an introduction to consolidated financial statements pertemuan 1-2 mata kuliah: f0074 - akuntansi...
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An Introduction to Consolidated Financial Statements
Pertemuan 1-2
Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan IITahun : 2010
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1: Benefits & Limitations1: Benefits & LimitationsAn Introduction to Consolidated Financial Statements
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Business Acquisitions
• FASB Statement 141R• Business combinations occur
– Acquire controlling interest in voting stock– More than 50%– May have control through indirect ownership
• Consolidated financial statements– Primarily for owners & creditors of parent– Not for non-controlling owners or subsidiary creditors
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2: Subsidiaries2: SubsidiariesAn Introduction to Consolidated Financial Statements
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Who is a Subsidiary?
• ARB No. 51 allowed broad discretion• FASB Statement No. 94
– Control based on share ownership• FASB Statement No. 160
– Financial control
• Subsidiaries, or affiliates, continue as separate legal entities and reporting to their controlling and noncontrolling interests.
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Consolidated Statements
• Prepared by the parent company• Parent discloses
– Consolidation policy, Reg. S-X– Exceptions to consolidation, temporary control
and inability to obtain control• Fiscal year end
– Use parent's FYE, but– May include subsidiary statements with FYE
within 3 months of parent's FYE.• Disclose intervening material events
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3: Parent Company Recording3: Parent Company RecordingAn Introduction to Consolidated Financial Statements
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Penn Example: Acquisition Cost = Fair Value = Book Value
Penn acquires 100% of Skelly for $40, which equals the book value and fair values of the net assets acquired.
Cost of acquisition $40
Less 100% book value 40
Excess of cost over book value
$0
Skelly BV=FVCash $1
0Other current assets
15
Net plant assets 40Total $65Accounts payable $1
5Other liabilities 10Capital stock 30Retained earnings
10
Total $65To consolidate, eliminate
Penn's Investment account and Skelly's capital stock and retained earnings.
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Balance sheets Separate Consolidated
Penn
Skelly
Penn & Sub.
Cash $20 $10 $30
Other curr. assets
45 15 60
Net plant 60 40 100
Investment in Skelly
40 0 0
Total $165 $65 $190
Accounts payable $20 $15 $35
Other curr. liabilities
25 10 35
Capital stock 100 30 100
Retained earnings
20 10 20
Total $165 $65 $190
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4: Allocations at Acquisition Date4: Allocations at Acquisition DateAn Introduction to Consolidated Financial Statements
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Cost, Fair Value and Book Value
Acquisition cost, fair values of identifiable net assets and book values may differ.
– Allocate excess or deficiency of cost over book value and determine goodwill, if any.
– When BV = FV, excess is goodwill.Cost less BV = Excess to allocate
– Allocate first to FV-BV differences– Remainder is goodwill (or bargain purchase)
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Example: BV ≠ FV but Cost = FVPiper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245FV = 385 – 75 = $310
Cost – FV = $0 goodwill
Sandy BV FV
Cash $40 $40
Receivables 30 30
Inventory 50 75
Plant, net 200 240
Total$32
0 $38
5
Liabilities $75 $75
Capital stock 100
Retained earnings 145
Total$32
0
Cost $310
100% BV 245
Excess of cost over BV $65
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Piper and Sandy (cont.)
Allocate to: AmtAmort.
Inventory 100%(+25) 25 1st yrPlant 100%(+40) 40 10 yrs
Total $65 Piper's elimination worksheet entry:Capital stock 100
Retained earnings 145
Inventory 25
Plant 40Investment in Sandy 310
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Example: BV ≠ FV and Cost ≠ FVPanda acquires 100% of Salty for $530.
BV = 250 + 190 = $440FV = 580 – 85 = $495
Cost – FV = $35 goodwill
Salty BV FV
Cash$10
0 $10
0
Receivables 40 40
Inventory 250 250
Plant, net 130 190
Total $520 $58
0
Liabilities $80 $85
Capital stock 250
Retained earnings 190
Total $520
Cost $530
100% BV (250+190) 440
Excess of cost over BV $90
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Panda and Salty (cont.)
Panda's elimination worksheet entry:
Capital stock 250
Retained earnings 190
Plant 60
Goodwill 35
Liabilities 5
Investment in Salty 530
Allocate to: AmtAmort.
Plant 60 4 yrsLiabilities -5 5 yrsGoodwill 35 -
Total $90
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Example: BV ≠ FV and Cost ≠ FVPrintemps acquires 100% of Summer for $185.
