Beruflich Dokumente
Kultur Dokumente
as
1. Investments in financial assets (when the investing firm has no
significant control over the operations of the investee firm)
2. Investments in associates (when investing company has
significant influence over the operations of the investee firm, but
not control)
3. Business Combinations (when investing company has control over
the operations of the investee firm)
Ownership
Degree of
Influence
Accounting Treatment
Equity Method
Control
Acquisition Method
50%/50%
Shared Control
IFRS : Proportionate
Consolidation preferred
US GAAP : Equity Method
Investment in Associates
Conditions for Significant influence
1.
2.
3.
4.
5.
6.
The cost (purchase price ) to acquire shares is greater than the book
value of those shares. IFRS allows an entity to measure its PPE using
historical cost or FV (less accumulated depreciation). US GAAP however
requires the use of historical cost to measure PPE (less accumulated
depreciation).
When cost of Investments > investors proportionate share of
investees net identifiable assets, the difference is first allocated
to specific assets. These differences are then amortized to investors
proportionate share of investees profit and loss account over the
economic life of assets, whose FV exceeds historical value. This
allocation is not a formally recorded: the first impact is the investment
account on the B/sheet of investor is the COST Over time, as the
differences are amortized, the balance in investment account will come
closer to representing the ownership % of the BV of net assets of
associate.
The difference between COA and investors share of FV of net identifiable
assets as Goodwill and is not amortised.( both US GAAP and IFRS)
Goodwill is reviewed for impairment on regular basis and written
down for any identified impairment. Goodwill is included in carrying
The excess purchase price allocated to assets and liabilities is accounted for in
the manner that is consistent with the accounting treatment for that asset
or liability to which it is assigned. Amounts allocate to assets and liabilities
that are expensed (inventory) or periodically depreciated or amortised (PPE
or intangible assets) must be treated in similar manner.
These allocated amounts are not reflected on the financial statements of the
investee and the investees income statement will not reflect the necessary
periodic adjustments. Therefore, the investor must directly record these
adjustment effects by reducing its share of investees profit recognized on
its income statement. Amounts allocated to assets or liabilities that are not
systematically amortized (e.g. land) will continue to be reported at their fair
value as of the date the investment instead of being separately recognized.
It is not amortized since it is considered to have an indefinite life.
If the investors share of the fair value of the associates net assets
(identifiable assets, liabilities and contingent liabilities) is greater
than the cost of the investment, the difference is excluded from the
carrying amount of the investment and instead included as income in the
determination of the investors share of the associates profit or loss in the
period in which the investment is required.
Both standards require that the election to use the fair value option occur
at the time of initial recognition and is irrevocable. Subsequent , to initial
recognition, the investment is reported at fair value with unrealized
gains and losses arising from changes in fair value as well as any
interest and dividends received included in the investors profit or
loss (income). Under the fair value method, the investment account on
the investors balance sheet does not reflect the investors proportionate
share of the investees profit or loss, dividends, or other distributions. In
addition, the excess of cost over the fair value of the investees
identifiable net assets is not amortized, nor is the goodwill created.
QUESTION
Assume A Co. acquires 30% of outstanding shares of B co. At the
acquisition date, book values and fair values of Bs recorded assets
and liabilities are as follows :
Book Value
Fair Value
Current Assets
$ 10,000
$ 10,000
Plant And
Equipment
190,000
220,000
Land
120,000
140,000
$320,000
$370,000
Liabilities
100,000
100,000
Net Assets
$220,000
$270,000
A co. believes the value of B co. is higher than the fair value of its
identifiable net assets. They offer $ 100,000 for a 30% interest in B
co. Part of the excess purchase price is attributable to the $ 50,000
difference between Book value and fair value of the identifiable
assets and so the remaining amount is attributable to goodwill.
Question
On 1st January P company acquired 20 % of R co. common shares for
the cash price of $ 500,000. It is determined that P co. has the ability
to exert significant influence on R cos financial and operating
decisions. The following information concerning R cos assets and
liabilities on 1 January 2009 is provided :
Book Value
Fair Value
Difference
Current Assets
100,000
100,000
1,900,000
2,200,000
300,000
2,000,000
2,300,000
300,000
Liabilities
800,000
800,000
Net Assets
1,200,000
1,500,000
300,000
Plant And
Equipment
The plant and equipment are depreciated on straight line basis and
have 10 years of remaining life. R co. reports net income of 2009 of $
100,000 and pays dividends of $ 50,000.
Calculate
a) Goodwill included in purchase price
b) Investment in associates at the end of 2009
Impaired
The impairment loss is recognized on the income statement and the
carrying amount of the investment on the balance sheet is either
reduced directly or through the use of an allowance
account. As per IFRS
U.S. GAAP takes a different approach. If the fair value of the
investment declines below its carrying value and the decline is
determined to be permanent, U.S. GAAP requires an impairment
loss to be recognized on the income statement and the carrying
value of the investment on the balance sheet is reduced to
its fair value.
Both IFRS and U.S. GAAP prohibit the reversal of impairment
losses even if the fair value later increases.
