311 Lecture 06 Consolidation

Summary

In this video lecture on advanced accounting, the focus is on consolidation, particularly through the equity method and the consolidation of financial statements. The professor covers a wide range of topics essential for accounting students or professionals aiming to become CPAs. The lecture delves into the intricacies of consolidation, investment categories, market and equity methods, as well as various consolidation strategies and their accounting treatments. Key concepts include significant influence, control, purchase price allocation, and impairment of goodwill. This comprehensive session, despite its complexity, aims to equip learners with significant knowledge to tackle consolidation in financial statements effectively.

Highlights

• The lecture stressed the importance of connecting accounting concepts for effective consolidation 🌐.
• An emphasis was placed on the necessity of equity accounting for investments over 20% 🏦.
• The session explained purchase price allocation, essential for understanding mergers and acquisitions 🛍.
• Push down accounting and its implications were explored to offer clarity on reporting standards 📊.
• Discussed the principle that controlling interest requires over 50% ownership, which affects consolidation methods 🏢.

Key Takeaways

• Consolidation requires a deep understanding of advanced accounting principles like the equity method and purchase price allocation 📚.
• Understanding affiliated transactions and how they impact financial statements is crucial 🔗.
• The importance of accurately accounting for investments cannot be understated, as it affects both investors and the consolidation process 💼.
• The lecture highlighted complex concepts but offered approaches to simplify them for better understanding 😊.
• A key takeaway is the significance of control and significant influence in accounting for consolidations and mergers 🏢.

Overview

Welcome to the accounting odyssey where you venture into the complex world of consolidation! This video lecture is your trusty map, guiding you through the intricate pathways of advanced accounting topics like the equity method and financial consolidations. Get ready to decode the jigsaw puzzles of accounting terminology, merging entities, and the delicate dance of goodwill and impairment.

Let's journey together to understand why the equity method is a crucial asset in your accounting arsenal. The lecture delves into the significance of properly accounting for investments, portraying the nuances of market and equity methods. We’ll also brush up on consolidation tactics, ensuring you're well-equipped to navigate the maze of financial statements like a pro.

Brave explorers will appreciate the thorough discussion on mergers and acquisitions, statutory procedures, and the giant leaps into the realm of purchase price allocation. While the concepts may seem daunting, they’re presented in a manner that seeks to demystify the subject matter, providing clarity and confidence. Get ready to conquer accounting mountain, one consolidation step at a time!

Chapters

• 00:00 - 02:30: Introduction and Overview The chapter begins with an introductory music piece, setting a thematic tone for the content that follows.
• 02:30 - 05:00: Consolidation Concepts The chapter introduces the concept of consolidation in accounting, targeting individuals pursuing qualifications like CPA or those involved in accounting professions. It sets the stage for understanding how different financial entities are combined and represented as a single entity in financial statements. The chapter might use sound cues (Music) to indicate transitions or important points, aiming to enhance the learning experience.
• 05:00 - 07:30: Equity Method The chapter titled 'Equity Method' discusses the broad applicability of the subject matter, highlighting its relevance across various fields. The instructor mentions their involvement in teaching and acknowledges diverse student reactions to their teaching style. They emphasize the importance of teacher-student collaboration, encouraging students to report any errors in the course materials via email for continuous improvement. Additionally, the video accompanying the chapter is unedited and meant for restricted viewing only within the intended audience.
• 07:30 - 10:00: Market Method vs Equity Method This chapter provides an overview of the Market Method and Equity Method in consolidation accounting, aimed at improving understanding and big-picture thinking in advanced accounting topics. It acknowledges the complexity and challenges in connecting various aspects within this field.
• 10:00 - 12:30: Consolidation Process and Adjustments The chapter titled 'Consolidation Process and Adjustments' focuses on understanding the importance of the equity method as a foundational concept in achieving successful consolidation. The speaker emphasizes the necessity for students to review prior intermediate courses, specifically courses 201 and 202, particularly in areas where they feel weak. There is an acknowledgment of the complexity of advanced accounting, with a recognition that many students find it challenging, as evidenced by poor performances in related assessments.
• 12:30 - 15:00: Equity and Investment Categories The chapter titled 'Equity and Investment Categories' focuses on building a toolkit for understanding financial transactions. The instructor emphasizes the importance of grasping the financial transaction flow to comprehend the resulting flow of information. Key concepts include understanding journal entries and the trial process.
• 15:00 - 17:30: Fair Value and Goodwill This chapter discusses the importance of understanding how a trial balance leads to the preparation of a balance sheet and income statement. It emphasizes the flow of income to the equity section, and delves into key terminology necessary before proceeding to consolidation. Understanding affiliated and unaffiliated entities, independent transactions, and identifying investors are crucial aspects covered.