BV = 75 + 105 = $180FV = 250 - 40 = $210
Cost $185
100% BV (75+105) 180
Excess of cost over BV $5
Summer BV FV
Cash $10 $10
Receivables 30 30
Inventory 80 90
Plant, net 100 120
Total$22
0 $25
0
Liabilities $40 $40
Capital stock 75
Retained earnings 105
Total$22
0
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Printemps and Summer (cont.)
Allocate to: AmtAmort.
Inventory 101st yr
Plant, land 20 - Bargain purchase (25) Gain
Total $5
Investment in Summer 210
Gain on Bargain purchase 25
Cash 185
Printemps records the acquisition of Summer assuming a cash purchase as follows. Note that the investment account is recorded at its fair value and the bargain purchase is treated immediately as a gain.
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Worksheet Elimination Entry
Printemps' elimination worksheet entry:Capital stock 75
Retained earnings 105
Unamortized excess 30
Investment in Summer 210
Inventory 10
Plant 20
Unamortized excess 30
Unamortized excess equals $30 (gain is recognized)• $10 for undervalued inventory• $20 for undervalued land included in plant assets
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Printemp
s SummerAdjustmen
ts Consol-
BV BV DR CR idated
Cash $30 $10 $40
Receivables 50 30 80
Inventory 100 80 10 190
Plant, net 450 100 20 570Investment in Summer 210 210 0Unamortized excess 30 30
Total $840 $220 $880
Liabilities $270 $40 $310
Capital stock 200 75 75 200Retained earnings 370 105 105 370
Total $840 $220 $880
240 240
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5: Non-controlling Interests5: Non-controlling InterestsAn Introduction to Consolidated Financial Statements
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Non-controlling InterestParent owns less than 100%
– Non-controlling interest represents the minority shareholders– Part of stockholders' equity– Measured at fair value, based on parent's acquisition price
• Parent pays $40,000 for an 85% interest– Implied value of the full investee is 40,000/85% = $47,059.– Minority share = 15%(47,059) = $7,059.
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Example: Non-controlling Interests
Popo acquires 80% of Sine for $400 when Sine had capital stock of $200 and retained earnings of $175. Sine's assets and liabilities equaled their fair values except for buildings which are undervalued by $50. Buildings have a 10-year remaining life.
Cost of 80% of Sine $400 Implied value of Sine (400/80%) $500 Book value (200+175) 375Excess over book value $125
Allocate to:
Building $50
Goodwill 75
Total $125
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Elimination Entry
Popo's elimination worksheet entry:Capital stock 200
Retained earnings 175
Building 50
Goodwill 75
Investment in Sine 400
Noncontrolling interest 100
An unamortized excess account could have been used for the excess assigned to the building and goodwill.
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Popo SineAdjustmen
ts Consol-
BV BV DR CR idated
Cash $50 $10 $60
Receivables 130 50 180
Inventory 80 100 180
Building, net 300 240 50 590
Investment in Sine 400 400 0
Goodwill 75 75
Total $960 $400 $1,085
Liabilities $150 $25 $175
Capital stock 250 200 200 250
Retained earnings 560 175 175 560
Noncontrolling interest 100 100
Total $960 $400 $1,085
500 500
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6: Amortizations After Acquisition6: Amortizations After AcquisitionAn Introduction to Consolidated Financial Statements
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Unamortized ExcessExcess assigned to assets and liabilities are amortized according to the account
Balance sheet account
Amortization period
Income statement account
Inventories and other current assets
Generally, 1st year
Cost of sales and other expense
Buildings, equipment, patents,
Remaining life at business combination
Depreciation and amortization expense
Land, copyrights Not amortized
Long term debt Time to maturity Interest expense
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Piper and Sandy (cont.)
Allocate to: AmtAmort.
Inventory 25 1st yrPlant 40 10 yrs
Total $65
Cost $310
100% BV 245
Excess $65
Beginning unamortized
excess
Current year's
amortization
Ending unamortized
excessInventory 25 (25) 0
Plant 40 (4) 36
Total 65 (29) 36
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Panda and Salty (cont.)
Beginning unamortized
excess
Current year's
amortization
Ending unamortized
excessPlant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 14 76
Cost $530
100% BV 440
Excess $90
Allocate to: AmtAmort.
Plant 60 4 yrsLiabilities -5 5 yrsGoodwill 35 -
Total $90
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Printemps and Summer (cont.)
Beginning unamortized
excess
Current year's
amortization
Ending unamortized
excessInventory 10 (10) 0
Land 20 0 20
Total 30 (10) 20
Cost$18
5
100% BV 180
Excess $5
Allocate to: AmtAmort.
