Consolidation - Subsequent Years

situations will be parent acaquired the sub as of Jan 1, Year 1, but we will consolidate as of dec 31, Year 5

Lessons -
1) what information is required before we consolidate the f/s
2) how parent keep track of the investment in subsidary

parent keeping track the investment in subsidiary - how?

there 2 ways,
1) parent will apply equity method
parent will constantly apply the changes to the investment in sub

2) parent will use cost method

value in the investment in sub - will not change!
our focus will be consolidation when the investmetn in sub are in cost!

Consolidation steps
Step 1 - calculating the acquisition differential at the time of the acquisition (one time calculation
these the fair value at the of the acquistion = cost of acccount from the parent's

the following will be steps for each of the consolidation years

Step 2a) information from Step 1 - acquisition differenial - schedule of the amortization of the acquisition differentia
and goodwill impairment (chapter 5)

Step 2b) - list all the intercompany transactions that will result balance showing in the year of the consolidation
why? Because we will eliminate those intercompany transaction in the consoliddation
we will eliminate and avoid any balance overstated or understated due to intercompany transactions

all (except 1) intercompany transactions will result mirror balance

revenue | expense with the same amount
payable | receivable with the same amount

this exception transaction will result 1 side adjustment only! In the parent income statement
Dividend! - since we are using cost method,

Cash
Dividend income (investment income)

Step 2c - intercompany transaction that result intercompany profits/gain/loss

the sale of the following
a) inventory Chapter 6
b) land (non-depreciable asset) chapter 6
c) depreciable asset Chpater 7a

aspect that we have to consider … TAX implication

let's focus on Step 2a!

we need to prepare the schedule of the amortization of the acquisition differential (goodwill impairment)
amortization - reduction - do we need to reduce the fair value difference and goodwill that we identify in step 1

When do we "reduce" or "amortize" the FV difference

a) apply to all asset and liabilities - we will amortize the FV difference if the asset/liabilities are written off (disposed
derecognized etc)

special rule for inventory for out study purpose, we will apply FIFO in the amortization and consolidation

b) applicable to only to depreciable asset - asset is being held and used - FV difference will be amortized over the
useful live of the asset, as if we doing additional depreciation

c) apply to liabilties (LTD) - FV difference will be amortized using effective interest rate method Intermediate accoun
chapter 7B

eventually all these adjustment will be reflected on the f/s!

question - which account do I adjust?

we will create the following table / schedule

default columns
1 2 3 4
Acquision differential Balance as at Acc. Amortization current year
Acq date from initial acq to Amortization
Jan 1, Year 1 prior year end in year 6
Y1 to Y5

Inventory 2,000 (2,000) -

land xxx
PPE (10 years) (10,000) 5,000 1,000
goodwill xxx
total

Amoritzation column 3 and 4 - we have "+" and "-", in terms what excatly does it mean????
if the amortization column is negative - we will have to REDUCE the net income!
if the amortization column is positive - we will have to increase the net income

in Year 6, the amoritzation of the PPE is to increase the net income by $1,000
so, we will have to reduce the depreciation expense by $1,000

Column #5 - unamortized remaining amount will be adjuste to the consolidated balance sheet
Column #4 - the current year amortization - will be adjusted in the income statement
Column #3 will be used to calculate consolidated RE
 date as of dec 31, Year 5

time calculation
cost of acccount from the parent's perspective

tization of the acquisition differential

n the year of the consolidation

he consoliddation
ue to intercompany transactions

income statement
 al (goodwill impairment)
odwill that we identify in step 1

/liabilities are written off (disposed,

rtization and consolidation

rence will be amortized over the

nal depreciation

t rate method Intermediate accounting II

Unamortized amount as of Dec 31

5
Balance as at
conoslidation date
Dec 31, Year 6

(4,000)

mean????
balance sheet
Example 1 - 80%-owned Subsidiary

Balance sheet (as of January 1, Year 5)

Company P Company S Consolidated

Assets 142,800 17,000 159,800
Inventory 22,000 10,000 34,000
Investment in S 15,200 - -
Goodwill (A) - - 1,000
180,000 27,000 194,800

Liabilities 45,000 11,000 56,000

Common shares 50,000 10,000 50,000
Retained earnings 85,000 6,000 85,000
Non-controlling interest (B) - - 3,800
180,000 27,000 194,800

Note FV of the inventory of the sub is $12,000

(A year later…)

December 31, Year 5 - Financial Statements (Individual Statements)

Year 1 - Income Statements

Company P Company S
Sales 50,000 30,000
Investment income - dividend 2,000 -
Total revenue 52,000 30,000