• 17:30 - 20:00: Purchase Price and Methods This chapter revolves around essential concepts related to corporate acquisitions and financial terminologies. Key terms like parent company, subsidiary, and affiliated subsidiary are explained, focusing on their roles in the corporate structure. It discusses the book value and net assets of acquired assets, as well as the fair value of these assets - crucial for gauging a company's financial health pre- and post-acquisition.
• 20:00 - 22:30: Mergers and Acquisitions Types This chapter delves into the diverse types of mergers and acquisitions with a focus on various financial and accounting considerations. It explores concepts such as consolidation and subsequent consolidation processes, along with financial elements like amortization, depreciation, and depletion. The chapter also discusses unrealized transactions and affiliated transactions, emphasizing their reliance on economic entities and full accrual principles. It distinguishes between social value and management value, foreign recognition versus unrecognized items, and intra- and inter-affiliated eliminations. Additionally, the chapter covers upstream and downstream transactions, particularly in the context of calculating sold inventory.
• 22:30 - 25:00: Consolidation Entries and Examples This chapter covers several key concepts related to inventory accounting and business consolidations. First, it distinguishes between the perpetual and periodic systems of inventory accounting. Then, it explores the dynamics between transferor versus transferee and discusses investor-sub-parent relationships. The chapter also dives into the equity method where investments in subsidiaries are concerned, explaining the income of the investee within this context.
• 25:00 - 27:30: Complex Consolidation Scenarios In this chapter titled 'Complex Consolidation Scenarios', the focus is on understanding various terminologies and their application in accounting, particularly using the equity method. It underscores the significance of the equity method in financial reporting and discusses the four different approaches recognized by the Generally Accepted Accounting Principles (GAAP) for accounting equity securities investments. The transcript suggests reinforcing understanding of terminologies if uncertain, emphasizing their foundational role in mastering complex consolidation scenarios.
• 27:30 - 30:00: Push Down Accounting and Impairment The chapter titled 'Push Down Accounting and Impairment' discusses four primary methods used to report investments: cost method, fair value method, equity method, and consolidation of financial statements. It emphasizes the importance of using these methods appropriately in accordance with accounting principles. The chapter further explores the significance of the equity method, covering 21 key points regarding its importance.
• 30:00 - 32:30: Summary and Final Thoughts This chapter discusses the importance of equity, emphasizing its value addition for investors and creditors. It highlights how proper equity accounting facilitates better income measurement and enables managers to offer incentives through bonuses. Additionally, the chapter underscores the significance of the equity method in ensuring a seamless consolidation process in accounting.
• 32:30 - 35:00: Closing Remarks This chapter discusses the accounting treatment under the equity method, particularly focusing on how investments are recorded and updated in financial statements. It explains that the duplication in financial records can be avoided by consistently updating the investment account balance to reflect the investee or subsidiary's financial status. Typically, this involves debiting the investment account for its share of income from the subsidiary and crediting it to the equity investee income. The chapter likely wraps up with these practical accounting insights as its closing remarks.

311 Lecture 06 Consolidation Transcription

• 00:00 - 00:30 [Music] [Music] do [Music]
• 00:30 - 01:00 do [Music] greetings and welcome back to your journey towards becoming an accountant cpa or building that platform that would
• 01:00 - 01:30 allow you to springboard to so many different fields since i teach for all it is natural that some will like and dislike my apology this video is on edited and should not be made available to anyone outside please report any errors throughout this course to me via email immediately let's continue to improve that powerful
• 01:30 - 02:00 software of years in the area of consolidation today to improve your big picture thinking i am going to help you with a quick recap to connect the pieces before i move out don't feel horrible if you are having issues connecting the pieces it is advanced accounting and it requires connecting many people if you recall
• 02:00 - 02:30 i said i will give you space and time to digest the equity method because of the importance to accomplish consolidation i had also recommended that you review intimidate 201 and 202 at least in areas that you felt weak students find advanced accounting complicated and i happen to agree with and unfortunately fails 311 miserably we're not here for
• 02:30 - 03:00 that and i have to ensure you get out of this course safely but with competence let's start down the road of building a toolkit so you can dip into it as you go forward we have in front of us the financial transaction flow you need to understand this flow in order to start understanding the flow results understand journal entries the trial
• 03:00 - 03:30 balance and how from the trial balance the balance sheet is prepared along with the income statement the income flows to the equity section and so this process is important nothing changes before we get into consolidation we discussed all these terminology it is important to understand what affiliated entities are unaffiliated arms land transaction independent transactions who are the investors who the investors
• 03:30 - 04:00 what is a parent company a subsidiary an all-affidiated subsidiary book value of acquired assets net assets fair value of an acquired asset what is purchase price what is a premium over book value goodwill negative goodwill inter company transaction or intra transaction fair value allocation market value method cost initial method full equity partial equity acquisition
• 04:00 - 04:30 consolidation subsequent consolidation amortization depreciation depletion unrealized transaction or affiliated transaction relies transaction economic entity full accrual social value not reported item management value foreign recognition versus unrecognized reviews of intra and inter-affiliated elimination upstream downstream transaction calculating sold inventory