Inventory 101st yr
Plant, land 20 - Bargain purchase (25) Gain
Total $5
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7: Subsequent Balance Sheets7: Subsequent Balance SheetsAn Introduction to Consolidated Financial Statements
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Balance Sheets After Acquisition
In preparing a consolidated balance sheet– Eliminate the parent's Investment in Subsidiary– Eliminate the subsidiary's equity accounts (common
stock, retained earnings, etc.)– Adjust asset and liability accounts for any
unamortized excess balance– Record goodwill, if any– Record Non-controlling Interest, if any
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Popo and Sine (cont.)
Cost of 80% of Sine $400 Implied value of Sine $500 Book value 375Excess $125
Allocate to:
Building $50 10 yrs
Goodwill 75 -
Total $125
Beginning unamortized
excess
Current year's
amortization
Ending unamortized
excessBuilding 50 (5) 45
Goodwill 75 0 75
Total 125 (5) 120
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After 1 year:Pop
o SineCash $40 $15 Receivables 110 85Inventory 90 100Building, net 280 235Investment in Sine 404 Total $924 $435
Popo SineLiabilities $100 $50 Capital stock 250 200Retained earnings 574 185
Total $924 $435 Popo's elimination worksheet entry:Capital stock 200
Retained earnings 185
Unamortized excess 120
Investment in Sine (80%) 404
Noncontrolling interest (20%) 101
Building 45
Goodwill 75
Unamortized excess 120
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After 1 year: Popo Sine Adjustments Consol- BV BV DR CR idated
Cash $40 $15 $55 Receivables 110 85 195Inventory 90 100 190Building, net 280 235 45 560Investment in Sine 404 404 0Goodwill 75 75Unamortized excess 120 120
Total $924 $435 $1,075 Liabilities $100 $50 $150 Capital stock 250 200 200 250Retained earnings 574 185 185 574Noncontrolling interest 101 101Total $924 $435 $1,075 505 505
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Key Balance Sheet Items
• Investment in Subsidiary does not exist on the consolidated balance sheet
• Equity on the consolidated balance sheet consists of the parent's equity plus the non-controlling interest.
• Non-controlling interest is proportional to the Investment in Subsidiary account when the equity method is used.
$101 = $404 x .20/.80
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8: Consolidated Income Statements8: Consolidated Income StatementsAn Introduction to Consolidated Financial Statements
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Comprehensive Example, Data
Pilot acquires 90% of Sand on 12/31/2009 for $4,333 when Sand's equity consists of $4,000 common stock, $1,000 other paid in capital, and $900 retained earnings. On that date Sand's inventories, land and buildings are understated by $100, $200, and $1,000, respectively and its equipment and notes payable are overstated by $300 and $100.
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Assignment and Amortization
Cost of 90% of Sand$10,20
0
Implied value of Sand 10,200/.90
$11,333
Book value (4000+1000+900) 5,900
Excess over book value $5,433 Unamortized excess 1/1/10
Current amortization
Unamortized excess
12/31/10Inventory 100 (100) 0Land 200 0 200Building 1,000 (25) 975Equipment (300) 60 (240)Note payable 100 (100) 0Goodwill 4,333 0 4,333Total 5,433 (165) 5,268
Allocate to:
Inventory $100 1st yr
Land 200 -
Building 1,00040 yrs
Equipment (300) 5 yrsNote payable 100
1st yr
Goodwill 4,333 -
Total$5,43
3
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Pilot Sand Consol.*
Sales $9,523.50 $2,200.0
0 $11,723.50
Income from Sand 571.50 $0.00 Cost of sales (4,000.00) (700.00) (4,800.00)Depreciation exp - bldg (200.00) (80.00) (305.00)Depreciation exp - equip (700.00) (360.00) (1,000.00)Other expense (1,800.00) (120.00) (1,920.00)Interest expense (300.00) (140.00) (540.00)
Net income $3,095.00 $800.00
Total consolidated income $3,158.50 Noncontrolling interest share 63.50
Controlling interest share $3,095.00 * Cost of sales, building depreciation and interest expense are increased by $100, $25, and $100, and equipment depreciation is $60 lower than the sum of Pilot and Sand.
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Key Income Statement Items
• The Income from Subsidiary account is eliminated.• Current period amortizations are included in the
appropriate expense accounts.• Noncontrolling interest share of net income is
proportional to the Income from Subsidiary under the equity method.
$571.50 x .10/.90
= $63.50
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Push-Down Accounting• SEC requirement
– Subsidiary is substantially wholly-owned (approx. 90%)
– No publicly held debt or preferred stock• Books of the subsidiary are adjusted
– Assets, including goodwill, and liabilities revalued based on acquisition price
– Retained earnings is replaced by Push-Down Capital which includes retained earnings and the valuation adjustments