FAR M16 Business Consolidation.doc

M16Business ConsolidationStudy Notes- FAR M16 (Business Consolidation)FAS 141R, FIN46R, and FAS160 are the main US GAAPs applicable to the business combinations.FAS 141R no requires that all assets and liabilities of the acquired company should be recognized at full fair value (based on FAS157). So in comparison with the old methods, it will result in higher consolidated assets and non controlling interests.When shall we consolidate?Under the current US GAAP, there are two consolidation models(1) Voting interest based model, and (2) risks and reward based model (variable interest entities, VIE)In the case of (2), sometimes, the control is not achieved through the voting interest, but through some special contractual arrangement, which is determined in accordance with FIN46R. For CPA exam purpose, you dont need to know many details of the standard as it is very complicated. You basically need know the concept of a VIE and that an entity is assumed to be a VIE subject to consolidation if their equity is less than 10% of total assets. To avoid consolidation of such entity, definitive evidence must be provided that they can fund their future activities without additional subordinated investment. A VIE is consolidated by the primary beneficiary, which is the enterprise that is exposed to the majority of the risks and rewards associated with the VIE.Page 655-656 on Wiley book has pretty detailed explanations.Steps in acquisition accounting1. Determine who is the acquirerPage 652 on Wiley book has the explanations.2. Determine the acquisition date3. Recognize and measure at fair value the identifiable assets acquired, liabilities assumed and noncontrolling interest in the acquire.On the acquisition date, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest are measured at fair value.The acquirer also recognizes assets that were not previously recognized on the acquirees book if the assets are identifiable based on contractual-legal or separability criteria.Normally, they are all intangible assets.1. Marketing-related intangibles2. Customer-related intangibles3. Artistic-related intangibles4. Contract-based intangibles5. Technology-based intangibles.Customer list, order or production backlog, customer contracts, non-contractual relationship, Rights, Permits, Patents, Copyrights, Trademarks & Trade Names, Franchises, Computer Software & Licenses, Technical Drawings & Manuals, Customer Lists, Unpatented Technology, In-Process Research and development Noncompeting agreement.Items do not include assembled workforce, intellectual capital and potential contracts.4. Recognize and measure goodwill, or recognize a gain from a bargain purchaseThe goodwill or gain from bargain purchase is calculated as follows:Fair value of consideration transferredPlus: Fair value of previously held equity interests in acquireePlus: Fair value of noncontrolling interestLess: Fair value of net identifiable assets=Goodwill or gain from bargain purchaseThe fair value of the contingent consideration is included as part of the consideration paid for the acquiree. Contingent consideration may be transferred in a business acquisition by promising to pay additional cash or to issue additional shares of the equity of the acquirer. The contingent consideration is measured at fair value at acquisition date. After the date of acquisition, additional information may indicate the initial value has changed. If the changes in value occur during the measurement period, then it is treated as a change in a provisional amount and accounted for by an adjustment to goodwill. After the measurement date, a change in the fair value of contingent consideration classified as an asset or liability is reported in earnings of the period. Any contingent consideration classified as equity is not remeasured. Any settlement of contingent consideration classified as equity is accounted for within owners equity.Acquisition-related costs for a business acquisition are treated as expense in the period in which the costs are incurred. Acquisition-related costs may include finders fees, advisory, legal accounting, valuation, consulting and other professional fees. The costs of registering and issuing debt and equity securities are considered as part of acquisition costs but they are not expensed. The costs of registering and issuing equity securities are netted against the proceeds of the stock and reduce the paid in capital in excess of par account. Bond issuance costs are treated as deferred charge and amortized over the life of the bond.Consolidated financial statementFor the CPA exam, you need to know the following elimination entries when you study the consolidation.1. Day 1 consolidation date (100% ownership)Elimination entry on consolidation worksheet:Dr. Common Stock (acquire)Dr. APIC (acquire)Dr. Retained Earnings (acquire)Dr./(Cr.) Adjustments of the FV of identifiable assets and liabilitiesDr. Goodwill Cr. Investments in subsidies 2. 12/31/201X, One year after the consolidation date (100% ownership)Elimination entries on consolidation worksheetUsually, the investments in the subsidiaries are accounted for by the parent using the partial equity method, which is most likely to be tested by the CPA exam.1) Eliminate any intercompany investment income during the year (in order to adjust the retained earnings back to Day 12) Eliminate the equity and investment account and recognize goodwill, and adjustments to identifiable assets and liabilities3) Eliminate any intercompany transactions during the year, especially in the areas of inventory, fixed assets, bonds, dividends, intercompany receivable and payables.3. Day 1 consolidation date (100% ownership)Elimination entries on the consolidation worksheetDr. Common Stock (acquire)Dr. APIC (acquire)Dr. Retained Earnings (acquire)Dr./(Cr.) Adjustments of the FV of identifiable assets and liabilitiesDr. Goodwill Cr. Investments in subsidies Cr. Non-controlling interests4. 12/31/201X, one year after the consolidation date (100% ownership)1) Eliminate any intercompany investment income during the year (in order to adjust the retained earnings back to Day 12) Eliminate the equity and investment account and recognize goodwill, and adjustments to identifiable assets and liabilities3) Eliminate any intercompany transactions during the year, especially in the areas of inventory, fixed assets, bonds, dividends, intercompany receivable and payables. ( Due to the complexity of any intercompany sales transactions if the ownership is 100%, it is not expected that CPA exam will have any complicated scenarios like you will see as in 100% ownership situation)4) Allocate the current year Net income to no controlling interests.FAS 160TopicFAS 160 requirementsNCI