1. Consolidations -100% of Stock - Subsequent to the Date of Acquisition
Chapter Three
Consolidations -100% of Stock - Subsequent to the Date of Acquisition
Consolidations – Subsequent to
the Date of Acquisition
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2. Consolidation – The Effects of the Passage of Time
The passage of time creates complexities for consolidations, record keeping and the balance of the investment account will vary due to the accounting method used.
A worksheet and consolidation entries are used to eliminate the investment account, the eliminate the subsidiary equity accounts and consolidate the subsidiary’s assets, liabilities, revenues and expenses to create a single set of financial statements for the combined business entity.
Note:
Consolidation entries are work paper entries only they are not entered on the permeate books and records of the parent or the subsidiary.
Despite complexities created by the passage of time, the basic objective of all consolidations remains the same: to combine asset, liability, revenue, expense, and equity accounts of a parent and its subsidiaries. From a mechanical perspective, a worksheet and consolidation entries continue to provide structure for the production of a single set
of financial statements for the combined business entity.
A worksheet and consolidation entries are used to eliminate the investment account and record the subsidiary’s assets and liabilities to create a single set of financial statements for the combined business entity.

3. Investment Accounting by Acquiring Company
Comparison of internal reporting of investment methods.
Method
Investment
Income Account
Equity
Continually adjusted to reflect ownership of acquired company.
Income accrued as earned; amortization and other adjustments are recognized.
Initial Value
Remains at Initially-Recorded cost
Dividends declared recorded as Dividend Income
Partial Equity
Adjusted only for accrued income and dividends declared by acquired company.
Income accrued as earned; no other adjustments recognized.
Comparison of internal reporting of investment methods.
Equity Method
Continually adjusted to reflect ownership of acquired company.
Income accrued as earned; amortization and other adjustments are recognized.
Initial Value
Remains at Initially-Recorded cost. Dividends declared recorded as Dividend Income
Partial Equity
Adjusted only for accrued income and dividends declared by acquired company. Income accrued as earned; no other adjustments recognized.
Some parent companies rely on internally designed performance measures (rather than GAAP net income) to evaluate subsidiary management or for resource allocation decisions. For such companies, a full equity method application may be unnecessary for internal purposes. In these cases, the partial equity method, although only approximating the GAAP income measure, may be sufficient for decision making. Nonetheless, no matter what method the parent chooses to internally account for its subsidiary, the selection of a particular method (i.e., initial value, equity, or partial equity) does not affect the amounts ultimately reported on consolidated financial statements to external users.

4. Subsequent Consolidation - Equity Method (Example)
Parrot Company obtains all of the outstanding common stock of Sun Company on January 1, Parrot acquires this stock for $800,000 in cash. Sun Company’s balances are shown below.
Book Values Fair Values
1/1/ /1/ Difference
Current assets $320,000 $ 320, –0–
Trademarks (indefinite life) , , ,000
Patented technology (10-year life) , , ,000
Equipment (5-year life) , , (30,000)
Liabilities (420,000) (420,000) –0–
Net book value $600,000 $ 720, $120,000
Common stock—$40 par value $(200,000)
Additional paid-in capital (20,000)
Retained earnings, 1/1/ (380,000)
As a basis for this illustration, assume that Parrot Company obtains all of the outstanding
common stock of Sun Company on January 1, Parrot acquires this stock for $800,000 in cash.
The book values as well as the appraised fair values of Sun’s accounts follow:
Book Values Fair Values
1/1/ /1/14 Difference
Current assets $ 320,000 $ 320, –0–
Trademarks (indefinite life) , , ,000
Patented technology (10-yrs) 320, , ,000
Equipment (5-year life) , ,000 (30,000)
Liabilities (420,000) (420,000) –0–
Net book value , $ 720,000 $120,000
Common stock—$40 par value$(200,000)
Additional paid-in capital (20,000)
Retained earnings, 1/1/ (380,000)
Parrot considers the economic life of Sun’s trademarks as extending beyond the foreseeable future and thus having an indefinite life. Such assets are not amortized but are subject to periodic impairment testing. For the definite lived assets acquired in the combination (patented technology and equipment), we assume that straight-line amortization with no salvage value is appropriate. 9

