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Modul ke
03 An Introduction to
Consolidated Financial Statements
Fakultas
Ekonomi
Bisnis Eriana Kartadjumena, Ph.D, Ak, CSRS
eriana.kartadjumena@widyatama.ac.id
Program Studi
Strata 1 (S1)
Akuntansi
1-1 1
Objectives
1. Recognize the benefits and limitations of
consolidated financial statements.
2. Understand the requirements for inclusion of a
subsidiary in consolidated financial statements.
3. Apply the consolidation concepts to parent
company recording of the investment in a
subsidiary at the date of acquisition.
4. Allocate the excess of the fair value over the book
value of the subsidiary at the date of acquisition.
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Objectives (continued)
5. Learn the concept of noncontrolling interest when
the parent company acquires less than 100% of the
subsidiary's outstanding common stock.
6. Amortize the excess of the fair value over the book
value in periods subsequent to the acquisition.
7. Prepare consolidated balance sheets subsequent
to the date of acquisition, including preparation of
elimination entries.
8. Apply the concepts underlying preparation of a
consolidated income statement.
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1: Benefits & Limitations
An Introduction to Consolidated Financial
Statements
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Business Acquisitions
• Business combinations occur
• Acquire controlling interest in voting stock
• More than 50%
• May have control through indirect ownership
• Consolidated financial statements
• Primarily for owners & creditors of parent
• Not for non-controlling owners or subsidiary creditors
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2: Subsidiaries
An Introduction to Consolidated Financial
Statements
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Who is a Subsidiary?
• PSAK 65 allowed broad discretion
• FASB Statement No. 94
• Control based on share ownership
• FASB Statement No. 160
• Financial control
• Subsidiaries, or affiliates, continue as separate legal entities and
reporting to their controlling and non-controlling interests.
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Consolidated Statements
• Prepared by the parent company
• Parent discloses
• Consolidation policy, Regulation of stock exchange
• Exceptions to consolidation, temporary control and
inability to obtain control
• Fiscal year end
• Use parent's FYE, but
• May include subsidiary statements with FYE within 3
months of parent's FYE.
• Disclose intervening material events
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3: Parent Company Recording
An Introduction to Consolidated Financial
Statements
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Penn Example: Acquisition Cost = Fair Value = Book
Value
Skelly BV=FV Penn acquires 100% of Skelly for
Cash $10 $40, which equals the book value
Other current assets 15 and fair values of the net assets
Net plant assets 40 acquired.
Total $65
Accounts payable $15 Cost of acquisition $40
Other liabilities 10 Less 100% book value 40
Capital stock 30
Excess of cost over book value $0
Retained earnings 10
Total $65 To consolidate, Penn eliminate this
acquisition transaction
Dr. capital stock 30,000
retained earning 10,000
cr. Investment in Skelly's 40,000
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Balance sheets Separate Consolidated
Penn Skelly Penn & Sub.
Cash $20 $10 $30
Other curr. assets 45 15 60
Net plant 60 40 100
Investment in Skelly 40 0 0
Total $165 $65 $190
Accounts payable $20 $15 $35
Other curr. liabilities 25 10 35
Capital stock 100 30 100
Retained earnings 20 10 20
Total $165 $65 $190
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4: Allocations at Acquisition
Date
An Introduction to Consolidated Financial
Statements
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Cost, Fair Value and Book Value
Acquisition cost, fair values of identifiable net assets and
book values may differ.
• Allocate excess or deficiency of cost over book value and
determine goodwill, if any.
• When BV = FV, excess is goodwill.
Cost less BV = Excess to allocate
• Allocate first to FV-BV differences
• Remainder is goodwill (or bargain purchase)
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Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
Sandy BV FV BV = 100 + 145 = $245
Cash $40 $40 FV = 385 – 75 = $310
Receivables 30 30
Inventory 50 75
Plant, net 200 240 Cost – FV = $0 goodwill
Total $320 $385
Liabilities $75 $75
Capital stock 100 Cost $310
Retained 100% BV 245
earnings 145 Excess of cost over BV $65
Total $320
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Piper and Sandy (cont.)
Allocate to: Amt Amort.
Inventory 100%(+25) 25 1st yr
Plant 100%(+40) 40 10 yrs
Total $65
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Panda and Salty (cont.)
Allocate to: Amt Amort.
Plant 60 4 yrs
Liabilities -5 5 yrs
Goodwill 35 -
Total $90
Panda's elimination worksheet entry:
Capital stock 250
Retained earnings 190
Plant 60
Goodwill 35
Liabilities 5
Investment in Salty 530
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Example: BV ≠ FV and Cost ≠
FV
Printemps acquires 100% of Summer for $185.
Summer BV FV BV = 75 + 105 = $180
Cash $10 $10 FV = 250 - 40 = $210
Receivables 30 30
Inventory 80 90
Plant, net 100 120
Total $220 $250
Liabilities $40 $40
Cost $185
Capital stock 75 100% BV (75+105) 180
Retained earnings 105 Excess of cost over BV $5
Total $220
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Printemps and Summer (cont.)
Allocate to: Amt Amort.
Inventory 10 1st yr
Plant, land 20 -
Bargain purchase (25) Gain
Total $5
Printemps records the acquisition of Summer assuming a cash purchase as
follows. Note that the investment account is recorded at its fair value and
the bargain purchase is treated immediately as a gain.
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An Introduction to Consolidated Financial Statements
5: Noncontrolling Interests
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Noncontrolling Interest
Parent owns less than 100%
• Non-controlling interest represents the minority shareholders
• Part of stockholders' equity
• Measured at fair value, based on parent's acquisition price
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Example: Noncontrolling
Interests
Popo acquires 80% of Sine for $400 when Sine had capital stock of $200
and retained earnings of $175.
