Slide 3-1 3 Consolidated Financial Statements—Date of Acquisition Advanced Accounting, Fourth Edition Slide 3-2 Learning Objectives 1. Understand the concept of control as used in reference to consolidations. 2. Explain the role of a noncontrolling interest in business combinations. 3. Describe the reasons why a company acquires a subsidiary rather than its net assets. 4. Describe the valuation and classification of accounts in consolidated financial statements. 5. List the requirements for inclusion of a subsidiary in consolidated financial statements. 6. Discuss the limitations of consolidated financial statements. 7. Record the investment in the subsidiary on the parent’s books at the date of acquisition. 8. Prepare the consolidated workpapers and eliminating entries at the date of acquisition. 9. Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Slide 3-3 10. Discuss some of the similarities and differences between U.S. GAAP and IFRS with respect to the preparation of consolidated financial statements at the date of acquisition. - Recall that business combinations may be negotiated either as assets acquisitions or as a stock acquisition. - In Ch2. the procedural focus on was on business combination arising from asset acquisitions. In those situations the acquiring company survived, and the acquired company or companies ceased to exist as separate legal entities. -This chapter focus on accounting practices followed in stock acquisition, that is when one company controls the activities of another company through the direct or indirect ownership of some or all of its voting stock. Slide 3-4 Chapter Focus - Accounting for Stock Acquisitions When one company controls another company through direct or indirect ownership of its voting stock. Acquiring company referred to as the parent. Acquired company referred to as the subsidiary. Other shareholders considered noncontrolling interest. Any joint relationship is termed an affiliation, the related companies are called affiliated companies. Parent records interest in subsidiary as an investment. If a subsidiary owns a controlling interest in one or more other companies, a chain of ownership is forged by which the parent company controls other companies. Slide 3-5 Definitions of Subsidiary and Control The Securities and Exchange Commission defines a subsidiary as an affiliate controlled by another entity, directly or indirectly, through one or more intermediaries. Control means the possession, direct or indirect, of the power to direct management and policies of another entity, whether through the ownership of voting shares, by contract, or otherwise. Slide 3-6 LO 1 Meaning of control. Definitions of Subsidiary and Control The FASB has defined control as the “ability of an entity to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limit its losses from that other entity’s activities.” The FASB stressed the need to prepare consolidated financial statements whenever control exists, even in the absence of a majority ownership. Slide 3-7 LO 1 Meaning of control. Reasons For Subsidiary Companies Advantages to acquiring a controlling interest in another company. 1. Stock acquisition is relatively simple (by open market, tender offer). 2. Control of subsidiary’s operation can be accomplished with a much smaller investment, since not all of the stock need be acquired. 3. Separate legal existence of affiliates provides an element of protection of the parent’s assets. Slide 3-8 Note: an important distinction must be noted between the LO 3 Acquiring assets or stock. consolidated statements and the parent statements (parent Investments at the Date of Acquisition Recording Investments at Cost (Parent’s Books) Stock investment is recorded at cost as measured by fair value of the consideration given or consideration received, whichever is more clearly evident. Consideration given may include cash, other assets, debt securities, stock of the acquiring company. Slide 3-9 LO 7 Recording of investment at acquisition. Investments at the Date of Acquisition E3-2: On January 1, 2011, Polo Company purchased 100% of the common stock of Save Company by issuing 40,000 shares of its (Polo’s) $10 par value common stock with a market price of $17.50 per share. Polo incurred cash expenses of $20,000 for registering and issuing the common stock. The stockholders’ equity section of the two company’s balance sheets on December 31, 2010, were: Polo Common stock, $10 par value Slide 3-10 Save $350,000 $320,000 Other contributed capital 590,000 175,000 Retained earnings 380,000 205,000 Investments at the Date of Acquisition E3-2: Prepare the journal entry on the books of Polo Company to record the purchase of the common stock of Save Company and related expenses. Investment in Save (40,000 x $17.50) Common Stock 400,000 Other Contributed Capital 300,000 Other Contributed Capital Cash Slide 3-11 700,000 20,000 20,000 Notes: - Issuing shares cost, should reduce the additional contributed capital or adjusting the premium or discount on bond issues. - Both direct and indirect costs related to acquisition should be expensed as incurred. Professional fees expense 10000 Cash 10000 - If the investment in cash instead of issuing stock, the journal entry will be: Investment in S company Cash Slide 3-12 250000 250000 - Affiliated companies should prepare a full set of financial statements (Balance sheet, statement of income and comprehensive income, statement of cash flow, statement of stockholders’ equity and notes to financial statements). - On the date of acquisition the most relevant statement is the consolidated balance sheet. - The consolidated balance sheet reports the sum of the assets and liabilities of the parent and its subsidiaries as if they constituted a single company. - Assets and liabilities are summed, regardless of whether the parent owns 100% or a smaller controlling interest. Noncontrolling interests are reflected as a component of owners’ equity. Slide - 3-13 - Since the parent and its subsidiaries are treated as a single entity, eliminations must be made to cancel the effects of transactions among the parent and its subsidiaries. - Intercompany receivables and payable, for example must be eliminated to avoid double counting and to avoid given the impression that the consolidated entity owes money to itself. - And any intercompany profits in assets arising from subsequent transaction must be eliminated, since an entity cannot profit on transaction with itself. A workpaper is frequently used to summarize the effects of various additions and Slide eliminations. - 3-14 Consolidated Balance Sheets: Use of Workpapers Intercompany Accounts to Be Eliminated Parent’s Accounts Subsidiary’s Accounts Investment in subsidiary Against Equity accounts Intercompany receivable (payable) Against Intercompany payable (receivable) Advances to subsidiary (from subsidiary) Against Advances from parent (to parent) Interest revenue (interest expense) Against Interest expense (interest revenue) Dividend revenue (dividends declared) Against Dividends declared (dividend revenue) Management fee received from subsidiary Against Management fee paid to parent Sales to subsidiary (purchases of inventory from subsidiary) Against Purchases of inventory from parent (sales to parent) Slide 3-15 Consolidated Balance Sheets: Use of Workpapers Investment Elimination - The investment account represents the investment by the parent company in the net assets of the subsidiary and is reciprocal to the subsidiary companies’ stockholders’ equity. - It is necessary to eliminate the investment account of the parent company and the related stockholders’ equity of the subsidiary to avoid double counting of these net assets. - When parent’s share of subsidiary’s equity is eliminated against the investment account, subsidiary’s net assets are substituted for the investment account in the consolidated balance sheet. Slide 3-16 Consolidated Balance Sheets: Use of Workpapers Investment Elimination “Computation and Allocation of Difference between Implied Value and Book Values” 1. Determine percentage of stock acquired. 2. Divide purchase price by the percentage acquired to calculate the implied value of the subsidiary. 3. Difference between step 2 and book value of subsidiary’s equity must be allocated to adjust the underlying assets and liabilities of the acquired company. Slide 3-17 Consolidated Balance Sheets: Use of Workpapers The prior steps lead to the following possible cases: Case 1. The implied value (IV) of the subsidiary is equal to the book value of the subsidiary’s equity (IV = BV), and a. The parent company acquires 100% of the subsidiary’s stock; or b. The parent company acquires less than 100% of the subsidiary’s stock. Case 2. The implied value of the subsidiary exceeds the book value of the subsidiary’s equity (IV > BV), and a. The parent company acquires 100% of the subsidiary’s stock; or b. The parent company acquires less than 100% of the