• 04:30 - 05:00 unsold inventory what is the perpetual system for accounting for inventory versus periodic transfer versus transferee investor sub-parent relationship investment in sub-account equity and investee income acquisition method purchase method pooling of interest method push down accounting controlling versus non-controlling interest significant influence and control in the past
• 05:00 - 05:30 we have discussed these terminologies and if you still feel shaky on them i would recommend you go back and clear these items up we know that the equity method is important why is it important general accepted accounting principle gap recognizes four different approach to account for or report of investment in equity security equity securities can
• 05:30 - 06:00 be accounted for under the cost method fair value method the equity method and consolidation of the financial statements all four are ways to report investments however you must use them appropriately according to the accounting principle so why is the equity method important we have covered the reason why the method is important and in total 21 key points which we will go
• 06:00 - 06:30 over the equity most important reasons is that it adds value for both investors and creditors it also allows for better measurement of income managers can incentivize via bonus the consolidation process is also dependent upon the proper accounting of investments under the equity method it allows for the consolidation process to work smoothly such as for instance removing
• 06:30 - 07:00 duplication would not be possible unless the equity method constantly update the investment account balance so that it's in line with the investee or the subsidiary the typical journal entry to record the value for the investment under the equity method are as follows debit the investment for its share of income from the subsidiary and credit equity investee income if the subsidiary pays
• 07:00 - 07:30 dividends it will debit irreceivable and credit the investment account when the dividends is subsequently paid we will debit cash and remove the receivable so let's understand the equity method and investments in general the world of investment by corporation falls in three key categories assets debts and assets follow fairs 140 and it's a general
• 07:30 - 08:00 journal entry as a matter of fact for all three categories the purchase and recording of the acquisition of these items are similar debit the item you bought credit cash debit the item credit cash debit the item credit cash assets is far simpler than debt and debt securities are far simpler than equity equity is where the complication lies assets and debt has nothing to do with
• 08:00 - 08:30 percentage of acquisition however equity method depends on the percentage of acquisition as i said earlier assets fasb140 helps in determining whether they were a real sale or not debt security is accounted for on the fast 115 and so are equity securities if it's less than 20 equity security uh under the equity
• 08:30 - 09:00 method is accounted for under asc 523 and 21 which was in effect apb18 what's important to note here is our focus in and our discussion surrounds peace books what's going on on the parent books so we know what to do for assets we know what to do for debt security we know that there are three categories on the debt security on the fast 115
• 09:00 - 09:30 trading available for sale and health to maturity but for equity security we have available for sale and trading but not health to maturity based on the fact that equity is for infinity there's no health and maturity date so under equity security on peace books we can handle the investment in one of three ways we can handle it under the market method full equity method or
• 09:30 - 10:00 and consolidation i'll discuss a little later so what's the difference between the market method and full equity on facebook so it's important to note that the consolidation while it requires the investment account balance from facebook it is done on work papers when we buy something i said the simple way to represent it is p plus s plus adjustment so for now
• 10:00 - 10:30 we're going to think of consolidation as p plus s plus some adjustment coming back to equity security here on peace books when it's less than 20 it's market method over 20 less than equal to 50. we have significant influence and so we must use the full equity method well what is the difference between the two purchasing is pretty much the same debit investment credit cash no different investments
• 10:30 - 11:00 earnings is not recorded under the market method but it is recorded under the full equity method you can see here nothing is done if the subsidiary has earnings but under the full equity we will account for it in the investment account if the subsidiary pays dividends both market method and full equity account for it but differently they will both debit cash
• 11:00 - 11:30 but under the market method we will debit dividend income as compared to full equity we will credit investment dividends just to retake we will credit dividend income and credit investment income and that really is the key difference between these two methods how about the market value changes changes in fair
• 11:30 - 12:00 value of the equity security under the market method we will mark to market for every reporting period we will debit the asset or evaluation account and we will credit a realized gains account the reverse is true we will credit the asset or valuation account and debit loss what's important to note is under the equity method
• 12:00 - 12:30 there is now accounting for fair market value changes if there is an impairment it is treated the same on the both market method and full equity and we will talk about impairments later what's important to note the consolidation over here what i want you to know the full equity method would be used whether it's over 20 or over 50 percent
• 12:30 - 13:00 to facilitate consolidation so once you're over 20 percent you will use the full equity method on ps books and that includes over 50. let's circle back to the investment account and see how they differ under the market method this investment was 427 under full equity it was lower and so we will use the same numbers for
• 13:00 - 13:30 to facilitate consolidation we will do the same thing on the books of p even if it's over 50. so you could see how each of these items were handled in a t account fashion so you have the journal entries comparison the t account comparison so you can see the difference if we were to drill into the equity
