ACC 703 Chapter Notes - Chapter 5: Amortization Schedule, Premium Bond, Pro Forma

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30 Nov 2014
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Chapter(5(–(Consolidation(Subsequent(to(Acquisition(Date(
!
Methods(of(Accounting(for(an(Investment(in(a(Subsidiary(
Internal!records:!Cost!or!Equity!Method!
Cost!Method:!
o Investment!initially!recorded!at!cost!
o Income!from!sub!is!recognized!in!net!income!when!right!to!dividends!
is!established!(declared)!
Equity!Method:!
o IAS!28:!investment!initially!recognized!at!cost!and!adjusted!for!
changes!in!net!assets!!
o Profit/loss!of!investee!is!recognized!in!investor’s!income!
o Dividends!reduce!the!carrying!amount!of!the!investment!!
o Changes!in!investee’s!OCI!may!require!adjustments!to!carrying!
amount!
! Revaluation!of!PPE!and!FX!differences!
! Investor’s!share!is!recognized!in!OCI!
o Equity!method!is!also!used!to!account!for!investment!in!an!associate!
o Net!income,!OCI!and!Retained!Earnings!on!internal!records!will!be!
equal!to!the!parent’s!share!on!the!consolidated!statements!!
Acquisition!differential!must!be!amortized!over!useful!life!of!assets!
Statements:!
o Internal!(parent):!GL!supported!by!subQledgers!and!an!Investment!in!
Sub!account!(accounted!for!using!cost,!equity!or!FV!method)!
o External!(separateQentity):!prepared!by!parent!for!external!users!
! Canadian!companies!must!prepare!nonQconsolidated!
statements!for!CRA!!
! IAS!27:!investments!in!subsidiary!on!the!separateQentity!
financial!statement!must!be!reported!at!cost!(IFRS)!
o Consolidated!(external):!prepared!by!parent!!
! Look!the!same!regardless!of!whether!cost!or!equity!method!
used!for!internal!records!
CRA!
o Dividends!received!and!investment!income!from!sub!must!be!
reversed!when!calculating!taxable!income!
!
Consolidated(Income(and(Retained(Earnings(Statements((
Parent’s!investment!income!from!sub!does!not!appear!on!consolidated!
income!statement!!
Some!of!sub’s!revenues!and!expenses!are!revalued!to!reflect!amortization!
and!impairment!for!FV!
If!parent!uses!the!equity!method,!the!retained!earnings!statement!is!already!
prepared!!
Amortization(of(Acquisition(Differential(is(only(on(the(consolidated(
financial(statements,(not(the(sub’s(financial(statements((
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Calculating(Consolidated(Net(Income:(
!
Consolidated!Net!Income!includes!parent’s!and!sub’s!incomes,!along!with!
consolidation!adjustments!
Consolidated!Net!Income!Attributable!to!Parent!is!the!parent’s!share!of!
consolidated!net!income!
o This!amount!is!recorded!by!parent!under!the!equity!method!
Acquisition!Differential!amortization!must!be!deducted!to!determine!
consolidated!net!income!
o Consider:!If!a!sub!was!purchased!for!a!price!greater!than!its!carrying!
value,!then!its!amortization!deductions!are!based!on!the!carrying!
values,!and!not!the!fair!values!
o AD!must!be!amortized!or!written!off!to!reflect!the!use,!impairment!or!
sale!of!the!underlying!assets!!
o Definite!useful!life!assets!are!amortized!over!useful!life!
o Inventory!is!written!off!in!the!first!year!as!Cost!of!Goods!sold!
o Land!is!not!amortized!–!incorporated!in!gain/loss!calculation!and!
recognized!in!income!statement!when!it!is!sold!or!impaired!!
o Goodwill!and!other!intangibles!are!not!amortized,!but!tested!for!
impairment!and!then!written!off!when!impaired!!
!
Testing(Goodwill(and(Other(Assets(for(Impairment(
IAS!36:!Impairment!of!Assets!–!An!asset,!a!group!of!assets,!or!a!cashQ
generating!unit!should!be!written!down!if!its!carrying!amount!exceeds!the!
amount!to!be!recovered!through!use!or!sale!of!the!asset!
o WriteQdown!is!an!impairment(loss!–!reported!in!net!income!
Recoverable(Amount:!Higher!of!FV!less!costs!of!disposal!and!value!in!use!
Fair!Value:!Price!that!would!be!received!to!sell!an!asset!or!paid!to!transfer!a!
liability!in!an!orderly!transaction!between!market!participants!(exit!price)!
Value(in(Use:!Present!value!of!the!future!cash!flows!expected!to!be!derived!
from!the!asset!or!group!of!assets!
o Incorporates!expected!future!cash!flows,!discounted!using!a!beforeQ
tax!rate!that!reflects!current!markets!assessments!of!the!timeQvalue!of!
money!and!the!risks!specific!to!the!asset!!
If!either!FV!less!costs!of!disposal!or!Value!in!Use!is!higher!than!the!carrying!
amount,!the!other!value!does!not!need!to!be!measured!!
o If!FV!less!costs!of!disposal!cannot!be!measured,!then!the!value!in!use!
may!be!used!as!the!recoverable!amount!!
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If!cash!flow!cannot!be!measured!for!an!individual!asset,!a!cashQgenerating!
unit!may!be!used!
o CashQGenerating!Unit:!The!smallest!identifiable!group!of!assets!that!
generates!cash!inflows!that!are!largely!independent!of!the!cash!
inflows!from!other!assets!or!groups!of!assets!
Sub(and(parent(may(not(always(have(the(same(result(for(impairment(
o Sub!may!determine!no!impairment!at!separateQentity!level,!but!since!
the!consolidated!values!are!usually!higher!(due!to!AD),!there!may!be!
impairment!at!consolidated!level!!
Property,(Plant,(Equipment,(and(Intangible(Assets(with(Definite(Useful(
Lives(
o Amortized!over!useful!lives!
o At!the!end!of!each!reporting!period,!determine!if!there!is!impairment!
loss!
! Entity!assesses!whether!indicators!exist!that!asset!may!be!
impaired!
If!indicators!exist,!then!recoverable!amount!must!be!
determined!and!compared!to!carrying!amount!
If!there!are!no!indicators,!then!asset!is!not!impaired!
o If!the!recoverable!amount!is!greater!than!carrying!amount,!then!there!
is!no!impairment!and!asset!is!reported!at!carrying!amount!
o If!the!recoverable!amount!is!less!than!the!carrying!amount,!then!there!
is!impairment!and!the!asset!is!written!down!to!its!recoverable!amount!
!
Intangible(Assets(with(Indefinite(Useful(Lives(
o Must!be!tested!for!impairment!on!an!annual!basis,!regardless!of!
whether!or!not!indicators!exist!
o Same!process!for!intangible!assets!not!yet!available!for!use!
o Test!may!be!performed!at!any!time,!but!must!be!performed!at!the!
same!time!every!year!
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