Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
An Introduction to Consolidated Financial
Statements
Pertemuan 15-16
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 noncontrolling owners or subsidiary creditors
Bina Nusantara University
3
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.
Bina Nusantara University
4
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
Bina Nusantara University
5
Parent Company Recording
Penn Example: Acquisition Cost = Fair Value = Book Value
Skelly BV=FV
Cash
Other current assets
Net plant assets
Total
Accounts payable
$10
15
40
$65
$15
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
$0
Other liabilities
10
Excess of cost over book value
Capital stock
30
Retained earnings
10
To consolidate, eliminate Penn's
Investment account and Skelly's
capital stock and retained
earnings.
Total
Bina Nusantara University
$65
6
Parent Company Recording – Cont’d
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
Bina Nusantara University
7
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)
Bina Nusantara University
8
Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245
Sandy
BV
FV
FV = 385 – 75 = $310
Cash
$40
$40
Receivables
30
30
Inventory
50
75
Plant, net
200
240
$320
$385
Liabilities
$75
$75
Capital stock
100
Cost
Retained earnings
145
100% BV
245
Excess of cost over BV
$65
Total
Total
Bina Nusantara University
$320
Cost – FV = $0 goodwill
$310
9
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
Bina Nusantara University
100
145
25
40
310
10
Example: BV ≠ FV and Cost ≠ FV
Panda acquires 100% of Salty for $530.
Salty
BV
FV
BV = 250 + 190 = $440
Cash
$100 $100
FV = 580 – 85 = $495
Receivables
40
40
Inventory
250
250
Plant, net
130
190
$520
$580
Liabilities
$80
$85
Capital stock
250
Retained
190
Total
Total
Bina Nusantara University
$520
Cost – FV = $35 goodwill
Cost
$530
100% BV (250+190)
440
Excess of cost over BV
$90
11
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
Retained earnings
Plant
Goodwill
Liabilities
Investment in Salty
Bina Nusantara University
250
190
60
35
5
530
12
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
$220
$250
$40
$40
Total
Liabilities
Capital stock
Retained earnings
Total
Bina Nusantara University
75
105
Cost
100% BV (75+105)
Excess of cost over BV
$185
180
$5
$220
13
Printemps and Summer (cont.)
Allocate to:
Inventory
Plant, land
Bargain purchase
Total
Amt Amort.
10 1st yr
20 (25) Gain
$5
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
Bina Nusantara University
210
25
185
14
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
Plant
Unamortized excess
Bina Nusantara University
10
20
30
15
Printemps
Summer Adjustments
Worksheet
Elimination
Entry
Cash
Receivables
Inventory
Plant, net
Investment in
Unamortized excess
Total
Liabilities
Capital stock
Retained earnings
Total
BV
$30
50
100
450
BV
$10
30
80
100
DR
10
20
210
30
$840
$270
200
370
$840
$220
$40
75
105
$220
210
30
0
$880
$310
200
370
$880
75
105
240
Bina Nusantara University
CR
Consolidated
$40
80
190
570
240
16
Noncontrolling Interest
Parent owns less than 100%
–
–
–
Noncontrolling 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.
Bina Nusantara University
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Example: Noncontrolling 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
Allocate to:
Implied value of Sine (400/80%)
$500
Building
$50
375
Goodwill
75
Book value (200+175)
Excess over book value
Bina Nusantara University
$125
Total
$125
18
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.
Bina Nusantara University
19
Popo
Sine Adjustments
Elimination
Entry
Cash
Receivables
Inventory
Building, net
Investment in Sine
Goodwill
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest
Total
BV
$50
130
80
300
400
BV
$10
50
100
240
DR
50
400
75
$960
$150
250
560
$400
$25
200
175
200
175
100
$960
$400
500
Bina Nusantara University
CR
Consolidated
$60
180
180
590
0
75
$1,085
$175
250
560
100
$1,085
500
20
Amortizations After Acquisition
Unamortized Excess
Excess assigned to assets and liabilities are amortized
according to the account
Balance sheet account Amortization period
Income statement
Inventories and other Generally, 1st year
assets
Buildings,
Remaining life at
combination
Cost of sales and
Land, copyrights
Not amortized
Long term debt
Time to maturity
Bina Nusantara University
Depreciation and
expense
Interest expense
21
Piper and Sandy (cont.)
Cost
$310
Allocate to:
Amt Amort.
100% BV
245
Inventory
25 1st yr
Excess
$65
Plant
40 10 yrs
Total
$65
Beginning
unamortized
Current year's
amortization
Ending
excess
Inventory
25
(25)
0
Plant
40
(4)
36
Total
65
(29)
36
Bina Nusantara University
22
Piper and Sandy (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
Bina Nusantara University
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Printemps and Summer (cont.)
Cost
100% BV
Excess
Allocate to:
Inventory
Plant, land
Bargain purchase
Total
$185
180
$5
Amt Amort
10 1st yr
20 (25) Gain
$5
Beginning
unamortized
Current year's
amortization
Ending
excess
Inventory
10
(10)
0
Land
20
0
20
Total
30
(10)
20
Bina Nusantara University
24
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 Noncontrolling Interest, if any
Bina Nusantara University
25
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 year's
amortization
(5)
Ending
excess
45
Goodwill
75
0
75
Total
125
(5)
120
Bina Nusantara University
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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
235
Popo
$100
250
574
Sine
$50
200
185
$435 Total
$924
$435
Popo and Sine (cont.)
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
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
Adjustments
DR
CR
Popo and Sine (cont.)
404
75
Unamortized excess
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest
Total
45
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 noncontrolling interest.
• Noncontrolling interest is proportional to the
Investment in Subsidiary account when the equity
method is used.
$101 = $404 x .20/.80