• 13:30 - 14:00 method which we have done previously the 21 key items to recognize it's worth mentioning that mark to market for the appreciation of equity security had a recent change and that's asu number 2016-1 in the past
• 14:00 - 14:30 trading and available for sale security were treated differently today because of this change 201601 asu both will realize gains and available for sale securities no longer report unrealized gains in comprehensive income but in fact report those gains and losses as
• 14:30 - 15:00 realized just like trading security in the income statement so i will not go over all of these in details but just to highlight quickly some of the things you should carry with you forward we know can the equity method and consolidation is challenging and complex we know that once you have over 50 percent you have affiliated
• 15:00 - 15:30 transactions and therefore you cannot consider them independent or arms like we understand the need for the equity method we know what affiliated subsidiaries are when they're not independent when you have over 50 percent we know the deal with liabilities and we understand the difference between significant influence and control and as coke and pepsi makes judgments as to whether to assume
• 15:30 - 16:00 liabilities or not they will do so by applying the equity method and on purpose staying below 50 percent so this way they cannot be sued we understand that significant influence can be affected by many factors we know we don't look at one factor to determine whether a company has influence over another via its
• 16:00 - 16:30 investments but we look at them collectively investment representation on the board of directors investors participation in policy making of the subsidiary material intra transactions management exchange technology dependency interdependency and the extent of ownership by the investor in relation to the size and concentration of other investors meaning
• 16:30 - 17:00 if you are the largest of all other investors then you are significant we know what the codification rules are under codification 323 it's pretty much apb 18. 323 and 321 talks about the accounting of fair value under 20 market method we know what that is we know that there are some additional changes here we know what the asu 2
• 17:00 - 17:30 2016.01 in terms of gains we examine the equity method in terms of changes in ownership percentages and how we treat it and we no longer treat it retrospectively but we treat it prospectively we know that the reporting the investee income from other sources other than continued operation is reported separately the rule calls for
• 17:30 - 18:00 us to stop reporting losses once the investment account has been written down to zero and i have explained to you the professor balcoran's method as to how to continue the accounting so that you know when to restart we know that reporting the sale of an equity method how to calculate the per share cost in order to calculate gains and loss and we talked about upstream and downstream transaction which i will highlight again for you
• 18:00 - 18:30 we know all of this is covered from an international perspective the iasb ifrs in ias28 so upstream and downstream transactions downstream is where the parent sells to the subsidiary in upstream is where the subsidiary sells to the parent it helps
• 18:30 - 19:00 to understand when this kind of affiliated transaction occurs below 50 percent there is a slight difference in the way these intra entity sales are handled when it's over fifty percent so let's examine here we have over twenty and less than fifty percent intra entity transactions and here we have over 50 and less and up to 100 inter-entity transactions
• 19:00 - 19:30 what are inter-entity transactions all intra-transactions period are transactions where affiliated organizations are buying and selling with each other our examination surrounds inventory the art is simple here you can go through the effects of how net income
• 19:30 - 20:00 is overstated or understated because of the impact of inventory for consolidation purposes intra company sales sales between an investor and equity investee not a subsidiary since it's over 50 percent has no control just significant influence this is how we're gonna handle it the inventory that we care about is the
• 20:00 - 20:30 inventory that is left not the inventory that is already been sold to a bonafide third party we know that when it's less than 20 percent upstream and downstream treatment has no difference in the year of sale when the sale was actually made or the purchase was actually made amounts the affiliates
• 20:30 - 21:00 what is left in ending inventi creates an overstatement of the assets thereby create a lower cost of goods sold and a higher net income therefore ending inventory creates an overstatement that must be addressed these intra entity transactions has to be eliminated the way to do this is we will debit the equity in investee income equity investee income to remove it from the
• 21:00 - 21:30 income pickup we did because of the equity method remember we debited the investment and we credited equity in investing income because this inventory that is sitting in the ending inventory cause net income of the subsidiary to be overstated we're going to make an adjustment for it now notice the profits of upstream sits on the
• 21:30 - 22:00 subsidiaries books the profits of a downstream sits on the parent books but what we're saying is under 20 less than equal to 50 they make no difference the entries will be the same at least in the year of sale or purchase we'll debit equity and investee income and credit the investment on the both upstream and downstream
• 22:00 - 22:30 if that inventory was not sold in the current year in the year purchase or sale then it's going to move to the next year and that ending inventory will become beginning in the following year when that happens we consider this transaction realized reason it's considered realize it's considered to be sold
• 22:30 - 23:00 so we're going to then in the following year recognize this eliminated profits the year we did before we're going to recognize it the year after so we're going to go back and debit the investment account and then credit equity in investing income to show the realization that's for downstream for upstream there's a slight difference