Cost of sales 26,500 14,700

Other expenses 5,200 8,000
Total expenses 31,700 22,700
Net Income 20,300 7,300

Year 5 - Retained Earnings section

Company P Company S
Balance as at January 1 85,000 6,000
Net income 20,300 7,300
105,300 13,300
Dividends 6,000 2,500
Balance as at December 31 99,300 10,800
December 31, Year 5 - Balance Sheet
Company P Company S
Assets 151,100 18,300
Inventory 30,000 14,000
Investment in S 15,200 -
196,300 32,300

Liabilities 47,000 11,500

Common shares 50,000 10,000
Retained earnings 99,300 10,800
196,300 32,300

additional information
a) goodwill is impaired by $50 in year 5
b) sub declared dividend $2,500 in year 5
c) FVE will be used to account the NCI

step 1: acq differential

Acquisition cost (80%) 15,200

NCI 20% 3,800 as of the acquisitino date Jan 1, Year 5
total 100% 19,000 (15,200 / 80%)
net book value fo the sub
C/S 10,000
R/E 6,000 16,000
acquisition differential 3,000
Allocation to the FV diff of net asset
Inventory 2,000
goodwill 1,000

fas forward to the consolidation date - Dec 31, Year 5

Step 2a: Schedule of the amortization fo the acq differential

1 2 3 4 5
Acquisition differential Bal as at acq acc. Amort amortization in Bal as at cons.
Jan 1, Y5 NIL Year 5 Dec 31, Y5
Inventory 2,000 (2,000) -
Goodwill 1,000 (50) 950
total 3,000 (2,050) 950

Step 2b - intercompany transactions that will result balance showing on the F/sS
1) dividend from sub ($2,500 x 80%) 2,000 ( I will have to remove dividend from
the income statement) - which account?

Step 2c - intercompany profit /gain/loss

n/a

Company P
Consolidated Statement of income
for the year ended dec 31, Year5
Parent sub Adj adj Consolidated
Sales (always deal with inventory) 50,000 30,000 80,000
Investment income 2,000 - (2,000) -
Total 80,000

Cost of sales 26,500 14,700 2,000 43,200

other expense 5,200 8,000 13,200
Goodwill impairment - - 50 50
Total expense 56,450

consolidated net income 23,550

Attributed to
parent 22,500
NCI 1,050

the consolidated net income is $23,550, but this whole 100%, we need to break down the $23,550 - how? By reconciling
the net income directly from the parent the subsidiary

parent net income 20,300 (we will include Step 2b, 2c, and 2a)
divided from Sub (2,000) (dividend will only be the adjustment 2b) <--- dividend income has already reflected in the income of sub.
step 2c -
adjusted parent's net income 18,300
Sub's net income 7,300
Step 2c -
Step 2a - amortization of acq diff (2,050)
adjusted sub's net income 5,250
Cons. Net income 23,550
attributed to parent (100% of $18300 + 80% of 5250) 22,500
attibuted to NCI 1,050

Company P
Consolidated Statement of changes in equity
R/E section
for the year ended Dec 31, Year 5
Cons. R/E as of Jan 1, year 5 85,000
cons NI attributed to parent 22,500
Dividend declared (parent) (6,000) (assume)
consol R/E as of Dec 31, year 5 101,500

cons. R/E is the parent's r/e + net changes of the sub's r/E since acquisition

Can we verify the amount? Yes

direct verification approach
by reconcilde the R/e fo the parent and sub

Parent's R/E as of Dec 31, Year 5 99,300 (Step 2c, and then 2a)
Step 2c -
Adjusted parent's r/e 99,300
Sub's R/E as of dec 31, Y5 10,800
Sub's R/E as of acq date 6,000
changes since acq 4,800
Step 2c -
Acc. Amort of the acq differential (2,050) (Column 3 +4 from step 2a)
net changes 2,750
% of ownerhsip 80% 2,200
consolidatd r/e 101,500

NCI as of Dec 31, Year 5

NCI calcluation has 2 methods of calculating

Method 2)
NCI = (Sub's NBV at the of year + NCI valuee of the unamortized acq differential

Sub's net book value as of dec 31, year 5

C/S 10,000
R/E 10,800
20,800
Step 2c adjustment -
ADD: uamoortized acq diff 950
21,750
NCI % 20%
NCI as of dec 31, Year 5 4,350

Method #1 - you will need the NCI value as of acquisition

NCI as acquisition date 3,800
Net changes since acq of control 2,750
NCI % 20% 550
NCI as of dec 31, Year 5 Yea

Company P
Consolidated balance sheet
AS of dec 31, Year 5
Parent Sub adj adj Cons.
Asset 151,100 18,300 - - 169,400
Inv 30,000 14,000 44,000
Investment inSub 15,200 - (15,200) -
goodwill 950 950
total 214,350

Liablitlies 47,000 11,500 58,500

C/S (parent) 50,000
R/E 101,500
NCI 4,350
214,350
Example 1 - 80%-owned Subsidiary