5. Subsequent Consolidation - Equity Method (Example)
PARROT COMPANY
100 Percent Acquisition of Sun Company
Allocation of Acquisition-Date Subsidiary Fair Value
January 1, 2014
FV of consideration transferred by Parrot Company. $ 800,000
Net Book Value of Sun Company (600,000)
Excess of fair value over book value ,000
Allocation to specific accounts based on fair values:
Trademarks $ 20,000
Patented technology ,000
Equipment (overvalued) (30,000)
120,000
Excess FV not specifically identified—Goodwill $ 80,000
PARROT COMPANY
100 Percent Acquisition of Sun Company
Allocation of Acquisition-Date Subsidiary Fair Value
January 1, 2014
FV of consideration transferred by Parrot Company. $ 800,000
Net Book Value of Sun Company (600,000)
Excess of fair value over book value ,000
Allocation to specific accounts based on fair values:
Trademarks $ 20,000
Patented technology ,000
Equipment (overvalued) (30,000)
120,000
Excess FV not specifically identified—goodwill $ 80,000 17

6. Subsequent Consolidation - Equity Method (Example)
Amortization computation:
Useful Annual
Account Allocation Life Amortization
Trademarks $ 20,000 Indefinite –0–
Patented technology 130, years $13,000
Equipment (30,000) 5 years (6,000)
Goodwill ,000 Indefinite –0–
$ 7,000
Amortization computation:
Account Allocation Life Amortization
Trademarks $ 20,000 Indefinite –0–
Patented technology 130, years $13,000
Equipment (30,000) 5 years (6,000)
Goodwill ,000 Indefinite –0–
$ 7,000
Amortization will be $7,000 annually for five years until the equipment fair value reduction is fully removed.
Amortization will be $7,000 annually for five years until the equipment fair value reduction is fully removed. 22

7. Subsequent Consolidation - Equity Method (Example)
Assume Sun Company earns income of $100,000 in 2014 and pays a $40,0000 cash dividend on August 1, 2014.
Assume Sun Company earns income of $100,000 in 2014 and pays a $40,0000 cash dividend on August 1, 2014.
1/1/14 Investment in Sun Company ,000
Cash ,000
To record the acquisition of Sun Company.
8/1/14 Cash ,000
Investment in Sun Company ,000
To record receipt of cash dividend from subsidiary
under the equity method.
12/31/14 Investment in Sun Company ,000
Equity in Subsidiary Earnings ,000
To accrue income earned by 100% owned subsidiary.
12/31/14 Equity in Subsidiary Earnings ,000
Investment in Sun Company ,000
To recognize amortizations on allocations made in acquisition of sub. 23

8. Subsequent Consolidation - Worksheet Entries
For the first year, the parent prepares five entries on the work papers to consolidate the two companies.
S) Eliminates the subsidiary’s Stockholders’ equity, as of the first day of the year, and the book value component within the parent’s investment account.
Recognizes the unamortized Allocations, as of the first day of the year, associated with the adjustments to fair value.
I) Eliminates the subsidiary Income (Equity Method) accrued by the parent.
D) Eliminates the subsidiary Dividends.
E) Recognizes excess amortization Expenses for the current period on the allocations from the original adjustments to fair value.
Subsequent Consolidation - Worksheet Entries
For the first year, the parent prepares five entries on the workpapers to consolidate the two companies.
S) Eliminates the subsidiary’s Stockholders’ equity account beginning balances and the book value component within the parent’s investment account.
Recognizes the unamortized Allocations as of the beginning of the current year associated with the adjustments to fair value.
I) Eliminates the subsidiary Income accrued by the parent.
D) Eliminates the subsidiary Dividends.
E) Recognizes excess amortization Expenses for the current period on the allocations from the original adjustments to fair value. 3