Sine's assets and liabilities equaled their fair values except for buildings
which are undervalued by $50. Buildings have a 10-year remaining life.
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Elimination Entry
Popo's elimination worksheet entry:
Capital stock 200
Retained earnings 175
Building 50
Goodwill 75
Investment in Sine 400
Noncontrolling interest 100
An unamortized excess account could have been used for the excess
assigned to the building and goodwill.
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Popo Sine Adjustments Consol-
BV BV DR CR idated
Cash $50 $10 $60
Receivables 130 50 180
Inventory 80 100 180
Building, net 300 240 50 590
Investment in Sine 400 400 0
Goodwill 75 75
Total $960 $400 $1,085
Liabilities $150 $25 $175
Capital stock 250 200 200 250
Retained earnings 560 175 175 560
Noncontrolling interest 100 100
Total $960 $400 $1,085
500 500
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An Introduction to Consolidated Financial Statements
6: Amortizations After Acquisition
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Unamortized Excess
Excess assigned to assets and liabilities are
amortized according to the account
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Panda and Salty (cont.)
Cost $530 Allocate to: Amt Amort.
100% BV 440 Plant 60 4 yrs
Liabilities -5 5 yrs
Excess $90
Goodwill 35 -
Total $90
Beginning Current Ending
unamortized year's unamortized
excess amortization excess
Plant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 14 76
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Printemps and Summer (cont.)
Cost $185 Allocate to: Amt Amort.
Inventory 10 1st yr
100% BV 180
Plant, land 20 -
Excess $5 Bargain purchase (25) Gain
Total $5
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An Introduction to Consolidated Financial Statements
7: Subsequent Balance Sheets
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Balance Sheets After Acquisition
In preparing a consolidated balance sheet
• Eliminate the parent's Investment in Subsidiary
• Eliminate the subsidiary's equity accounts (common
stock, retained earnings, etc.)
• Adjust asset and liability accounts for any unamortized
excess balance
• Record goodwill, if any
• Record Noncontrolling Interest, if any
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Popo and Sine (cont.)
Cost of 80% of Sine $400 Allocate to:
Implied value of Sine $500 Building $50 10 yrs
Book value 375 Goodwill 75 -
Excess $125 Total $125
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After 1 year: Popo Sine Popo Sine
Cash $40 $15 Liabilities $100 $50
Receivables 110 85 Capital stock 250 200
Inventory 90 100 Retained earnings 574 185
Building, net 280 235
Investment in Sine 404
Total $924 $435 Total $924 $435
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After 1 year: Popo Sine Adjustments Consol-
BV BV DR CR idated
Cash $40 $15 $55
Receivables 110 85 195
Inventory 90 100 190
Building, net 280 235 45 560
Investment in Sine 404 404 0
Goodwill 75 75
Unamortized excess 120 120
Total $924 $435 $1,075
Liabilities $100 $50 $150
Capital stock 250 200 200 250
Retained earnings 574 185 185 574
Noncontrolling interest 101 101
Total $924 $435 $1,075
505 505
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Key Balance Sheet Items
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An Introduction to Consolidated Financial Statements
8: Consolidated Income Statements
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Comprehensive Example, Data
Pilot acquires 90% of Sand on 12/31/2009 for $10,200
when Sand's equity consists of $4,000 common stock,
$1,000 other paid in capital, and $900 retained
earnings.
On that date Sand's inventories, land and buildings are
understated by $100, $200, and $1,000, respectively
and its equipment and notes payable are overstated by
$300 and $100.
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Assignment and
Amortization Allocate to:
Inventory $100 1st yr
Land 200 -
Cost of 90% of Sand $10,200 Building 1,000 40 yrs
Implied value of Sand Equipment (300) 5 yrs
10,200/.90 $11,333 Note payable 100 1st yr
Book value (4000+1000+900) 5,900 Goodwill 4,333 -
Total $5,433
Excess over book value $5,433
Unamortized Current Unamortized
excess 1/1/10 amortization excess 12/31/10
Inventory 100 (100) 0
Land 200 0 200
Building 1,000 (25) 975
Equipment (300) 60 (240)
Note payable 100 (100) 0
Goodwill 4,333 0 4,333
Total 5,433 (165) 5,268
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Consol.
Pilot Sand *
Sales $9,523.50 $2,200.00 $11,723.50
Income from Sand 571.50 571.5 $0.00
Cost of sales (4,000.00) (700.00) 100 (4,800.00)
Depreciation exp - bldg (200.00) (80.00) 25 (305.00)
Depreciation exp - equip (700.00) (360.00) 60 (1,000.00)
Other expense (1,800.00) (120.00) (1,920.00)
Interest expense (300.00) (140.00) 100 (540.00)
Net income $3,095.00 $800.00
Total consolidated income $3,158.50
Noncontrolling interest share 63.50
Controlling interest share $3,095.00
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Key Income Statement Items
• The Income from Subsidiary account is eliminated.
• Current period amortizations are included in the
appropriate expense accounts.
• Noncontrolling interest share of net income is
proportional to the Income from Subsidiary under
the equity method.
$571.50 x .10/.90
= $63.50
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Push-Down Accounting
• SEC requirement
• Subsidiary is substantially wholly-owned (approx. 90%)
• No publicly held debt or preferred stock
• Books of the subsidiary are adjusted
• Assets, including goodwill, and liabilities revalued based on acquisition
price
• Retained earnings is replaced by Push-Down Capital which includes
retained earnings and the valuation adjustments
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