December 31, Year 6 - Financial Statements

Year 6 - Income Statements

Company P Company S
Sales 60,000 40,000
Investment income - dividend 2,400 -
Total revenue 62,400 40,000

Cost of sales 32,000 18,000

Other expenses 9,000 12,000
Total expenses 41,000 30,000
Net Income 21,400 10,000

Year 6 - Retained Earnings section

Company P Company S
Balance as at January 1 99,300 10,800
Net income 21,400 10,000
120,700 20,800
Dividends 8,000 3,000
Balance as at December 31 112,700 17,800

December 31, Year 6 - Balance Sheet

Company P Company S
Assets 134,500 21,000
Inventory 35,000 16,000
Investment in S 15,200 -
184,700 37,000

Liabilities 22,000 9,200

Common shares 50,000 10,000
Retained earnings 112,700 17,800
184,700 37,000

Assume Goodwill was impaired by $80

we do not need to do step 1 (previously done)

we will need to do step 2 - information gathering

Step 2a - amortization of the acq differential (goodwill impairment0

 1 2 3 4 5
Acq differential Bal as at acc. Amort Amortization in Bal as at
Jan 1, Year 5 Year 5 Year 6 Dec 31, year 6
Inventory 2,000 (2,000) - -
goodwill 1,000 (50) (80) 870
total 3,000 (2,050) (80) 870

Step 2b - intercompany transaction in year 6

Dividend from Sub ($3,000 x 80%) 2,400

step 2c - unrealized profit/gain/loss

n/A

Company P
Consolidated Statement of Income
For the year ended Dec 31, Year 5
Sales ($60,000 + $40,000) 100,000
Investment Income ($2,400 - $2,400) -
100,000

Cost of sales ($32,000 + $18,000) 50,000

Other expenses ($9,000 + $12,000) 21,000
Goodwill impairment ($0 +$0 + $80) 80
71,080

Net Income 28,920

Attributable to
Parent 26,936
NCI 1,984

we will need to calculate the consolidated net income directly from parent's net income
sub's net income

we will also include the adjustment from Step 2a, b, c

the order will be 2b, c, and finally a

Parent's net income 21,400

Dividend from sub (2,400)
step 2c -
adjusted parent's net income 19,000
sub's net income 10,000
Step 2c -
amortization in year 5 (80)
adjusted sub's net income 9,920
consolidated net income 28,920

attributed to parent (100% of 19,400 + 80% of99 26,936

Attributed to NCI (20% of the 9920) 1,984

Company P
Consolidated Statement of changes of equity
(R/E section only)
For the year ended for Dec 31, year 5
Consolidated R/E as of dec 31, Year 5 101,500
Add: consolidated net income - attributed to parent 26,936
Dividend declared (8,000)
Ending balance R/E as of dec 31, Year 5 120,436

cons. R/E as of dec 31, Year 5

Parent's R/E as Dec 31, Year 5 99,300
Step 2c -
adjusted parent's r/e 99,300
Sub's R/e as of dec 31, Year 5 10,800
sub's r/E as of acq 6,000
changes since acq 4,800
Step 2c -
Accumlated amort of the acq diff (2,050) (step 2a column 3)
net changes 2,750
% of ownership 80% 2,200
cons. R/E as of dec 31, Year 5 101,500

Consolidated R/E as of dec 31, year 6

Parent's R/E as Dec 31, Year 6 112,700
Step 2c -
adjusted parent's r/e 112,700
Sub's R/e as of dec 31, Year 6 17,800
sub's r/E as of acq 6,000
changes since acq 11,800
Step 2c -
Accumlated amort of the acq diff (2,130) (step 2a column 3 + 4)
net changes 9,670
% of ownership 80% 7,736
cons. R/E as of dec 31, Year 5 120,436

in order to complete the consolidated balance sheet,

we will need to first calculate the NCI as of dec 31, Year 5

there are 2 methods to do calculation

Method 1 - we will reconcile the amount directly from the beginning of the NCI as of the acq date

NCI as of the acq date 3,800

Net changes 9,670
% of the NCI 20% 1,934
NCI as of Dec 31, Year 5 5,734

Method 2
NCI = (Sub's NBV as of consolidation date + unamortized acq difff) x % NCI

Sub's NBV as of Dec 31, year 5

C/s 10,000
R/E 17,800
27,800
Step 2c -
27,800
unamortized acq diff 870
28,670
NCI % 20%
NCI as of dec 31, Year 5 5,734

Company P
Consolidated Balance Sheet
For the year ended, December 31, Year 6

Assets ($134,500 + $21,000) 155,500

Inventory ($35,000 + $16,000 + $0) 51,000
Investment in Company S ($15,200 - $15,200) -
Goodwil ($0 + $0 + $870) 870
207,370

Liabilities ($22,000 + $9,200) 31,200

Common shares 50,000
Retained earnings 120,436
Non-controlling interest 5,734
207,370