9. Subsequent Consolidation Equity Method Example Entry S
Note: If this is the first year of the investment, and the investment was made at a time other than the beginning of the fiscal year, then pre-acquisition income / expense (net Income) of the subsidiary must be accounted for in the retained earnings balance.
Common Stock (Sun Company) ,000
APIC (Sun Company) ,000
R/E, 1/1/14 (Sun Company) ,000
Investment in Sun Company ,000
Note: If this is the first year of the investment, and the investment was made at a time other than the beginning of the fiscal year, then pre-acquisition income of the sub must be accounted for in the retained earnings balance.
Entry S removes Sun’s stockholders’ equity accounts as of the beginning of the
year. Subsidiary equity balances generated prior to the acquisition are not relevant to the
business combination and should be deleted. The elimination is made through this entry
because the equity accounts and the $600,000 component of the investment account represent
reciprocal balances: Both provide a measure of Sun’s book value as of January 1, 2012.
Before moving to the next consolidation entry, a clarification point should be made.
In actual practice, worksheet entries are usually identified numerically. However, as in
the previous chapter, the label “Entry S” used in this example refers to the elimination
of Sun’s beginning Stockholders’ Equity. As a reminder of the purpose being served, all
worksheet entries are identified in a similar fashion. Thus, throughout this textbook,
“Entry S” always refers to the removal of the subsidiary’s beginning stockholders’ equity
balances for the year against the book value portion of the investment account.

10. Subsequent Consolidation Equity Method Example Entry A
Note: In the first year, FV adjustments are calculated in the allocation computation. In subsequent years, FV adjustments must be reduced by any depreciation taken in prior consolidations.
Trademarks ,000
Patented technology ,000
Goodwill ,000
Equipment ,000
Investment in Sun Company ,000
Note: In the first year, FV adjustments are calculated in the allocation computation. In subsequent years, FV adjustments must be reduced by any depreciation taken in prior consolidations. Consolidation Entry A adjusts the subsidiary balances from their book values to acquisition-date fair values (see Exhibit 3.2). This entry is labeled “Entry A” to indicate
that it represents the Allocations made in connection with the excess of the subsidiary’s
fair values over its book values. Sun’s accounts are adjusted collectively by the $200,000
excess of Sun’s $800,000 acquisition-date fair value over its $600,000 book value. 20

11. Subsequent Consolidation Equity Method Example Entries I & D
Note: Entry I (100,000 – 7,000) removes Sun’s income recognized by Parrot during the year so Sun’s revenue and expense accounts (and current amortization / depreciation expense) can be brought into the consolidated totals.
Equity in Subsidiary Earnings ,000
Investment in Sun Company ,000
“Entry I” (for Income) removes the subsidiary income recognized by Parrot during the year
so that Sun’s underlying revenue and expense accounts (and the current amortization expense)
can be brought into the consolidated totals. The $93,000 figure eliminated here represents the
$100,000 income accrual recognized by Parrot, reduced by the $7,000 in excess amortizations.
For consolidation purposes, the one-line amount appearing in the parent’s records is not appropriate and is removed so that the individual revenues and expenses can be included. The entry originally recorded by the parent is simply reversed on the worksheet to remove its impact.
Investment in Sun Company ,000
Dividends Paid ,000
The dividends declared by the subsidiary during the year also must be eliminated from
the consolidated totals. The entire $40,000 dividend goes to the parent so that,
from the viewpoint of the consolidated entity, it is simply an intra-entity transfer of cash.
The distribution did not affect any outside party. Therefore, “Entry D” (for Dividends)
is designed to offset the impact of this transaction by removing the subsidiary’s Dividends
Paid account. Because the equity method has been applied, Parrot’s receipt of this
money was recorded originally as a decrease in the Investment in Sun Company account.
To eliminate the impact of this reduction, the investment account is increased.
Note: Entry D removes the intra-entity transfer of cash for the dividends distributed to Parrot from Sun. 21

12. Subsequent Consolidation Equity Method Example Entry E
Amortization Expense 13,000
Equipment 6,000
Depreciation Expense 6,000
Patented Tech 13,000
Net Expense $7,000