• 23:00 - 23:30 in which we will debit the retained earnings of the subsidiary why because this income closed out in retained earnings on the subs books so we're going to affect retained earnings and credit the equity in investing income now how does that differ when you're at over 50 percent well actually it doesn't differ very much it's still downstream and upstream
• 23:30 - 24:00 transaction is still intra entity transaction is just that the percentage ownership of p of s is over 50 percent well what we will do is actually instead of adjusting the equity in investing income we will adjust cost to goods sold instead of adjusting investment we'll go straight to the asset and adjust the asset by crediting it so we'll debit cost of goods sold and credit the inventory
• 24:00 - 24:30 by us increasing cost of goods sold we in effect reduce net income and by us reducing the asset when we combined it for consolidation purposes we will have the correct inventory cost the original cost not the cost that includes a profit margin because of the sale if that inventory is not sold and still
• 24:30 - 25:00 sits in inventory the ending will become beginning as we discussed earlier we are going to consider it sold in the second year and we are going to consider it realized because it will be part of available for sale in this scenario the debit entries are the same investment retained earnings the credit entries instead of equity and investee we will credit cost to get sold and cost a good soul this is the
• 25:00 - 25:30 difference between the two percentages below 20 to 50 and equal and above 50. accounting for inventory on realized gains beginning inventory ending inventory for downstream and upstream transaction so consolidation is where a company controls another company
• 25:30 - 26:00 we know that the need for consolidation is huge it helps with transparency the only way to see what a company truly owns it helps investors they would like to see all the assets and liabilities before they make an investing decision the consolidation is required but what is important to understand it is a process has to be over 50 percent once over 50 percent erb
• 26:00 - 26:30 the view is investor investor relationship is so closely connected that the two corporations are viewed as one legally universal we're still talking about financial accounting it's an external reporting typically for investors and creditors once you have over 50 percent you control there are cases where you don't have to have fifty percent you will have less than fifty percent
• 26:30 - 27:00 nonetheless you still control these are typically with variable interest entities and we will examine those later disney in 2015 reclassifies several of its equity method investee to consolidated entity why remember our point about liabilities corporations are constantly playing should i keep my investment under the
• 27:00 - 27:30 equity method or should i step it up because i have the power to do so and combined it report it as part of the consolidated results the scale of consolidated entities is enormous i mean look at these numbers and the pass are as large as the present so m a deals are huge they're like countries 47 billion so why is this so popular well
• 27:30 - 28:00 it helps if you combine your entities with vertical integration cost savings quick access to two markets economy of skills more attractive financing opportunities you diversifying your business obtain cost synergies or operating synergy tax advantage many m a's are done because there's an available tax advantage why would you advise not to come by you're going to lose control by
• 28:00 - 28:30 combining with other entity you're simply giving away your shares you're losing control you may get run away with overpaying once you get into the process of growing your business via combination m a another important point is that the individual pieces may have more value in the past the way consolidation was reported was under the pooling of interest method it
• 28:30 - 29:00 was a very abused method corporations loved it it was easy to manipulate there were 12 conditions and these conditions were manipulated in order to qualify for it the key is ceos were able to hide huge values and then subsequently manipulate it along with net income because of the way pooling of interest reported
• 29:00 - 29:30 combined results it was eliminated because of the abuse we move then via phase 141 to purchase method which is closely related to the method we use today referred to as the acquisition method and we'll come back and discuss the details of this for now just appreciate in the past we had pooling of interest to account for the m a's or acquisitions we move to purchase method and today we
• 29:30 - 30:00 are using the acquisition although the purchase method is still around but we are encouraged to report using the acquisition method a couple of key things to know about consolidation we know what drives it but in order to consolidate you must exert control we know what control is for you to refer to a company that you invest in as a subsidiary you must exert control the
• 30:00 - 30:30 way to acquire a company is by doing it friendly or hostilely typically you try the friendly way first by approaching the board members they reject you then you place a tender offer to the market so you place your offer directly to the shareholders if the company doesn't like you as in the example that i discussed with you previously oracle cisco and jd edwards they have a bunch
• 30:30 - 31:00 of things they can do they can employ the poison pill green mail white knight selling the crown jewel or even a leverage buyout to prevent the takeover so these are defensive tactics when you have an unfriendly hostile pursuer so i agree with you consolidation is a complicated process because it involves many adjustments it depends on accounting methods that in that
• 31:00 - 31:30 creates the need to follow many fast ps or principles it involves foreign entity accounting principles different gaps in different countries that needs to be converted and to top it off the companies you invest in can be in different countries with different currency so yes it's complicated but we're gonna undo that complication the first thing you would do if you are going to invest is make a
• 31:30 - 32:00 purchase what you're buying is book value access over book value which is the fair list of value you may pay for some goodwill and possibly contingency costs on the fez 142 it calls for price allocation between book value fair value access and goodwill so to meet that requirement as you will do in your project you will show what you paid for the company you would show the book value on how much you acquired that gives you an
