An Introduction to Consolidated Financial Statements Pertemuan 1-2 Mata kuliah: F Akuntansi Keuangan Lanjutan II Tahun: 2010

1: Benefits & Limitations An Introduction to Consolidated Financial Statements

Business Acquisitions FASB Statement 141R 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

2: Subsidiaries An Introduction to Consolidated Financial Statements

Who is a Subsidiary? ARB No. 51 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 noncontrolling interests.

Consolidated Statements Prepared by the parent company Parent discloses –Consolidation policy, Reg. S-X –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

3: Parent Company Recording An Introduction to Consolidated Financial Statements

Penn Example: Acquisition Cost = Fair Value = Book Value Penn acquires 100% of Skelly for $40, which equals the book value and fair values of the net assets acquired. Cost of acquisition$40 Less 100% book value40 Excess of cost over book value$0 Skelly BV=FV Cash$10 Other current assets15 Net plant assets40 Total$65 Accounts payable$15 Other liabilities10 Capital stock30 Retained earnings10 Total$65 To consolidate, eliminate Penn's Investment account and Skelly's capital stock and retained earnings.

Balance sheetsSeparateConsolidated PennSkellyPenn & Sub. Cash$20$10$30 Other curr. assets Net plant Investment in Skelly4000 Total$165$65$190 Accounts payable$20$15$35 Other curr. liabilities Capital stock Retained earnings Total$165$65$190

4: Allocations at Acquisition Date An Introduction to Consolidated Financial Statements

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)

Example: BV ≠ FV but Cost = FV Piper acquires 100% of Sandy for $310. BV = = $245 FV = 385 – 75 = $310 Cost – FV = $0 goodwill SandyBVFV Cash$40 Receivables30 Inventory5075 Plant, net Total$320$385 Liabilities$75 Capital stock100 Retained earnings145 Total$320 Cost$ % BV245 Excess of cost over BV$65

Piper and Sandy (cont.) Allocate to:AmtAmort. Inventory 100%(+25)251st yr Plant 100%(+40)4010 yrs Total$65 Piper's elimination worksheet entry: Capital stock100 Retained earnings145 Inventory25 Plant40 Investment in Sandy 310

Example: BV ≠ FV and Cost ≠ FV Panda acquires 100% of Salty for $530. BV = = $440 FV = 580 – 85 = $495 Cost – FV = $35 goodwill SaltyBVFV Cash$100 Receivables40 Inventory250 Plant, net Total$520$580 Liabilities$80$85 Capital stock250 Retained earnings190 Total$520 Cost$ % BV ( )440 Excess of cost over BV$90

Panda and Salty (cont.) Panda's elimination worksheet entry: Capital stock250 Retained earnings190 Plant60 Goodwill35 Liabilities 5 Investment in Salty 530 Allocate to:AmtAmort. Plant604 yrs Liabilities-55 yrs Goodwill35 - Total$90

Example: BV ≠ FV and Cost ≠ FV Printemps acquires 100% of Summer for $185. BV = = $180 FV = = $210 Cost$ % BV (75+105)180 Excess of cost over BV$5 SummerBVFV Cash$10 Receivables30 Inventory8090 Plant, net Total$220$250 Liabilities$40 Capital stock75 Retained earnings105 Total$220

Printemps and Summer (cont.) Allocate to:Amt Amort. Inventory101st yr Plant, land20 - Bargain purchase(25)Gain Total$5 Investment in Summer210 Gain on Bargain purchase 25 Cash 185 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.

Worksheet Elimination Entry Printemps' elimination worksheet entry: Capital stock75 Retained earnings105 Unamortized excess30 Investment in Summer 210 Inventory10 Plant20 Unamortized excess 30 Unamortized excess equals $30 (gain is recognized) $10 for undervalued inventory $20 for undervalued land included in plant assets

PrintempsSummerAdjustmentsConsol- BV DRCRidated Cash$30$10 $40 Receivables Inventory Plant, net Investment in Summer210 0 Unamortized excess 30 Total$840$220 $880 Liabilities$270$40 $310 Capital stock Retained earnings Total$840$220 $

5: Non-controlling Interests An Introduction to Consolidated Financial Statements

Non-controlling 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 Parent pays $40,000 for an 85% interest –Implied value of the full investee is 40,000/85% = $47,059. –Minority share = 15%(47,059) = $7,059.

Example: Non-controlling 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. Cost of 80% of Sine$400 Implied value of Sine (400/80%)$500 Book value ( )375 Excess over book value$125 Allocate to: Building$50 Goodwill75 Total$125

Elimination Entry Popo's elimination worksheet entry: Capital stock200 Retained earnings175 Building50 Goodwill75 Investment in Sine 400 Noncontrolling interest 100 An unamortized excess account could have been used for the excess assigned to the building and goodwill.