subsidiary’s stock. Case 3. The implied value of the subsidiary is less than the book value of the subsidiary’s equity (IV < BV), and a. The parent company acquires 100% of the subsidiary’s stock; or b. The parent company acquires less than 100% of the subsidiary’s stock. Slide 3-18 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(a): Implied Value of Subsidiary Is Equal to Book Value of Subsidiary Company’s Equity (IV BV)—100% of Stock Acquired. Illustration: Assume that on January 1, 2010, P Company acquired all the outstanding stock (10,000 shares) of S Company for cash of $160,000. What journal entry would P Company make to record the shares of S Company acquired? Investment in S Company Cash Slide 3-19 $160,000 $160,000 Consolidated Balance Sheets: Use of Workpapers Case 1(a): The balance sheets of both companies immediately after the acquisition of shares is as follows: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets Liabilities Common stock Other Contributed capital Retained earnings Total Liab. and Equity Slide 3-20 P Company S Company $ 40,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 160,000 $ 800,000 $ 260,000 $ 120,000 400,000 80,000 200,000 $ 800,000 $ 100,000 100,000 20,000 40,000 $ 260,000 Implied value = Book value Price paid % acquired $160,000 100% Implied value 160,000 Book value Difference 160,000 $0 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(a): The workpaper entry to eliminate S Company’s stockholders’ equity against the investment account is: Common stock (S) 100,000 Other contributed capital (S) 20,000 Retained earnings (S) 40,000 Investment in S Company 160,000 This is a workpaper-only entry. Slide 3-21 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(a): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets P Company S Company $ 40,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 160,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 800,000 $ 100,000 100,000 20,000 40,000 $ 260,000 Eliminations Debit Credit Consolidated Balances $ 80,000 380,000 320,000 120,000 160,000 $ 1,060,000 $ $ 220,000 500,000 100,000 240,000 1,060,000 Adjusting and eliminating entries are made on the workpaper for the preparation of consolidated statements. Slide 3-22 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(a): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets P Company S Company $ 40,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 160,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 800,000 Slide 3-23 Solution on notes page $ 100,000 100,000 20,000 40,000 $ 260,000 Eliminations Debit Credit 160,000 Consolidated Balances $ 80,000 380,000 320,000 120,000 $ 900,000 $ 100,000 20,000 40,000 $ 160,000 $ 160,000 $ 220,000 400,000 80,000 200,000 900,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(a): Note the following on the workpaper. 1. The investment account and related subsidiary’s stockholders’ equity have been eliminated and the subsidiary’s net assets substituted for the investment account. 2. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification. 3. Consolidated stockholders’ equity is the same as the parent company’s equity. Slide 3-24 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of Subsidiary’s Stock Acquired (IV=BV) - Partial Ownership. Illustration: Assume that on January 1, 2010, P Company acquired 90% (9,000 shares) of the stock of S Company for $144,000. What journal entry would P Company make to record the shares of S Company acquired? Investment in S Company Cash Slide 3-25 $144,000 $144,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): The balance sheets of both companies immediately after the acquisition of shares is as follows: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets P Company S Company $ 56,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 144,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 $ 800,000 $ 260,000 Slide 3-26 Implied value = Book value Price paid % acquired $144,000 90% Implied value 160,000 Book value Difference 160,000 $0 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): Computation and Allocation of Difference between Implied and Book Values: 90% Parent Share $ 144,000 Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earnings Total book value Difference between implied and book value Slide 3-27 10% Noncontrolling Share $ 16,000 90,000 18,000 36,000 $ 144,000 $ 10,000 2,000 4,000 16,000 $ $ - - Total Value $ 160,000 100,000 20,000 40,000 $ 160,000 $ - LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): The workpaper entry to eliminate S Company’s stockholders’ equity against the investment account is: Common stock (S) 100,000 Other contributed capital (S) 20,000 Retained earnings (S) 40,000 Investment in S Company Noncontrolling interest in equity Slide 3-28 144,000 16,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Eliminations Debit Credit Consolidated Balances $ 96,000 380,000 320,000 120,000 144,000 $ 1,060,000 Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets P Company S Company $ 56,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 144,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 $ $ 800,000 $ 260,000 $ Slide 3-29 Solution on notes page 220,000 500,000 100,000 240,000 1,060,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 1(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Total assets P Company S Company $ 56,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 144,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 Slide 3-30 $ 800,000 $ 100,000 100,000 20,000 40,000 $ 260,000 Eliminations Debit Credit 144,000 Consolidated Balances $ 96,000 380,000 320,000 120,000 $ 916,000 $ 100,000 20,000 40,000 $ 160,000 16,000 $ 160,000 $ 220,000 400,000 80,000 200,000 16,000 916,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): Implied Value Exceeds Book Value of Subsidiary Company’s Equity (IV>BV)—Partial Ownership. Illustration: Assume that on January 1, 2010, P Company acquired 80% (8,000 shares) of the stock of S Company for $148,000. What journal entry would P Company make to record the shares of S Company acquired? Investment in S Company Cash Slide 3-31 $148,000 $148,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): The balance sheets of both companies immediately after the acquisition of shares is as follows: Implied value = Book value Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Difference (IV>BV) Total assets P Company S Company $ 52,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 148,000 Price paid $ 800,000 $ 260,000 % acquired Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 $ 800,000 $ 260,000 Slide 3-32 $148,000 80% Implied value 185,000 Book value 160,000 Difference $25,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): Computation and Allocation of Difference between Implied and Book Values: 80% Parent Share $ 148,000 Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earnings Total book value Difference between implied and book value Land revaluation (mark to market) Balance 20% Noncontrolling Share $ 37,000 80,000 16,000 32,000 $ 128,000 $ $ $ $ 20,000 (20,000) - $ Total Value $ 185,000 20,000 4,000 8,000 32,000 100,000 20,000 40,000 $ 160,000 5,000 (5,000) - $ $ 25,000 (25,000) - We assume the entire difference is attributable to land with a current value higher than historical cost. Slide 3-33 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): The workpaper (elimination) entries are as follows: #1 Common stock (S) 100,000 Other contributed capital (S) 20,000 Retained earnings (S) 40,000 Difference between IV and BV 25,000 Investment in S Company 148,000 Noncontrolling interest in equity #2 Land 25,000 Difference between IV and BV Slide 3-34 37,000 25,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Difference (IV>BV) Total assets P Company S Company $ 52,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 148,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 Slide 3-35 Eliminations Debit Credit 25,000 25,000 $ 800,000 $ 260,000 148,000 25,000 Consolidated Balances $ 92,000 380,000 320,000 145,000 $ 937,000 $ 100,000 20,000 40,000 $ 210,000 37,000 $ 210,000 $ 220,000 400,000 80,000 200,000 37,000 937,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 2(b): Reasons an Acquiring Company May Pay More Than Book Value. 1. Fair value of specific tangible or intangible assets of the subsidiary may exceed its recorded value because of appreciation. 2. Excess payment may indicate existence of goodwill. 3. Liabilities, generally long-term, may be overvalued. 