13. Applying the Initial Value Method and the Partial Equity Method
The parent company can use the initial value method or the partial equity method for internal record-keeping.
Application of either alternative changes the balances recorded by the parent over time and the consolidation process, but neither of these approaches affect any of the final consolidated balances reported.
Just three parent’s accounts vary because of the method applied:
• Investment account.
• Income recognized from investment in the subsidiary.
• Parent’s retained earnings (beginning balance - periods after year of combination).
The parent company may opt to use the initial value method or the partial equity method for internal record-keeping rather than the equity method. Application of either alternative changes the balances recorded by the parent over time and, thus, the procedures followed in creating consolidations. However, choosing one of these other approaches does not affect any of the final consolidated figures to be reported.
When a company utilizes the equity method, it eliminates all reciprocal accounts, assigns
unamortized fair-value allocations to specific accounts, and records amortization
expense for the current year. Application of either the initial value method or the partial
equity method has no effect on this basic process. For this reason, a number of the consolidation entries remain the same regardless of the parent’s investment accounting method.
In reality, just three of the parent’s accounts actually vary because of the method applied:
• The investment account.
• The income recognized from the subsidiary.
• The parent’s retained earnings (in periods after the initial year of the combination).

14. Applying the Initial Value Method and the Partial Equity Method
Entries S, A, and E are the same for all three methods.
The parent’s record-keeping is limited to two periodic journal entries:
Excess Amortization / Depreciation of assets (Partial Equity Method)
Receipt of dividends. (Initial Value Method)
So, the Investment and Income account balances differ for the other methods, and so will the worksheet Entries I and D.
Consolidation Entries – Other than Equity Method
Entries S, A, and E are the same for all three methods.
The parent’s record-keeping is limited to two periodic journal entries:
annual accrual of subsidiary income and
receipt of dividends.
So, the Investment and Income account balances differ for the other methods, and so will the worksheet Entries I and D.

15. Applying the Initial Value Method
If the Initial Value Method is used by the parent to account for the investment in the first year, the consolidation entries will change slightly.
The parent will record the subsidiary’s activity differently under this method, so the accounts will differ from the Equity Method.
No adjustments are made (recorded) in the Investment account for current year income, dividends paid by the subsidiary, or amortization of purchase price allocations.
Dividends received from the subsidiary are recorded as Dividend Revenue.
If the Initial Value Method is used by the parent to account for the investment in the first year, the consolidation entries will change slightly.
The parent will record the sub’s activity differently under this method, so the accounts will differ from the Equity Method.
No adjustments are recorded in the Investment account for current year income, dividends paid by the subsidiary, or amortization of purchase price allocations.
Dividends received from the subsidiary are recorded as Dividend Revenue.
Although the initial value method theoretically stands in marked contrast to the equity
method, few reporting differences actually exist. In the year of acquisition, Parrot’s income
and investment accounts relating to the subsidiary are the only accounts affected.
Under the initial value method, income recognition in 2012 is limited to the $40,000
dividend received by the parent; no equity income accrual is made. At the same time,
the investment account retains its $800,000 initial value. Unlike the equity method,
no adjustments are recorded in the parent’s investment account in connection with
the current year operations, subsidiary dividends, or amortization of any fair-value
allocations.

16. Consolidation Entries - Initial Value Method
Two entries for the initial value method are different than those for the equity method. Entry S is the same as the Equity Method. Entry A is the same as the Equity Method. *Entry I is different using Initial Value Method: It eliminates the Parent’s Dividend Income account and the Subsidiary's Dividends Paid account. *There is no Entry D. (See Entry I) Entry E is the same as the Equity Method.
Consolidation Entries - Initial Value Method
Two entries for the initial value method are different than those for the equity method.
Entry S is the same as the Equity Method.
Entry A is the same as the Equity Method.
Entry I is different using Initial Value Method: It eliminates the Parent’s Dividend Income account and the Sub’s Dividends Paid account.
There is no Entry D.
Entry E is the same as the Equity Method. 4

17. Applying the Partial Equity Method Method
If the Partial Equity Method is used by the parent to account for the investment in the first year, the consolidation entries will change slightly.
The parent will record the subsidiary’s activity differently under this method, so the accounts will differ from the Equity Method.
No adjustments are made (recorded) in the Investment account for amortization of purchase price allocations.
If the Initial Value Method is used by the parent to account for the investment in the first year, the consolidation entries will change slightly.
The parent will record the sub’s activity differently under this method, so the accounts will differ from the Equity Method.
No adjustments are recorded in the Investment account for current year income, dividends paid by the subsidiary, or amortization of purchase price allocations.
Dividends received from the subsidiary are recorded as Dividend Revenue.
Although the initial value method theoretically stands in marked contrast to the equity
method, few reporting differences actually exist. In the year of acquisition, Parrot’s income
and investment accounts relating to the subsidiary are the only accounts affected.
Under the initial value method, income recognition in 2012 is limited to the $40,000
dividend received by the parent; no equity income accrual is made. At the same time,
the investment account retains its $800,000 initial value. Unlike the equity method,
no adjustments are recorded in the parent’s investment account in connection with
the current year operations, subsidiary dividends, or amortization of any fair-value
allocations.
3-17