Business Combinations
Business Combinations
Merger : The distinctive feature of merger is that only one of the
entities remain in existence. The Net assets of company B are
transferred to company A. Company B ceases to exist.
Company A + Company B = Company A
Acquisition : Both companies continue to exist in a parentsubsidiary relationship. It may or may not acquire 100% share of the
target company. If it acquires less than 1005 share of target
company, Noncontrolling Interest or Minority Interest are reported on
the consolidated financial statements.
Company A + Company B = (Company A + Company B )
Consolidation : A new legal entity is formed and none of the
predecessor entities cease to exist.
Company A + Company B = Company C
Special Purpose entities : A special purpose or variable interest
entity is typically created for single purpose by sponsoring company.
The equity investor may lack control and when control effectively
remains with the sponsoring company
ACCOUNTING METHOD
1. Pooling of Interest Accounting Method : Under IFRS, pooling of
ineterest method, combines the ownership interest of two entities. The
assets and liabilities of two entities are simply combines. Key attributes
of pooling method includes the following :
The two firms are combined using historical book value. (Fair
Value plays no role in accounting for a business combination)
4. Recognition
and measurement of Financial Assets and
Liabilities : Acquirer can reclassify the financial assets on the
basis of contractual terms , economic conditions, and the
acquirers operating or accounting policies and other pertinent
conditions that exist on acquisition date.
5. Recognition and measurement of Goodwill : Value that the
acquirer sees in the acquiree beyond the Fair value of acquirees
tangible and identifiable intangible assets. Under IFRS Goodwill is
recognized as the Fair Value of the acquisition less than the
acquirers share of the fair value of all identifiable
tangible and intangible assets, liabilities and contingent
liabilities acquired. This is referred as PARTIAL GOODWILL. US
GAAP considers the entity as whole. Goodwill is recognized as the
Fair Value of the acquisition less than the fair value of all
identifiable tangible and intangible assets, liabilities and
contingent liabilities acquired. This is referred as FULL GOODWILL.
IFRS also permits this 100 % goodwill under full goodwill option
on a transaction by transaction basis. Net income is not
effected by whichever method we use for Goodwill. The
impact on ratios would be different ROA and ROE in full
Goodwill
Example
Missile has acquired a subsidiary on 1 January 2008. The fair value
of the net assets of the subsidiary acquired were $2,170m. Missile
acquired 70% of the shares of the subsidiary for $2,145m. The noncontrolling interest was fair valued at $683m.
Goodwill based on the partial and full goodwill methods under IFRS 3
(Revised) would be:
Full goodwill
Non-controlling interest
(30% x 2,170)
(651)
Non-controlling interest
(683)
1,487
1,519
Purchase consideration
(2,145)
Purchase consideration
(2,145)
Goodwill
626
Goodwill
658
QUESTI
ON
Soluti
on
QUESTION
Franklin Book
Value
Jeffereson
Book Value
Jeffereson
Fair Value
Cash and
Receivable
10,000
300
300
Inventory
12,000
1,700
3,000
PP&E (Net)
27,000
2,500
4,500
49,000
4,500
7,800
Current Payables
8,000
600
600
16,000
2,000
1,800
24,000
2,600
2,400
25,000
1,900
5,400
5,000
400
Net Assets
Shareholder Equity;
Capital stock (1
par)
Additional paid in
6,000
700
capital co acquired 100%of outstanding shares of Jefferson by issuing
Franklin
1,000,000
shares of 1$
(15 $ Market Value).
Retained Earnings
14,000
800Show the Balances in post
combination method Under Acquisition Method.
SOLUTION
15,000,000
1,900,000
13,10,000
15,000,000
5,400,000
Goodwill
9,600,000
10,300
Inventory
15,000
PP&E (Net)
31,500
Goodwill
Total Assets
Current Payables
9,600
66,400
8,600
17,800
Total Liabilities
26,400
6,000
20,000
Retained Earnings
14,000
40,000
66,400
QUESTION
parent Book
Value
Subsidiary
Book Value
Subsidiar
y
Fair Value
Cash and
Receivable
40,000
15,000
15,000
Inventory
125,000
80,000
80,000
PP&E (Net)
235,000
95,000
155,000
400,000
190,000
2,50,000
Current Payables
55,000
20,000
20,000
120,000
70,000
70,000
175,000
90,000
90,000
2,25,000
1,00,000
160,000
Net Assets
Shareholder Equity;
Capital stock (1
87,000
34,000
par)
Parent
co acquired 90%of outstanding shares of Subsidiary in exchange
Retained
138,000
66,000
for
sharesEarnings
of Parent Co.
no par common stock
with FV of 180,000 . The
FMV of subsidiary shares on the date of the exchange was 2,00,000.