• 32:00 - 32:30 excess you will then go ahead and explain the excess by showing the excess over book value for items that are considered excess fair value so this premium has to do with payments for the fair value and if any is left over it is goodwill so we have book value fair value access and goodwill this is referred to as purchase price allocation
• 32:30 - 33:00 but in any event if you're buying a company these are the things you're paying for the purchase price is basic cash debt stock or a combination of these under the acquisition method we can acquire assets and record it onto this method and we can acquire stocks so we give up these items to acquire these items and use this accounting method to account for it we know the pooling of
• 33:00 - 33:30 interest is no longer around purchase method is there but we really focus on the acquisition method the purchase price it's really the percent of fair value of net assets so these assets here has to do with what percentage did you buy so purchase price is really the percent of fair market value of assets that you acquired plus goodwill plus contingency cost it's interesting to note when do we have goodwill
• 33:30 - 34:00 when the purchase price exceeds the net fair market value percent that you have purchased if the purchase price is less than the fair value then you have what used to be referred to as negative goodwill today that's considered again and we'll talk about that later so let's assess a purchase price counting four contingency costs as part of the purchase price
• 34:00 - 34:30 it's interesting to note that disney paid 450 million dollars for marker studios back in 2014 and as part of this 450 paid in contingency consideration almost a hundred million disney included that hundred million in its purchase price the acquisition method calls for contingency costs to be part of
• 34:30 - 35:00 purchase price so what does this contingency liability let's illustrate big and small port had combination costs and contingency costs these are not the same thing our focus on the contingency cost assume that big acquired small port on the 31st of december then issue 26 000 stock at 10 dollars per value 100 um fair value so the price paid was 2.6 mil
• 35:00 - 35:30 big also pays some fees 40 000 to a third party to assist with arranging this m a big promise to pay an additional 83 200 to a former owner if small port earnings exceed 300 000 during the next annual year so step back a little bit here why do we even want to pay this extra cost a hundred million it can happen in
• 35:30 - 36:00 many different ways other investors know that disney is pursuing buying a certain company and so they started to buy the stocks and hoard the stock disney in order to control this company needs more stocks and they have to come to you you feel the market price they're offering is not enough so you're gonna ask for more because you have the power you got the shares and they need it
• 36:00 - 36:30 so contingency costs arise because there's a need to close a deal out and this is the only shareholder and we have to pay extra the art of the deal is not to pay anything so what you're gonna do is one of two bets with that shareholders that are holding the shares you're going to say to that shareholders hey
• 36:30 - 37:00 i'm going to make your income better in this case big promises to pay an additional 83 000 and you know what if i can't make your income exceed 300 000 i'm gonna give you that 83 too well what is the 83 to to that shareholder it is the difference of what he or she believes his share is worth compared to what is being offered let's say by disney and usually it's a huge a large amount
• 37:00 - 37:30 here it was a hundred million so big promises to pay this extra amount that extra amount is going to become part of the purchase price you're going to make one of two promise because you don't want to pay this you're going to make a bet and you might win the bet because you know once you acquire this company you're gonna achieve the three hundred thousand and if you achieve it you don't have to make the payment so you've gotten by
• 37:30 - 38:00 the offer price and not having to pay any extra this is called the earnings bet you could also make a bet on stock by promising the shareholder hey the stock is 20 100 now when i'm done with this deal it's going to be 200 and if you win that bet you don't have to pay any extra so it's a contingent liability it's a promise to pay an amount in the future so big estimates 25
• 38:00 - 38:30 probability that he may lose this bet and since his one year out the interest rate for that year is four percent so if we wanted to record the cost now as part of the purchase price we are going to calculate it by discounting the 20 000 promised a year from today by the probability of paying it versus the discount present value factor we put that all together and it gives us 20 000
• 38:30 - 39:00 of current of today's payment later we will pay 83 200 if we lose the bet but today if we had to pay there will be 20 000 as part of the purchase price so the total purchase price is 2.620 the way we're going to journalize it is we will debit the investment for what we paid that includes the contingency liability we're going to go ahead and issue the shares 26 000 par value in the excess
• 39:00 - 39:30 and if you notice the combination cost was booked to professional expense and credit cash but not as part of investment value we'll dig a little deeper into that soon how about right now so combination costs versus contingency costs are not the same thing combination cost is not part of purchase
• 39:30 - 40:00 price while contingency cost is combination cost could be direct or indirect what we're talking about here in order for the combination to happen we may have accounting legal banking appraisal fees we may use some of our staff internally management folks secretary and we may issue securities in order to acquire as part of the purchase
• 40:00 - 40:30 price that has flotation costs if this occurs this is what we will do under the acquisition method direct expense will be expensed indirect will be expense and any flotation costs will be charged against the a pic additional paid in capital reduce it to illustrate the accounting treatment of these costs let's take a look at big big acquisition of small port big
• 40:30 - 41:00 paid an additional 100 000 in accounting fees and attorney fees to help with the deal he used his secretary and other administrator their costs indirectly with 75 000 the cost to register the security for issuance of 20 000 how do we account for it expense expense direct and indirect and the issuance cost is twenty thousand