18. Consolidation Entries – Partial Equity Method
The same two entries differ for the Partial Equity Method . Entry S is the same as the Equity Method. Entry A is the same as the Equity Method. *Entry I is different using Partial Equity Method: It eliminates the Parent’s equity in the sub’s income and reduces the investment account. *Entry D eliminates the dividend income account. (same as the Equity Method) Entry E is the same as the Equity Method.

19. Consolidation Entries – Subsequent Years
Neither the Initial Value or Partial Equity Method provides a full-accrual-based measure of the subsidiary activities on the parent’s income.
The initial value method uses the cash basis for income recognition.
The partial equity method only adjust for the annual accrual of subsidiary income and receipt of dividends.
(*C) A new worksheet adjustment is needed to convert the parent’s beginning of the year retained earnings balance to the Equity Method.
Consolidation Entries – Subsequent Years
Neither the Initial Value or Partial Equity Method provides a full-accrual-based measure of the subsidiary activities on the parent’s income.
The initial value method uses the cash basis for income recognition.
The partial equity method only partially accrues subsidiary income.
A new worksheet adjustment is needed to convert the parent’s beginning of the year retained earnings balance to a full-accrual basis.

20. Consolidation Entries – Subsequent Years
For consolidation purposes, the beginning retained earnings account must be increased (Initial Value Method) or decreased (Partial Equity Method) to create the same effect as the equity method.
Entry *C. The C refers to the Conversion being made to equity method (full accrual) totals. The asterisk indicates that this entry relates solely to transactions of prior periods.
Entry *C should be recorded before other worksheet entries to align the beginning balances for the year.
Consolidation Entries – Subsequent Years
For consolidation purposes, the beginning retained earnings account must be increased (Initial Value Method) or decreased (Partial Equity Method) to create the same effect as the equity method.
Entry *C. The C refers to the Conversion being made to equity method (full accrual) totals. The asterisk indicates that this entry relates solely to transactions of prior periods.
Entry *C should be recorded before other worksheet entries to align the beginning balances for the year.

21. Other Consolidation Entries
In addition to the Entries S, A, I, D, E, and *C, intercompany debt (payables and/or receivables) must be eliminated in entry P.
No matter which method the Parent chooses to record the Sub’s activity, the consolidated totals are always the same!
This is because all the entries that were made during the year are eliminated regardless of the method used or the amount!
Other Consolidation Entries
In addition to the Entries S, A, I, D, E, and *C, intercompany debt (payables and/or receivables) must be eliminated in entry P.
No matter which method the Parent chooses to record the Sub’s activity, the consolidated totals are always the same!
This is because all the entries that were made during the year are eliminated regardless of the method used or the amount!

22. Goodwill and Other Intangible Assets
FASB ASC Topic 350, “Intangibles-Goodwill and Other,” provides accounting standards for reporting income statement effects of impairment of intangibles acquired in a business combination.
In accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization.
—Goodwill and Other, provides accounting standards for determining, measuring, and reporting goodwill impairment losses. Because goodwill is considered to have an indefinite life, an impairment approach is used rather than amortization.
In accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization.

23. Goodwill and Other Intangible Assets
Once goodwill has been recorded, the value will remain unchanged until:
All or part of the related subsidiary is sold,
There has been a permanent decline in value in which case we test for impairment and record an impairment loss if the item is impaired. OR
Once goodwill has been recorded, the value will remain unchanged until:
All or part of the related subsidiary is sold,
There has been a permanent decline in value, in which case we record an impairment loss.

