendation . . . . . . . . . . . 535

Other Concepts . . . . . . . . . . . . . . 535Budgetary Control . . . . . . . . . . 535

Encumbrance System . . . . . . . . . 536


Index . . . . . . . . . 545

Table Of Contents xv

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