• 41:00 - 41:30 debit professional expense debit saudi and administrative and then debit apic notice it's all credited to cash because we literally paid for each of these so what under acquisition method is referred to as fair market value let's dig a little deeper and understand a little bit about fair market value
• 41:30 - 42:00 according to gap fair value as defined by gaap is the price that would be received from selling an asset or paid for transferring a liability in an orderly transaction between market participants at a measure measurement date however determining the acquisition date fair value of the individual assets acquired and liability assumed is challenging so asc
• 42:00 - 42:30 under 820-10 820-10-35-28 sets up what techniques can be used well they are 1-3 approach according to 820 you could use the market approach to assess fair value the income approach to assess fair value or the cost approach if you use the market approach the market approach estimates fair value using other market transactions such as
• 42:30 - 43:00 a stock market you could take the stock price and use that as a basis to assess the value of a firm or you could use the sale of another corp similar company that was recently made to assess the value of the subsidiary you're about to purchase fairvat the income approach looks at sfac6 which is the future cash flow projected why are you buying the company you're
• 43:00 - 43:30 buying it because you're interested in its income capability then why not take its strategic four years plan and discount that income back in order for you to determine the purchase price the fair value of the assets the cost approach is what we typically use and it's the cost approach estimate fair value by reference the current cost of or the replacement of asset costs
• 43:30 - 44:00 or comparable economic utility we use this heavily in the area of tangible assets when we are acquiring companies the cost approach what is the cost to replace it or what is its comparable economic utility value we know that goodwill is when the purchase price exceeds fair value we have goodwill unless there's no unless there's additional costs such as contingency costs it's part of purchase price
• 44:00 - 44:30 we know when we pay less than the fair value we have negative goodwill the fair value of net assets acquired on liability assumes to exceed so the fair value exceeds the consideration transferred will cause a gain under the acquisition method in such case the fair value of the net assets replaces the consideration so the point is here
• 44:30 - 45:00 is that we're paying a price that is less than fair value in order to get a gain so what we will do is recognize again and on the books we're going to recognize the subsidiary at fair value which would be greater than purchase price buy the gain but nevertheless in such case fair value of net assets will replace the value that we've paid
• 45:00 - 45:30 to acquire the firm but you must be careful doing this you might just bring on the regulatory agency because you're looking to recognize again and record a subsidiary above the price you paid so you better be darn sure that you have assessed the market value in a very provable way when we buy a subsidiary we're not only buying tangible assets we're also buying intangible assets and surrounds intangible assets is the question
• 45:30 - 46:00 do we write it off or do we put it on our books well if it is not according to 805-20 one of these five items write it off intangible assets must meet this criteria in an acquisition under the acquisition method 805-20 asc of the fsb marketing trading for example customers customers list for example artistic
• 46:00 - 46:30 plays operas and bullets contracts are all agreements that has value such as leases and licensing and so forth technology patent technology so when we buy a subsidiary we must run the intangibles against these items here and if they are here we can accept that asset if not we are going to write it off now the c's and the s have a very specific meaning
• 46:30 - 47:00 assets designated by the symbol s do not arise from contractual or auto legal rights but should nonetheless be recognized separately from goodwill so the bottom line is that these items will be reported separately and not as part of goodwill let's examine purchase price on the s fact six the income approach and let's see how that works as we
• 47:00 - 47:30 discuss purchase price can be the fair value of a stock of the stock from a stock market or the asset appraised value which is impractical for businesses um the value of a similar firm or the present value of earnings assume that polymer company is trying to decide whether to acquire ls inc and the following balance sheet for ellising provides information about book values estimated market values are
• 47:30 - 48:00 also listed based upon polymer's company's appraisals alice book values and ls market values are as follows you can see that liabilities as well the common stock 286-10 so polymer company expects that alice will earn approximately 260 per year in net income we're going to use a present value approach over the next five years the income is higher than
• 48:00 - 48:30 the 12 annual return on tangible asset considered to be in the stream norm that's the discount rate that's what the return is yearly so we want to compute an estimation of the goodwill based on information above that polymer might be willing to pay included in its purchase price question one palmer is willing to pay for excess
• 48:30 - 49:00 earnings for an expected life of four years on discounting see when we go to the board of directors we will provide three calculation of the purchase price and defend all three we will give an undiscounted value we will give a discounted value and then we will give this middle ground
• 49:00 - 49:30 value which is the discounted value and then a perpetuity so we'll give an undiscounted discounted and perpetually and you would see that there it creates a range so the first thing we're going to do is find out what the normal earnings are every year in this industry the normal earnings they said was tangible assets times 12 percent is 210 but it was mentioned
• 49:30 - 50:00 that this company earns 260 so this company is special it is earning over the nur by 50 000. that we can use to find goodwill because that's a special value as compared to other entity types in question one we will take an undiscounted approach four years times 50 200 000 offer for goodwill