24. Goodwill Impairment—Qualitative Assessment: Goodwill Impairment Test - Step Zero
FASB ASC Topic 350, “Intangibles-Goodwill and Other,” provides accounting standards for reporting income statement effects of either amortization or impairment of intangibles acquired in a business combination.
In accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization.
Stop

25. Goodwill Impairment – Two-Step Test
Step 1 Fair value (with allocated goodwill) is compared to the carrying value (including goodwill) of the consolidated entity’s reporting unit. Does fair value of the reporting unit exceed carrying value?
YES NO
Goodwill Impairment – Two-Step Test
Step 1
Fair value (with allocated goodwill) is compared to the carrying value (including goodwill) of the consolidated entity’s reporting unit.
Does fair value of the reporting unit exceed carrying value?
If yes, Goodwill is NOT impaired. No further testing is required.
If no, A second step must be taken to test for impairment.
Goodwill is NOT impaired. No further testing is required.
A second step must be taken to test for impairment.

26. Determination of Implied Fair Value of Goodwill
The implied value of goodwill is calculated similar to the initial determination of goodwill in a business combination.
Allocate the fair value of the reporting units to all its identifiable assets and liabilities.
Subtract the fair value of the net assets from the fair value of the reporting unit. The excess is “implied goodwill”.
Compare the resulting “implied goodwill” to the “recorded goodwill” on the books.
Determination of Implied Fair Value of Goodwill
The implied value of goodwill is calculated similar to the initial determination of goodwill in a business combination.
Allocate the fair value of the reporting unit to all its identifiable assets and liabilities.
Subtract the fair value of the net assets from the fair value of the reporting unit. The excess is “implied goodwill”.
Compare the resulting “implied goodwill” to the “recorded goodwill” on the books.

27. Goodwill Impairment – Two-Step Test
Implied value of the related goodwill can be determined using quoted market prices, similar businesses, or present value of future cash flows. Step 2 Is “implied goodwill” less than “recorded goodwill”? NO
YES
Goodwill Impairment – Two-Step Test
Implied value of the related goodwill can be determined using quoted market prices, similar businesses, or present value of future cash flows.
Step 2
Is “implied goodwill” less than “recorded goodwill”?
If no, Goodwill is NOT impaired. No further testing is required.
If yes, An impairment loss is recorded for the excess carrying value over implied fair value.
Goodwill is NOT impaired. No further testing is required.
An impairment loss is recorded for the excess carrying value over implied fair value.

28. Goodwill Impairment Test Example
Newcall’s Acquisition Fair Value
Reporting Units Goodwill January 1, 2015
DSM Wired $ 22,000,000 $950,000,000
DSM Wireless 155,000, ,000,000
Vision Talk ,000, ,000,000
Newcall tests for goodwill impairment of DSM Wireless. The implied fair value of goodwill is compared to its carrying value using the following allocation of the fair value of DSM Wireless at year end…
To illustrate the testing procedures for goodwill impairment, assume that on January 1, 2015,
investors form Newcall Corporation to consolidate the telecommunications operations of
DSM, Inc., and VisionTalk Company in a deal valued at $2.2 billion. Newcall organizes each
former firm as an operating segment. Additionally, DSM comprises two divisions—DSM
Wired and DSM Wireless—that along with VisionTalk are treated as independent reporting
units for internal performance evaluation and management reviews. Newcall recognizes
$215 million as goodwill at the merger date and allocates this entire amount to its reporting
units. 17

29. Goodwill Impairment Test Example
DSM Wireless Dec. 31, 2015, (fair value) $600,000,000
Fair values of DSM Wireless net assets at Dec. 31, 2015:
Current asset $ 50,000,000
Property ,000,000
Equipment ,000,000
Subscriber list 140,000,000
Patented technology 185,000,000
Current liabilities (44,000,000)
Long-term debt (125,000,000)
Value assigned to identifiable net assets ,000,000
Value assigned to goodwill ,000,000
Carrying value before impairment ,000,000
Impairment loss $151,000,000
DSM Wireless Dec. 31, 2015, fair value $600,000,000
Fair values of DSM Wireless net assets at Dec. 31, 2015:
Current asset $ 50,000,000
Property ,000,000
Equipment ,000,000
Subscriber list 140,000,000
Patented technology 185,000,000
Current liabilities (44,000,000)
Long-term debt (125,000,000)
Value assigned to identifiable net assets ,000,000
Value assigned to goodwill ,000,000
Carrying value before impairment ,000,000
Impairment loss $151,000,000

