Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
An Introduction to Consolidated Financial
Statements
Pertemuan 1-2
An Introduction to Consolidated Financial Statements
1: Benefits & Limitations
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
An Introduction to Consolidated Financial Statements
2: Subsidiaries
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.
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
An Introduction to Consolidated Financial Statements
3: Parent Company Recording
Penn Example: Acquisition Cost = Fair
Value = Book Value
Skelly BV=FV
Cash
Other current assets
Net plant assets
Total
Accounts payable
Other liabilities
Capital stock
Retained earnings
Total
Penn acquires 100% of Skelly for $40,
$10
which equals the book value and fair
values of the net assets acquired.
15
40
$65
$15
Cost of acquisition
$40
10
Less 100% book value
40
30
Excess of cost over book value
$0
10
To consolidate, eliminate Penn's
$65
Investment account and Skelly's
capital stock and retained
earnings.
Balance sheets
Separate
Consolidated
Penn
Skelly
Penn & Sub.
$20
$10
$30
Other curr. assets
45
15
60
Net plant
60
40
100
Investment in Skelly
40
0
0
$165
$65
$190
$20
$15
$35
25
10
35
100
30
100
20
10
20
$165
$65
$190
Cash
Total
Accounts payable
Other curr. liabilities
Capital stock
Retained earnings
Total
An Introduction to Consolidated Financial Statements
4: Allocations at Acquisition Date
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)
Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
Sandy
BV
FV
BV = 100 + 145 = $245
Cash
$40 $40
FV = 385 – 75 = $310
Receivables
30
30
Inventory
50
75
Plant, net
200
240
Total
Cost – FV = $0 goodwill
$320 $385
$310
$75
Capital stock
100
100% BV
245
Retained
145
Excess of cost over BV
$65
Total
$320
$75
Cost
Liabilities
Piper and Sandy (cont.)
Allocate to:
Inventory 100%(+25)
Plant 100%(+40)
Amt Amort.
25 1st yr
40 10 yrs
Total
$65
Piper's elimination worksheet entry:
Capital stock
Retained earnings
Inventory
Plant
Investment in Sandy
100
145
25
40
310
Example: BV ≠ FV and Cost ≠ FV
Panda acquires 100% of Salty for $530.
BV = 250 + 190 = $440
Salty
BV
FV
FV = 580 – 85 = $495
Cash
$100 $100
Receivables
40
40
Inventory
250
250
Plant, net
130
190
$520
$580
Liabilities
$80
$85
Capital stock
250
Total
Retained
Total
190
$520
Cost – FV = $35 goodwill
Cost
$530
100% BV (250+190)
440
Excess of cost over BV
$90
Panda and Salty (cont.)
Allocate to:
Amt Amort.
Plant
60 4 yrs
Liabilities
-5 5 yrs
Goodwill
35 -
Total
$90
Panda's elimination worksheet entry:
Capital stock
250
Retained earnings
190
Plant
60
Goodwill
35
Liabilities
Investment in Salty
5
530
Example: BV ≠ FV and Cost ≠ FV
Printemps acquires 100% of Summer for $185.
BV = 75 + 105 = $180
Summer
BV
FV
FV = 250 - 40 = $210
Cash
$10 $10
Receivables
30
30
Inventory
80
90
Plant, net
100
120
Total
Liabilities
Capital stock
Retained
Total
$220 $250 Cost
$40 $40 100% BV (75+105)
75
105
$220
Excess of cost over BV
$185
180
$5
Printemps and Summer (cont.)
Allocate to:
Inventory
Plant, land
Bargain purchase
Total
Amt
10
20
(25)
$5
Amor
1st yr
Gain
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.
Investment in Summer
Gain on Bargain purchase
Cash
210
25
185
Worksheet Elimination Entry
Unamortized excess equals $30 (gain is recognized)
• $10 for undervalued inventory
• $20 for undervalued land included in plant assets
Printemps' elimination worksheet entry:
Capital stock
Retained earnings
Unamortized excess
75
105
30
210
Investment in Summer
Inventory
10
Plant
20
Unamortized excess
30
Printemps
Summer
BV
BV
$30
$10
$40
50
30
80
Inventory
100
80
10
190
Plant, net
450
100
20
570
Investment in Summer
210
Cash
Receivables
Adjustments
DR
CR
210
Unamortized excess
30
Consol-
idated
0
30
Total
$840
$220
$880
Liabilities
$270
$40
$310
Capital stock
200
75
75
200
Retained earnings
370
105
105
370
$840
$220
Total
$880
240
240
An Introduction to Consolidated Financial Statements
5: Non-controlling Interests
Non-controlling Interest
Parent 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.