4. A variety of market factors may affect the price paid. Slide 3-36 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 3(b): Implied Value of Subsidiary is Less Than Book Value (IV<BV)—Partial Ownership. Illustration: Assume that on January 1, 2010, P Company acquired 80% (8,000 shares) of the stock of S Company for $120,000. What journal entry would P Company make to record the shares of S Company acquired? Investment in S Company Cash Slide 3-37 $120,000 $120,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 3(b): The balance sheets of both companies immediately after the acquisition of shares is as follows: Implied value = Book value Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Difference (IV<BV) Total assets P Company S Company $ 80,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 120,000 Price paid $ 800,000 $ 260,000 % acquired Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 $ 800,000 $ 260,000 Slide 3-38 $120,000 80% Implied value 150,000 Book value 160,000 Difference $10,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 3(b): Computation and Allocation of Difference between Implied and Book Values: 80% Parent Share $ 120,000 Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earnings Total book value Difference between implied and book value Plant & equipment (mark to market) Balance 20% Noncontrolling Share $ 30,000 80,000 16,000 32,000 $ 128,000 $ $ $ $ (8,000) 8,000 - $ Total Value $ 150,000 20,000 4,000 8,000 32,000 100,000 20,000 40,000 $ 160,000 (2,000) 2,000 - $ $ (10,000) 10,000 - Assume the difference is attributable to plant and equipment, in this case an overvaluation of $10,000. Slide 3-39 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 3(b): The workpaper (elimination) entries are as follows: #1 Common stock (S) 100,000 Other contributed capital (S) 20,000 Retained earnings (S) 40,000 Difference between IV and BV 10,000 Investment in S Company 120,000 Noncontrolling interest in equity #2 Difference between IV and BV Plant and equipment Slide 3-40 30,000 10,000 10,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Case 3(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2010, date of acquisition, is presented below: Balance Sheet Cash Other current assets Plant and equipment Land Investment in Sill Difference (IV>BV) Total assets P Company S Company $ 80,000 $ 40,000 280,000 100,000 240,000 80,000 80,000 40,000 120,000 $ 800,000 $ 260,000 Liabilities Common stock Other Contributed capital Retained earnings Noncontrolling interest Total Liab. and Equity $ 120,000 400,000 80,000 200,000 $ 100,000 100,000 20,000 40,000 Slide 3-41 Eliminations Debit Credit 10,000 $ 800,000 $ 260,000 10,000 120,000 10,000 Consolidated Balances $ 120,000 380,000 320,000 110,000 $ 930,000 $ 100,000 20,000 40,000 $ 170,000 30,000 $ 170,000 $ 220,000 400,000 80,000 200,000 30,000 930,000 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Review Question The noncontrolling interest in the subsidiary is reported as: a. Asset b. Liability c. Equity d. Expense Slide 3-42 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Subsidiary Treasury Stock Holdings - Subsidiary may hold some of its own shares as treasury stock at the time the parent company acquire its interest. - Treasury stock has a debit balance on the books of subsidiary. - Because the treasury stock account represents a contra stockholders’ equity account, the parent company’s share must be eliminated by a credit when the investment account and subsidiary company’s equity accounts are Slide 3-43 eliminated on the workpaper. مفهوم أسهم الخزينة: يقصد بعمليات أسهم الخزينة عملية إعادة شراء الشركة ألسهمها sharerepurchases or buybacks ويطلق على األسهم التي يتم إعادة شرائها بواسطة الشركة Treasury stocksأى أسهمالخزينة. هناك العديد من الحاالت التى تلجأ فيها الشركات المساهمة إلى استرداد جزء منأسهم رأسمالها عن طريق شرائها وسواء تم الشراء نقدا أو عينا فان ذلك بالطبع سيؤدى إلى تخفيض أصول الشركة أو إلى زيادة التزاماتها وفى المقابل انخفاض فى حقوق الملكية بنفس القدر. وتجدر اإلشارة إلى أن تملك الشركة ألسهمها ال يعنى أن هذه األسهم قد تم إلغاؤها أو تم استردادها بصفه نهائية .ولكن هناك عدة مجاالت الستخدامات أسهم الخزينة فقد يحتفظ بها إلعادة بيعها في وقت أخر أو لتوزيعها على العاملين أو على المساهمين ، أو قد يكون للشركة أغراض أخرى. Slide 3-44 Example: Assume that P company acquired 18000 shares of S company common stock on January 1, 2010, for a payment of $320,000 when S company’s stockholders’ equity section appeared as follows: Common stock, $10 par, 25000 shares issued Other contributed capital Retained earnings Less: Treasury stock at cost, 1000 shares Total stockholders’ equity 250,000 50,000 125,000 425,000 20,000 405,000 The total implied value of S company 320,000 /%75= 426,667 The implied value of the noncontrolling interest is 426,667*%25= 106,667 This results in a difference between implied value and book values of 426,667-405,000 = 21,667 