30. Goodwill Impairment Test Example
Goodwill is now valued at $4,000,000.
Newcall reports a $151,000,000 separate line item goodwill impairment loss in the operating section of its consolidated income statement.
Additional disclosures required: (1) the facts and circumstances leading to the impairment
(2) the method used to determine fair value of the associated reporting unit.
The reported values for all of DSM Wireless’ remaining assets and liabilities do not change.
Newcall reports a $151,000,000 goodwill impairment loss as a separate line item in the
operating section of its consolidated income statement. Additional disclosures are required
describing
the facts and circumstances leading to the impairment and
the method of determining the fair value of the associated reporting unit (e.g., market prices, comparable business, present value technique, etc.). The reported amounts for the other assets and liabilities of DSM Wireless remain the same and are not changed based on the goodwill testing procedure.

31. Other Intangibles
All identified intangible assets with finite lives should be amortized over their economic useful life that reflects the pattern of decline in the economic usefulness of the asset.
Factors that should be considered in determining the useful life of an intangible asset include
• Legal, regulatory, or contractual provisions.
• The effects of obsolescence, demand, competition, industry stability, rate of technological change, and expected changes in distribution channels.
All identified intangible assets with finite lives should be amortized over their economic useful life that reflects the pattern of decline in the economic usefulness of the asset.
Factors that should be considered in determining the useful life of an intangible asset include
• Legal, regulatory, or contractual provisions.
• The effects of obsolescence, demand, competition, industry stability, rate of technological
change, and expected changes in distribution channels.

32. Other Intangibles
Intangible assets with indefinite lives (extends beyond the foreseeable future) are tested for impairment on an annual basis. An entity has the option to first perform qualitative assessments to determine whether “it is more likely than not” the asset is impaired.
If so, a quantitative test must be performed. The asset’s carrying value is compared to its fair value. If fair value is less than carrying value, the intangible asset is considered impaired and an impairment loss is recognized. The asset’s carrying value is reduced accordingly.
Any recognized intangible assets considered to possess indefinite lives are not amortized but
instead are assessed for impairment on an annual basis. Similar to goodwill impairment
assessment, an entity has the option to first perform qualitative assessments for its indefinite-lived intangibles, to see if further quantitative tests are necessary. According to the FASB ASC ( ), if an entity elects to perform a qualitative assessment, it examines events and
circumstances to determine whether it is more likely than not (that is, a likelihood of more than
50 percent) that an indefinite-lived intangible asset is impaired. Qualitative factors include costs
of using the intangible, legal and regulatory factors, industry and market considerations, and
other. If the qualitative assessment indicates impairment is unlikely, no addition tests are needed. If the qualitative assessment indicates that impairment is likely, the entity then must perform a quantitative test to determine if a loss has occurred. To test an indefinite-lived intangible asset for impairment, its carrying amount is compared to its fair value. If the fair value is less than the carrying amount, then the intangible asset is considered impaired and an impairment loss is recognized. The asset’s carrying amount is reduced accordingly for the excess of its carrying amount over its fair value.

33. Contingent Consideration in Business Combinations
If part of the consideration to be transferred in an acquisition is contingent on a future event:
The acquiring firm estimates the fair value of a cash contingency and records a liability equal to the present value of the future payment.
The liability will continue to be measured at fair value with adjustments recognized in income.
Contingent stock payments are reported as a component of stockholders’ equity, and are not remeasured at fair value.
Under the acquisition method, contingent consideration obligations are recognized as
part of the initial value assigned in a business combination, consistent with the fair-value
concept. Therefore, the acquiring firm must estimate the fair value of the contingent portion
of the total business fair value. The contingency’s fair value is recognized as part of
the acquisition regardless of whether it is based on future performance of the target firm
or the future stock prices of the acquirer.
Subsequent to acquisition, obligations for contingent consideration that meet the definition of a liability will continue to be measured at fair value with adjustments recognized in income. Those obligations classified as equity are not subsequently remeasured at fair value, consistent with other equity issues (e.g., common stock).