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
Implied value of Sine (400/80%)
Book value (200+175)
Excess over book value
$400
$500
375
$125
Allocate to:
Building
$50
Goodwill
75
Total
$125
Elimination Entry
Popo's elimination worksheet entry:
Capital stock
Retained earnings
Building
Goodwill
200
175
50
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.
Popo
Sine
BV
BV
Cash
$50
$10
$60
Receivables
130
50
180
80
100
180
Building, net
300
240
Investment in Sine
400
Inventory
Adjustments
DR
CR
50
idated
590
400
Goodwill
Consol-
75
0
75
Total
$960
$400
$1,085
Liabilities
$150
$25
$175
Capital stock
250
200
200
250
Retained earnings
560
175
175
560
Noncontrolling interest
Total
100
$960
$400
100
$1,085
500
500
An Introduction to Consolidated Financial Statements
6: Amortizations After Acquisition
Unamortized Excess
Excess assigned to assets and liabilities are amortized
according to the account
Balance sheet
Amortization period Income statement
Inventories and
current assets
Buildings,
patents,
Generally, 1st year Cost of sales and
expense
Remaining life at Depreciation and
combination
amortization
Land, copyrights
Not amortized
Long term debt
Time to maturity
Interest expense
Piper and Sandy (cont.)
Cost
$310
100% BV
245
Excess
$65
Allocate to:
Inventory
Plant
Amt Amort.
25 1st yr
40 10 yrs
Total
$65
Beginning
unamortized
25
Current
amortization
(25)
Ending
unamortized
0
Plant
40
(4)
36
Total
65
(29)
36
Inventory
Panda and Salty (cont.)
Cost
$530
100% BV
440
Excess
$90
Allocate to:
Plant
Liabilities
Goodwill
Total
Amt Amort.
60 4 yrs
-5 5 yrs
35 $90
Beginning
unamortized
60
Current year's
amortization
(15)
Ending
excess
45
Liabilities
(5)
1
(4)
Goodwill
35
0
35
Total
90
14
76
Plant
Printemps and Summer (cont.)
Cost
100% BV
Allocate to:
Inventory
Plant, land
Bargain purchase
Total
$185
180
Amt
10
20
(25)
$5
Amor
1st yr
Gain
Excess
$5
Inventory
Beginning
unamortized
10
Current
amortization
(10)
Ending
unamortized
0
Land
20
0
20
Total
30
(10)
20
An Introduction to Consolidated Financial Statements
7: Subsequent Balance Sheets
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
Popo and Sine (cont.)
Cost of 80% of Sine
Implied value of Sine
Book value
Excess
$400
$500
375
$125
Allocate to:
Building
Goodwill
Total
$50 10 yrs
75
-
$125
Building
Beginning
unamortized
50
Current
amortization
(5)
Ending
unamortized
45
Goodwill
75
0
75
Total
125
(5)
120
After 1 year:
Cash
Receivables
Inventory
Building, net
Investment in Sine
Total
Popo
$40
110
90
280
404
$924
Sine
$15 Liabilities
85 Capital stock
100
Retained earnings
235
$435
Total
Popo
$100
250
574
Sine
$50
200
185
$924
$435
Popo's elimination worksheet entry:
Capital stock
Retained earnings
Unamortized excess
200
185
120
Investment in Sine (80%)
404
Noncontrolling interest (20%)
101
Building
45
Goodwill
75
Unamortized excess
120
After 1 year:
Cash
Receivables
Inventory
Building, net
Investment in Sine
Goodwill
Popo
BV
$40
110
90
280
404
Sine
BV
$15
85
100
235
45
404
75
Unamortized excess
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest
Total
Adjustments
DR
CR
120
$924
$100
250
574
$435
$50
200
185
120
200
185
101
$924
$435
505
Consolidated
$55
195
190
560
0
75
505
$1,075
$150
250
574
101
$1,075
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
An Introduction to Consolidated Financial Statements
8: Consolidated Income Statements
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.
Assignment and
Amortization
Cost of 90% of Sand
$10,20
Implied value of Sand
$11,33
Book value
5,900
Excess over book value
Inventory
Land
Building
Equipment
Note payable
Goodwill
Total
$5,433
Unamortized
1/1/10
100
200
1,000
(300)
100
4,333
5,433
Allocate
Inventory
Land
Building
Equipment
Note
Goodwill
Total
Current
(100)
0
(25)
60
(100)
0
(165)
$100
200
1,000
(300)
100
4,333
$5,43
1st
40
5 yrs
1st
-
Unamortized
12/31/10
0
200
975
(240)
0
4,333
5,268
Sales
Income from Sand
Cost of sales
Pilot
Sand
Consol.*
$9,523.50
$2,200.00
$11,723.50
571.50
$0.00
(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)
$3,095.00
$800.00
Net income
Total consolidated income
Noncontrolling interest share
Controlling interest share
$3,158.50
63.50
$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.
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
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