ACTG 6160 Lecture Notes - Lecture 3: Papyrus 46
7 Jun 2018
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Week 3: Advanced Financial Accounting
Acquisition method
• Whenever consolidation happens, the parent comes in at cost; the subsidiary comes in at FV at
the point of acquisition.
• There are separate entity f/s coming into consolidation for both the parent and subsidiary.
• However, consolidation happens as follows:
o parent at CV + subsidiary at CV + subsidiary FVA
Example:
• Natalia Inc. owns car worth 50k, amortized by 20k
• Natasha wants to buy car at 40k; she has car on books at 40k
• Natasha can either buy the car from Natalia Inc., or Natalia Inc.
o If she buys from Natalia Inc., no residual value and car is amortized at 30k
o If she buys Natalia Inc., no residual value and from Natalia Inc perspective, the car is
oth 30k ad the 30k is aotized, ut fo Natasha’s pespetie, the a is oth
40k since she bought it at 40k and so the 40k is amortized
▪ the difference is the FVA; FVA has to amortized as well
Compare purchase price paid to FV of net identifiable assets
• Goodwill is not an identifiable asset
• If <, it is a gain on bargain purchase
• If >, it is goodwill
• Market-based, cost-based, or income-based to determine the value of the net identifiable assets
• Negative goodwill = gain on bargain purchase
o Gain on bargain purchase cannot show up on the separate entity F/S
o Once the gain on bargain purchase is accounted for, there is no goodwill
o Identifiable assets have to be brought in to the consolidated F/S at FV
o Always account for net identifiable assets at their full FV
o Catch up for the gain on bargain purchase on the beginning R/E for the future years
• When the purchase price is less than the FV of net identifiable assets, the FVA is the difference
between the FV of net identifiable assets and the CV of net identifiable assets
Practice Problems: P2-3, P3-3, P3-6, P3-7
FV decrement is when CV is greater than FV; increment is when FV is greater than CV
If preferred shares did not exchange hands on acquisition, it represents non-controlling interest.
• Neither the parent or the subsidiary owns this; someone else owns this
The call price of preferred shares is equal to its carrying value
• This means that there is no FVA
Acquisition Method
• Identify the acquirer
o Important because the subsidiary comes in at FV and parent at cost
• Acquisition date
find more resources at oneclass.com
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Auisitio elated osts ae epesed o the paet’s ooks.
Acquisition method gives acquirer 1 year to determine all of the assets and their values received in the
acquisition.
Reverse Takeovers
• Listed Co. has 1 share o/s
o Issues 2 shares to SH of private co.
• Successful Private Ltd.
o SH transfers their shares of private co. to Listed Co.
• The SH of the private co. own 2 of the 3 o/s, thus they control Listed co., and therefore own the
controlled combined entity
• Now the name of Listed co. will change to Private co. HOLDCO to let everyone know that Private
co. is now public
Income Tax Allocation
• Net asset will result in a DITL
• Net liability will result in a DITA
• only concerned with temporary differences, not permanent differences
• If we do not consider the future income taxes, then we undervalue Goodwill
Parent Subsidiary Total Adj Truth (reflects transactions between you and
outside party)
Sales 10 20 30 (10) 20
COGS 5 10 15 (10) 5
P S Total Adj Truth Cons. Adj. #1 Cons. Adj. #2 Truth
Sales 10 10 20 (10) 10 (10) (10)
COGS 5 5 10 (7.5) 2.5 (10) 2.5 (7.5)
* This example is if the subsidiary only sold half of the inventory it purchased
• Subsidiary bought at 10, sold half (5), left with 5, but real balance is 2.5(dr.), but need to get rid
of 2.5(cr.)
• Sales 10
o COGS 10
• COGS 2.5
o End. Inv. 2.5
Year 2 (from notes; different numbers from example above)
R/E beg. 1.25
Beg. Inv. 1.25
Beg Inv. 1.25
COGS Yr2 1.25
Consolidated tax expenses should be less than the sum of the separate entity tax expenses because the
consolidated company makes less income than the separate entities.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Example: natalia inc. owns car worth 50k, amortized by 20k, natasha wants to buy car at 40k; she has car on books at 40k, natasha can either buy the car from natalia inc. , or natalia inc. If she buys from natalia inc. , no residual value and car is amortized at 30k. If she buys natalia inc. , no residual value and from natalia inc perspective, the car is (cid:449)o(cid:396)th 30k a(cid:374)d the 30k is a(cid:373)o(cid:396)tized, (cid:271)ut f(cid:396)o(cid:373) natasha"s pe(cid:396)spe(cid:272)ti(cid:448)e, the (cid:272)a(cid:396) is (cid:449)o(cid:396)th. 40k since she bought it at 40k and so the 40k is amortized the difference is the fva; fva has to amortized as well. Compare purchase price paid to fv of net identifiable assets: goodwill is not an identifiable asset. If
