RSM321H1 Chapter Notes - Chapter 3: Retained Earnings, Impaired Asset, Independent Business

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Published on 20 Dec 2017
School
Department
Course
Business Combinations
There are 3 main forms of business combinations. One company can obtain control over the net assets
of another company by
1. Purchasing its net assets
a. Purchase of assets
i. The selling company is left only with cash or other consideration received as
payment from the purchaser, and the liabilities present before the sale
b. Purchase of net assets
i. The acquirer purchases all the assets of the acquire and assumes all its liabilities,
which together are referred to as net assets
2. Acquiring enough of its voting shares to control the use of its net assets
a. Most common form of combination
b. It is often achieved through a tender offer made by the management of the acquirer to
the shareholders of the acquire
i. These shareholders are invited to exchange their shares for cash or for shares of
the acquirer company
c. Least costly to the acquirer because control can be achieved by purchasing < 100% of
the outstanding voting shares
3. Gaining control through a contractual arrangement
The working paper approach
Paet’s investment account does not appear on the consolidated B/S because it is replaced
with the underlying assets and liabilities of the sub
The su’s shh’s euit aouts do ot appea o the osolidate B/S eause the ae ot pat
of the consolidate entity’s shh’s euit
The allocation of the acquisition differential provides the amounts used to revalue the net assets
of the su. B addig the auisitio diffeetial to the aig aout of the su’s et assets
on a line-by-line basis, we end up with the fai alue of the su’s assets ad liailities
The direct approach
CV (parent) + CV (sub) +/- acquisition differential = consolidated amounts
o 100% acquisition: CV (parent) + FV (sub) = consolidated amounts
O the date of auisitio: osolidated shh’s euit = paet’s shh’s euit
Whe osolidate, ol paet’s equity (C/S + new issued & R/E) will included in the
consolidated amounts
Net method for accumulated depreciation: CV (P) + CV (S) - CV (S) [$0 as if the asset is new b/c
it does not report any A/D]
Consolidation of Non-Wholly Owned Subsidiaries
Non-wholly owned subsidiaries
Parent acquires < 100% of the shares: CV (P) + FV (S)
There are many ways of measuring and presenting NCI on the consolidated financial statements
(all 4 theories have been or now are required under Canadian GAAP)
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o Proprietary theory
The osolidated aouts ilude % of the paet’s CV plus the paet’s
shae of the FV of the su’s et assets
NCI is not recognized, ol the paet’s shae of the FV of the su is ought
onto the consolidated B/S
This theory is not used in practice to consolidate a parent and its sub, but used
to report certain types of joint arrangements
o Parent company theory
Similar to proprietary theory
NCI is recognized and reflected as a liability in the consolidated B/S; its amount
is based on the CV of the net assets of the sub
This theory is not used in practice
o Paet opa etesio theo → FV of idetifiale et assets ethod o patial GW
method
This theory was developed to address the concerns about GW valuation under
entity theory
It alues oth the paet’s shae ad the NCI’s shae of idetifiale et assets at
FV
Only the paet’s shae of the su’s GW is brought onto the consolidated
statements at the value paid by the parent
Sie the total alue of the su’s GW is ot easoal easuale, the NCI’s
potio of the su’s GW is ot easued ad ot ought oto the osolidated
statements
All of the su’s alue eept fo the NCI’s shae of GW is ought oto
the consolidated B/S
NCI is eogized i shh’s equity in the consolidated B/S
NCI is based on the FV of identifiable assets and liabilities
CV of S’s et assets:
Assets
XXX
Liabilities
(XX)
XX
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Document Summary

There are 3 main forms of business combinations. B(cid:455) addi(cid:374)g the a(cid:272)(cid:395)uisitio(cid:374) diffe(cid:396)e(cid:374)tial to the (cid:272)a(cid:396)(cid:396)(cid:455)i(cid:374)g a(cid:373)ou(cid:374)t of the su(cid:271)"s (cid:374)et assets on a line-by-line basis, we end up with the fai(cid:396) (cid:448)alue of the su(cid:271)"s assets a(cid:374)d lia(cid:271)ilities. It (cid:448)alues (cid:271)oth the pa(cid:396)e(cid:374)t"s sha(cid:396)e a(cid:374)d the nci"s sha(cid:396)e of ide(cid:374)tifia(cid:271)le (cid:374)et assets at. Excess of fv over cv for identifiable net assets [fv-cv] X: the consolidated b/s is prepared by combining, on an item-by-item basis, the. Cv (cid:894)p(cid:895) + fv (cid:894)s"s identifiable net assets(cid:895) + parent"s share of sub"s gw. Gw is i(cid:374)se(cid:396)ted as a(cid:374) asset, a(cid:374)d the (cid:272)al(cid:272)ulated nci is sho(cid:449)(cid:374) i(cid:374) shh"s equity: (cid:1005)(cid:1004)(cid:1004)% of su(cid:271)"s fv of ide(cid:374)tifia(cid:271)le assets a(cid:374)d lia(cid:271)ilities plus pa(cid:396)e(cid:374)t"s sha(cid:396)e of the su(cid:271)"s gw a(cid:396)e (cid:271)(cid:396)ought o(cid:374)to the (cid:272)o(cid:374)solidated b/s. Excess of fv over cv for identifiable net assets [fv-cv] i(cid:374)(cid:272)ludi(cid:374)g (cid:271)oth pa(cid:396)e(cid:374)t a(cid:374)d su(cid:271)"s full gw.

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