Full Goodwill
Method
Cash and Receivable
Partial Goodwill
Method
55,000
55,000
Inventory
205,000
205,000
PP&E (Net)
390,000
390,000
40,000
36,000
690,000
686,000
75,000
75,000
190,000
190,000
Total Liabilities
265,000
265,000
20,000
16,000
Capital stock
267,000
267,000
Retained Earnings
138,000
138,000
Total Equity
425,000
421,000
690,000
686,000
Goodwill
Total Assets
Current Payables
Shareholder Equity :
Non Controlling Interests
Under US GAAP the term joint venture refers only to jointly controlled
separate entity in which business activities are conducted . A corporate
JV is a corporation that is owned and operated by 2 or more venturers as
a separate and specific business for the mutual benefit of venturers. APB
requires use of EQUITY METHOD to account for JVs. Proportionate
consolidation s not generally permitted except for unincorporated
entities operating in certain industries.
Proportionate consolidation requires ventures share of assets and
liabilities, income and expenses of JV to combine line by line, in contrast
with equity method results in single line item (Equity income of JV) on
income statement and single line item (investment in JV) on the balance
sheet.
THE TOTAL INCOME RECOGNISED IS IDENTICAL UNDER TWO
METHODS. ALSO THE TOTAL NET ASSETS of the investor is
IDENTICAL UNDER BOTH METHODS. There can be significant
differences, however, in ratio analysis because of different effects on
values of Total assets, liabilities, sales, expenses.
EFFECT ON
RATIOS Proportionate
Equity Method
Acquisitio
Consolidation n Method
Method
Leverage
Lower (more
In - between
Favorable) Liabilities
are lower and equity
is the same
Higher
In - between
Lower
ROE
Higher Equity is
lower and Net Income
is the same
Same
Lower
ROA
In - between
Lower
QUESTION
On 31st March 2002, Sun company was merged into Moon Company. As
per the condition , Moon Company issued 4,00,000 shares of its
common stock of Rs 10 each when its market value was Rs 18 per
share in exchange of ll outstanding shares of Sun Ltd. The stockholder
equity section in the balance sheet of these companies immediately
before the merger was as follows :
If the merger qualifies for treatment as a purchase than on 31st March
2002, what amount should be reported in consolidated balance sheet
as the value of additional paid in capital?
Moon
Sun
Common Stock
60,00,000
30,00,000
26,00,000
3,00,000
50,000,000
17,00,000
1,36,00,00
0
50,00,000
Retained Earnings
QUESTION
On 1st April , Big company acquired small company by issuing
2,00,000 shares of Rs 10 each in exchange of all outstanding shares
of small company. The business combination is accounted by
following as a pooling of interest. On the same day the fair value of
each common share of Big company was RS 19. Other information is
as follows :
Carrying Amount
Fair Value
Cash
4,80,000
4,80,000
Receivables
5,40,000
5,40,000
Inventory
8,70,000
8,10,000
26,10,000
28,80,000
Liabilities
(10,50,000)
(10,50,000)
Net Assets
34,50,000
36,60,000
PPE
QUESTION
Purchase accounting is the most appropriate method for accounting a
business combination. Which of the following should be deducted in
determining the combined corporations net income for the current
period?
General
expenses related
to acquisition
Yes
No
Yes
Yes
No
Yes
No
No
QUESTION
On 1st April 2002Suraj and Shekhar companies furnished the
following balance sheet of their own :
Shekhar
Suraj
Current Assets
1,40,000
40,000
1,80,000
80,000
Total Assets
3,20,000
1,20,000
60,000
20,000
1,00,000
Stockholders Equity
1,60,000
1,00,000
Current Liabilities
65,00,000
20,00,000
Additional Paid in
capital
44,00,000
16,00,000
Retained Earnings
61,00,000
54,00,000
1,70,00,000
90,00,000
Both corporations continued to operate as separate businesses,
maintaining accounting records with years ending December 31. For
2000, Net Income and dividends paid from separate company operations
were Srinil Inc
Swapnil
Net Income
Six months ended June 30, 2000
10,00,000
3,00,000
11,00,000
5,00,000
13,00,000
QUESTION
On 30th September Arun Company acquired Tarun
Company in exchange of its 3,00,000 shares of Rs 20 each. The fair
value of common stock issued is equal to the book value of Tarun
companys net assets. Both the companies continue to operate
separately and books of accounts are also kept separate. Following
information furnished by two companies
Arun
Tarun
Net Income
Six Months ended September 30, 2000 15,00,000
4,50,000
7,50,000
16,50,000
Dividends Paid
July 25, 2000
19,00,000
PUSH-DOWN ACCOUNTING
Push-Down Procedure
Assets and liabilities are revalued
Goodwill, if any, is recorded
Retained earnings (prior to
acquisition) are eliminated
Push-down capital replaces retained
earnings
Includes old retained earnings
Any adjustments to assets and liabilities,
including goodwill
Push-Down Example
Paly buys 90% of Sim. Sim's book and fair
values are:
Cash
BV
5
FV
5
Liabilities
Inventory
Plant
assets
10
20
0
15
30
0
Capital stock
Retained earnings
BV FV
25 30
10
0
90
21
If
Sim
applies
push-down
accounting,
it
would
Goodwill
0 50 Total
5
revalue its21
inventories,
fixed assets, liabilities,
37
and record 5goodwill.
Total
0
90.0
45.0
90.0
4.5
Push-down
capital
225.0
100
50
90
Push-down
capital
240