Slide 3-45 Common stock-S-company Other contributed capital Retained earnings Difference between IV and BV Investment in S company Noncontroling interest Treasury Stock-S company Slide 3-46 250,000 50,000 125,000 21,667 320,000 106,667 20,000 Consolidated Balance Sheets: Use of Workpapers Other Intercompany Balance Sheet Eliminations Intercompany accounts receivable, notes receivable, and interest receivable, for example, must be eliminated against the reciprocal accounts payable, notes payable, and interest payable. The full amount of all intercompany receivables and payables is eliminated without regard to the percentage of control held by the parent company. Slide 3-47 Slide 3-48 Consolidated Balance Sheets: Use of Workpapers Adjusting Entries Prior to Eliminating Entries At times, workpaper adjustments to accounting data may be needed before appropriate eliminating entries can be accomplished. Make on workpaper in eliminations columns or Adjust the subsidiary’s statements prior to their entry on the workpaper. Slide 3-49 LO 9 Computing and allocating the difference between implied and book value (CAD). Consolidated Balance Sheets: Use of Workpapers Review Question Which of the following adjustments do not occur in the consolidating process? a. Elimination of parent’s retained earnings b. Elimination of intra-company balances c. Allocations of difference between implied and book values d. Elimination of the investment account Slide 3-50 LO 9 Computing and allocating the difference between implied and book value (CAD). Limitations of Consolidated Statements For Example: Little information of value in consolidated statements because they contain insufficient detail about the individual subsidiaries. Highly diversified companies operating across several industries, often the result of mergers and acquisitions, are difficult to analyze or compare. Slide 3-51 LO 6 Limitations of consolidated statements. IFRS Versus U.S. GAAP Slide 3-52 LO 10 Similarities and differences between U.S. GAAP and IFRS. IFRS Versus U.S. GAAP Slide 3-53 LO 10 Similarities and differences between U.S. GAAP and IFRS. IFRS Versus U.S. GAAP Slide 3-54 LO 10 Similarities and differences between U.S. GAAP and IFRS. Deferred Taxes on the Date of Acquisition APPENDIX A If a purchase acquisition is tax-free to the seller Tax bases of the acquired assets and liabilities are carried forward at historical book values. Assets and liabilities of the acquired company are recorded on the consolidated books at adjusted fair value. Under current guidelines, the tax effects of the difference between consolidated book values and the tax bases must be recorded as deferred tax liabilities or assets (SFAS No. 109 and SFAS No. 141R [ASC 805 and ASC 740]). Slide 3-55 Deferred Taxes on the Date of Acquisition Illustration: Suppose that Purchasing Company acquires 90% of Selling Company by issuing stock valued at $800,000. The only difference between book value and fair value relates to depreciable plant and equipment. Plant and equipment has a market value of $400,000 and a book value of $250,000. All other book values approximate market values. Assume that the combination qualifies as a nontaxable exchange. On the date of acquisition, Selling Company’s book value of equity is $600,000, which includes $150,000 of common stock and $450,000 of retained earnings. Assume a 30% tax rate. Consider the following Computation and Allocation Schedule with and without considering deferred taxes. Slide 3-56 Deferred Taxes on the Date of Acquisition Slide 3-57 Deferred Taxes on the Date of Acquisition Slide 3-58 Deferred Taxes on the Date of Acquisition The workpaper entry to eliminate the investment account is as follows: Entries for allocation with and without deferred taxes. Slide 3-59 Consolidation of Variable Interest Entities APPENDIX B FASB has issued guidance for the consolidation of specialpurpose entities (SPEs) through Interpretation No. 46(R) “Consolidation of Variable Interest Entities” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)[ASC 810–10– 30].” An enterprise shall consolidate a variable interest entity (VIE) when that enterprise has a variable interest (or combination of variable interests) that provides the enterprise with a controlling financial interest on the basis of the certain provisions (listed below). FASB Statement No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Slide 3-60 Copyright Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Slide 3-61