Consolidated Financial Statements

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Consolidated Financial Statements

• prepared from separate financial statements of
  acquiring (parent) and acquired (subsidiaries)
  companies using consolidation worksheet procedure
• present assets and liabilities of two companies
  as if they were single accounting entity
• required whenever stock held by acquiring company
  gives it controlling interest in acquired company

2
Controlling Interest

• when one company owns, directly or indirectly,
  over 50 of outstanding voting shares of another
  company
• gives parent company ability to establish
  subsidiarys operating and financial policies and
  to direct subsidiarys economic activities as if
  they were the economic activities of one of their
  branches or divisions

3
Direct vs. Indirect Ownership
Direct Ownership of Co. Z by Co. A
Indirect Ownership of Co. Z by Co. A
Company A
Company A
owns shares in
owns shares in
Company Y
Company Z
owns shares in
Company Z
4
Noncontrolling Interest

• any voting shares of acquired company that
  acquiring company does not purchase
• holders of such shares called noncontrolling
  interest
• consolidation procedure necessary to produce
  consolidated financial statements

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Criteria for Consolidation
Percentage of Outstanding Voting Stock Acquired
20
50
100
0
1. Level of economic influence
Significant influence
Nominal
Control
2. Financial statement presentation
Investment Account Separate Financial Statements
Consolidated Financial Statements
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Exceptions to gt 50 Consolidation Rules

• not required when control is likely to be
  temporary
• parent anticipates selling subsidiarys stock to
  reduce ownership below 50
• not required when control does not rest with
  majority stockholders
• subsidiary involved in bankruptcy is controlled
  by court-appointed trustee
• subsidiary located outside United States and
  availability of assets and net income restricted
  by foreign governments

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Consolidation Procedure

• required whenever business combination by
  acquisition of stock results in an investment in
  stock account on records of acquiring company
  (Type III and IV business combinations)
• never required when business combinations by
  acquisition of net assets (Type I and II business
  combinations)
• not required when business combination by
  acquisition of stock and stock of acquired
  company liquidated

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Diagram for Analysis of Valuation Differential
for Purchase Combination
Fair Value of Identifiable Net Assets Acquired
Book Value of Net Assets Acquired
Owned
Owned
Acquisition Cost
X
X
Revaluation Increment
Goodwill
Valuation Differential
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Steps in Consolidation Worksheet Procedure at
Date of AcquisitionWithout Noncontrolling
Interest

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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Steps in Consolidation Worksheet Procedure at
Date of Acquisition

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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Steps in Consolidation Worksheet Procedure at
Date of Acquisition

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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Steps in Consolidation Worksheet Procedure at
Date of Acquisition

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
1a) 50,000 100 50,000 (Ps Share of Ss Common Stock)
45,000 100 45,000 (Ps Share of Ss Beg. Retained Earnings)
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Steps in Consolidation Worksheet Procedure at
Date of Acquisition

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
Revaluation increment (decrement) on date of acquisition (DOA) (FV of identifiable net assets on DOA BV of identifiable net assets on DOA) owned
1b) (42,500 - 40,000) 100 2,500 (P's Share of Ss Inventory Revaluation Increment at Date of Acquisition)
(50,000 - 35,000) 100 15,000 (P's Share of Ss Land Revaluation Increment at Date of Acquisition)
(45,000 - 20,000) 100 25,000 (P's Share of Ss Equipment Revaluation Increment at Date of Acquisition)
(-0- - 7,500) 100 (7,500) (P's Share of Ss Patent Revaluation Decrement at Date of Acquisition)
AC FMV BV ? GW ?RI(D)2,50015,00025,000-7,50035,000 ? 150,000 130,000 95,00035,000 95,000 (50,00045,000)100 AC FMV BV ? GW ?RI(D)2,50015,00025,000-7,50035,000 ? 150,000 130,000 95,00035,000 95,000 (50,00045,000)100
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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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Steps in Consolidation Worksheet Procedure at
Date of Acquisition

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
1c) AC FMV BV ?GW150,000130,000 20,000?RI(D)2,50015,00025,000-7,50035,000? 150,000 130,000 95,00035,000 95,000 (50,00045,000)100   20,000 (Goodwill at Date of Acquisition)
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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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Steps in Consolidation Worksheet Procedure at
Date of AcquisitionWith Noncontrolling Interest

• enter separate balance sheets of parent and
  subsidiary
• prepare consolidation worksheet adjustments
• eliminate subsidiary owners equity (1a)
• recognize revaluation increments and decrements
  (1b)
• recognize goodwill (1c)
• complete minority interest column
• complete consolidated column
• prepare consolidated balance sheet from worksheet

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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
(1a) 50,000 80 40,000 (Ps Share of Ss Common Stock)
50,000 20 10,000 (Minority Interest in Ss Common Stock)
45,000 80 36,000 (Ps Share of Ss Beg. Retained Earnings)
45,000 20 9,000 (Minority Interest in Ss Beg. Retained Earnings)
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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
Revaluation increment (decrement) on date of acquisition (DOA) (FV of asset on DOA BV of asset on DOA) owned
(1b) (42,500 - 40,000) 80 2,000 (P's Share of Ss Inventory Revaluation Increment at Date of Acquisition)
(50,000 - 35,000) 80 12,000 (P's Share of Ss Land Revaluation Increment at Date of Acquisition)
(45,000 - 20,000) 80 20,000 (P's Share of Ss Equipment Revaluation Increment at Date of Acquisition)
(-0- - 7,500) 80 (6,000) (P's Share of Ss Patent Revaluation Decrement at Date of Acquisition)
AC FMV BV ? GW ?RI(D)2,00012,00020,000-6,00028,000 ? 120,000 104,000 76,00028,000 76,000 (50,00045,000)80 AC FMV BV ? GW ?RI(D)2,00012,00020,000-6,00028,000 ? 120,000 104,000 76,00028,000 76,000 (50,00045,000)80
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Standard Consolidation Worksheet Adjustments at
Date of Acquisition
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P Company and Consolidated SubsidiarySupporting
Calculations 1/1/X1
(1c) AC FMV BV ?GW120,000104,000 16,000?RI(D)2,00012,00020,000-6,00028,000? 120,000 104,000 76,00028,000 76,000 (50,00045,000)80   16,000 (Goodwill at Date of Acquisition)
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