PopoSineAdjustmentsConsol- BV DRCRidated Cash$50$10 $60 Receivables Inventory Building, net Investment in Sine400 0 Goodwill 75 Total$960$400 $1,085 Liabilities$150$25 $175 Capital stock Retained earnings Noncontrolling interest 100 Total$960$400 $1,

6: Amortizations After Acquisition An Introduction to Consolidated Financial Statements

Unamortized Excess Excess assigned to assets and liabilities are amortized according to the account Balance sheet account Amortization periodIncome statement account Inventories and other current assets Generally, 1 st yearCost of sales and other expense Buildings, equipment, patents, Remaining life at business combination Depreciation and amortization expense Land, copyrightsNot amortized Long term debtTime to maturityInterest expense

Piper and Sandy (cont.) Allocate to:AmtAmort. Inventory251st yr Plant4010 yrs Total$65 Cost$ % BV245 Excess$65 Beginning unamortized excess Current year's amortization Ending unamortized excess Inventory25(25)0 Plant40(4)36 Total65(29)36

Panda and Salty (cont.) Beginning unamortized excess Current year's amortization Ending unamortized excess Plant60(15)45 Liabilities(5)1(4) Goodwill350 Total Cost$ % BV440 Excess$90 Allocate to:AmtAmort. Plant604 yrs Liabilities-55 yrs Goodwill35 - Total$90

Printemps and Summer (cont.) Beginning unamortized excess Current year's amortization Ending unamortized excess Inventory10(10)0 Land200 Total30(10)20 Cost$ % BV180 Excess$5 Allocate to:Amt Amort. Inventory101st yr Plant, land20 - Bargain purchase(25)Gain Total$5

7: Subsequent Balance Sheets An Introduction to Consolidated Financial Statements

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 Non-controlling Interest, if any

Popo and Sine (cont.) Cost of 80% of Sine$400 Implied value of Sine$500 Book value375 Excess$125 Allocate to: Building$5010 yrs Goodwill75 - Total$125 Beginning unamortized excess Current year's amortization Ending unamortized excess Building50(5)45 Goodwill750 Total125(5)120

After 1 year:PopoSine Cash$40$15 Receivables11085 Inventory90100 Building, net Investment in Sine404 Total$924$435 PopoSine Liabilities$100$50 Capital stock Retained earnings Total$924$435 Popo's elimination worksheet entry: Capital stock200 Retained earnings185 Unamortized excess120 Investment in Sine (80%) 404 Noncontrolling interest (20%) 101 Building45 Goodwill75 Unamortized excess 120

After 1 year:PopoSineAdjustmentsConsol- BV DRCRidated Cash$40$15 $55 Receivables Inventory Building, net Investment in Sine404 0 Goodwill 75 Unamortized excess120 Total$924$435 $1,075 Liabilities$100$50 $150 Capital stock Retained earnings Noncontrolling interest 101 Total$924$435 $1,

Key Balance Sheet Items Investment in Subsidiary does not exist on the consolidated balance sheet Equity on the consolidated balance sheet consists of the parent's equity plus the non-controlling interest. Non-controlling interest is proportional to the Investment in Subsidiary account when the equity method is used. $101 = $404 x.20/.80

8: Consolidated Income Statements An Introduction to Consolidated Financial Statements

Comprehensive Example, Data Pilot acquires 90% of Sand on 12/31/2009 for $4,333 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.

Assignment and Amortization Cost of 90% of Sand$10,200 Implied value of Sand 10,200/.90$11,333 Book value ( )5,900 Excess over book value$5,433 Unamortized excess 1/1/10 Current amortization Unamortized excess 12/31/10 Inventory100(100)0 Land2000 Building1,000(25)975 Equipment(300)60(240) Note payable100(100)0 Goodwill4,3330 Total5,433(165)5,268 Allocate to: Inventory$1001st yr Land200 - Building1, yrs Equipment(300)5 yrs Note payable1001st yr Goodwill4,333 - Total$5,433

PilotSandConsol.* Sales$9,523.50$2,200.00$11, Income from Sand571.50$0.00 Cost of sales(4,000.00)(700.00)(4,800.00) Depreciation exp - bldg(200.00)(80.00)(305.00) Depreciation exp - equip(700.00)(360.00)(1,000.00) Other expense(1,800.00)(120.00)(1,920.00) Interest expense(300.00)(140.00)(540.00) Net income$3,095.00$ Total consolidated income$3, Noncontrolling interest share63.50 Controlling interest share$3, * Cost of sales, building depreciation and interest expense are increased by $100, $25, and $100, and equipment depreciation is $60 lower than the sum of Pilot and Sand.

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. $ x.10/.90 = $63.50

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