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Consolidated Financial Statements: On Date of Business Combination
Consolidated Financial Statements: On Date of Business Combination
Consolidated
Financial Statements:
On Date of Business
Combination
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Parent Company – Subsidiary
Relationships
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Parent Company – Subsidiary
Relationships
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Parent Company – Subsidiary
Relationships
However, such strict adherence to legal form
disregards the substance of most parent-subsidiary
relationships.
A parent company and its subsidiaries are a single
economic entity. In recognition of this fact,
consolidated financial statements are issued to
report the financial position and operating results of a
parent company and its subsidiaries as though they
comprised a single accounting entity.
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Nature of
Consolidated Financial Statements
Similar to the combined financial statements for a home
office and its branches.
Assets, liabilities, revenue, and expenses of the parent
company and its subsidiaries are totaled; inter-company
transactions and balances are eliminated; and the final
consolidated amounts are reported in the balance sheet,
income statements, statement of stockholders’ equity,
and statement of cash flows.
However, the separate legal entity status of the parent
and subsidiary corporations necessitates eliminations that
are generally more complex.
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Should All Subsidiaries Be
Consolidated?
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The Meaning of Controlling Interest
Traditionally, an investor’s direct or indirect
ownership of more than 50% of an investee’s
outstanding common stock has been required
to evidence the controlling interest underlying a
parent – subsidiary relationship.
However, even though such a common stock
ownership exists, other circumstances may
negate the parent company’s actual control of
the subsidiary.
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The Meaning of Controlling Interest
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The Meaning of Controlling Interest
If minority shareholders of a subsidiary have
the right effectively to participate in the financial
and operating activities of the subsidiary in the
ordinary course of business, the subsidiary’s
financial statements should not be consolidated
with those of the parent company.
It is important to recognize that a parent
company’s control of a subsidiary might be
achieved indirectly.
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Criticism of
Traditional Concept of Control
Many accountants criticize the traditional definition of
control which emphasizes on legal form.
These accountants maintain that an investor owning
less than 50% of an investee’s voting common stock in
substance may control the affiliate, especially if the
remaining common stock is scattered among a large
number of stockholders who do not attend stock holder
meetings or give proxies.
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Criticism of
Traditional Concept of Control
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Criticism of
Traditional Concept of Control
SEC require companies subject to its
jurisdiction, to emphasize economic substance
over legal form in adopting a consolidation
policy.
FASB issued a Discussion Memorandum “An
Analysis of Issues Related to Consolidation
Policy and Procedures”, which dealt at length
with the question of Ownership (legal form)
versus Control (economic substance).
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FASB’s Proposed Definition of
Control
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FASB’s Proposed Definition of
Control
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FASB’s Proposed Definition of
Control
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FASB’s Proposed Definition of
Control
– C. Has a unilateral ability to (1) Obtain a
majority voting interest in the election of a
corporation’s governing body or (2) Obtain a
right to appoint a majority of the corporation’s
governing body through the present ownership
of convertible securities or other rights that are
currently exercisable at the option of the holder
and the expected benefit from converting those
securities or exercising that right exceeds its
expected cost.
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FASB’s Proposed Definition of
Control
By the latter proposal, the FASB planned to
repeal the long-standing requirement of
majority ownership of an investee’s
outstanding common stock as a prerequisite
for consolidation.
Objectively determined legal form was to be
replaced by subjectively determined
economic substance as the basis for
consolidated financial statements.
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
P CORPORATION AND S COMPANY
Separate Financial Statements ( prior to business combination)
For Year Ended December 31, 2002
P Corp. S Comp
Income Statements
Revenue:
Net Sales $990,000 $600,000
Interest Revenue 10,000
Total Revenue $1,000,000 $600,000
Costs and Expenses:
Cost of Goods Sold $635,000 $410,000
Operating Expenses 158,333 73,333
Interest Expense 50,000 30,000
Income Taxes Expense 62,667 34,667
Total Costs and Expenses $906,000 $548,000
Net Income $94,000 $52,000
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
P CORPORATION AND S COMPANY
Separate Financial Statements ( prior to business combination)
For Year Ended December 31, 2002
P Corp. S Comp
Balance Sheets
Assets
Cash $100,000 $40,000
Inventories $150,000 $110,000
Other Current Assets 110,000 $70,000
Receivable from S Company $25,000
Plant Assets (Net) $450,000 $30,000
Patent (Net) $20,000
Total Assets 835,000 540,000
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
P Corporation ( combinor)
Journal Entries
31-Dec-02
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
Le dge r Accounts of Combinor Affe cte d by Busine ss Combina tion
Ca sh Account
Da te Ex pla na tion De bit Cre dit Ba la nce Dr/Cr
2002
Dec. 31 Balance Forward 100,000 Dr.
Dec. 31 Out-of-Pocket Costs of business combination 85,000 15,000 Dr.
Common Stock, $ 10 Pa r
Da te Ex pla na tion De bit Cre dit Ba la nce Dr/Cr
2002
Dec. 31 Balance Forward 300,000 Cr.
Issuance of Common Stock in business
Dec. 31 combination 100,000 400,000 Cr.
Pa id-In-Ca pita l in Ex ve ss of Pa r
Da te Ex pla na tion De bit Cre dit Ba la nce Dr/Cr
2002
Dec. 31 Balance Forward 50,000 Cr.
Issuance of Common Stock in business
Dec. 31 combination 350,000 400,000 Cr.
Costs of issuing common stock in business
Dec. 31 combination 35,000 365,000 Cr.
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
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Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination
P CORPORATION AND S COMPANY
Consolidated Balance Sheet
31-Dec-02
Assets
Current Assets
Cash ($15,000+$40,000) $55,000
Inventories ($150,000+ $135,000) 285,000
Other ($110,000 + $ 70,000) 180,000
Total Current Assets $520,000
Plant Assets (net) ($450,000 + $365,000) 815,000
Intangible Assets:
Patent (net) ($0 + $25,000) 25,000
Goodwill 15,000 40,000
Total Assets 1,375,000
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Working Paper for
Consolidate Balance Sheet
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Working Paper for
Consolidate Balance Sheet
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Working Paper for
Consolidate Balance Sheet
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Working Paper for
Consolidate Balance Sheet
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Working Paper for
Consolidate Balance Sheet
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Working Paper for
Consolidate Balance Sheet
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Consolidation of Partially Owned
Subsidiary
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Consolidation of Partially Owned
Subsidiary
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Consolidation of Partially Owned
Subsidiary
Because of the complexities caused by minority
interest in the net assets of a partially owned subsidiary
and the measurement of goodwill acquired in the
business combination, it is advisable to use a working
paper for preparation of a consolidated balance sheet
for a parent company and its partially owned subsidiary
on the date of the business combination. The format of
the working paper is identical to that used in
preparation of consolidated balance sheet of a parent
company with wholly owned subsidiary.
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Consolidation of Partially Owned
Subsidiary
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Consolidation of Partially Owned
Subsidiary
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Nature of Minority Interest
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Nature of Minority Interest
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Nature of Minority Interest
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Alternative Methods For Valuing
Minority Interest And Goodwill
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Alternative Methods For Valuing
Minority Interest And Goodwill
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Alternative Methods For Valuing
Minority Interest And Goodwill
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Alternative Methods For Valuing
Minority Interest And Goodwill
Supporters of this approach contend that a
single valuation method should be used for all
net assets of a purchased subsidiary –
including goodwill – regardless of the existence
of a minority interest in the subsidiary. They
further maintain that the goodwill should be
attributed to the subsidiary, rather than to the
parent company, as is done for a wholly owned
purchased subsidiary.
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