• 50:00 - 50:30 we're going to take the discounted approach if we were to take the earnings each year and discount it back that's worth 151 868 today and if we go the perpetuity route we're going to take the desire return and divide it into the the the excess earnings and that gives us 250. so you can see the discounted value is on the low side the perpetuity is on the high end
• 50:30 - 51:00 and the on discount it sits right in between the range so you could go to the board of directors and said well here's what the purchase price is discounted on discounted and perpetually that we will earn 12 forever so if we were to calculate the price of this the net fair market value of the assets was given to us 1.7 700 so the net assets fair value is 1.4 the bottom line
• 51:00 - 51:30 is we can add to 1.4 the goodwill in order to come up with total purchase price if we are offering 1.4 and this is the fair value of assets then the goodwill must be 350. we don't need to offer 350 maybe we can offer 151 200 or 250. you get the idea as to how the goodwill can be calculated by using
• 51:30 - 52:00 the present value approach of net income of the subsidiary and then tack it on to the purchase price so 1.4 includes goodwill if you subtract the fair value from that it will gives you what you're paying for goodwill but that goodwill number can be calculated let's take a look at another scenario here plant your company is considering to
• 52:00 - 52:30 acquire barclaying to assess the amount it might be willing to pay plantier makes the following competition and assumptions barclay inc has identifiably identifiable assets with a total fair value of nine mil and liabilities are 5.3 the asset includes office equipment with fair value approximating book value building with a fair value of 20 higher
• 52:30 - 53:00 than the book value and land with the fair value 50 higher than book value saying that take book value and do these calculation on it and you would get to fair market value because these are the undervaluations the remaining lies of the assets are deemed to be approximately equal to those used by barclay inc barclay inc pre-tax income for the year 2009-11 was 700 900 550 respectively the
• 53:00 - 53:30 implanteer believes that an average of these earnings represent a fair value estimate of annual earnings for indefinite future however it may need to consider adjustments for the following items included in pre-tax earnings so it gives you the income for each period and then gives you a bunch of adjustments that says it may need to consider these adjustments
• 53:30 - 54:00 the normal rate of return meaning other firms are making 15 percent assume further that plant year feels that it must earn 20 not 15 return on the investment and that goodwill is determined by capitalizing the excess earnings so we have to find out what the normal earnings are compared to the firm's earning and that will give us the excess
• 54:00 - 54:30 based on these assumptions calculate a reasonable offer price for barclay inc and indicate how much of the price consists of goodwill how much of the price consists of goodwill in b assume that plantier feels that it must earn 15 return on the investment but that the average excess earnings are to be capitalized for five years only based on these assumptions calculate a reasonable offering price for barclay inc indicate how much of the price consists
• 54:30 - 55:00 of goodwill so now the yearly income will not be adjusted for depreciation in the asset book value where book value equal fair value you don't need to make any adjustments it's already done in net income however depreciation will be calculated for those values that are understated because clearly that's not in net income
• 55:00 - 55:30 so first let's find out our normal earnings it was said to us that normal earnings is 15 normal earnings on net assets so you net assets are total fair market value so we have uh darkly identifiable assets with total fair value of 9 million a liability of 5.3 so net assets will be that minus assets minus liabilities time 15 percent
• 55:30 - 56:00 so the normal earnings in the industry is 555 000. so let's see let's calculate expected earnings expected earnings in 9 10 and 11. this was a cpa exam question for 15 points so we will take the pre-tax income 7 9 and 550 the depreciation on the building
• 56:00 - 56:30 clearly there was a twenty percent higher so we're going to calculate depreciation twenty percent higher and reduce that income by the twenty percent lend we do not depreciate so there's no effect that depreciation will affect each year so in this 2009
• 56:30 - 57:00 the income is 584. in 2010 we're going to subtract the 116. the income is 704. 784. so in addition they had given us the depreciation on building depreciation equipment we don't need to do anything with that 30 000 because there's no issues with that we did use the 580 up at 20 percent gets us depreciation expense of
• 57:00 - 57:30 additional 116 so that 580 should have been increased by 116. so income was overstated by the understated depreciation so we adjusted for that in addition there was an extraordinary loss in 2011 that's not part of normal earnings so we're going to add it back so in the third in third year
• 57:30 - 58:00 the net income is 6 34. so here's our three years income when we have three years where they're not the same the excess will be in order to calculate the excess to get to goodwill we will average it out that gives us 667 compared to the norm of 555 it appears that we have an excess earnings of one twelve three three three if we perpetuate or perpetuate take use
• 58:00 - 58:30 the perpetuity rate of twenty percent that will give us one twelve divide by 20 percent or 561 665 as estimated goodwill if we use the approach of discounting we will take the factor given to us go to the tables and we will realize that the present value for three years of income
• 58:30 - 59:00 annuity factor is 3.3 now this is an ordinary annuity factor on 112 667 income the same income because you can't have an annuity if the amounts are different so this is why we need the 667 averaged out so we could use the present value of an ordinary annuity and discount it back for three years that gives us 376 for
• 59:00 - 59:30 goodwill so if we wanted to calculate what we will pay we will pay the fair market value plus goodwill so on one end we could pay 4.26461 on the other end we could pay 4.07658 by calculating the excess earnings it leads us to goodwill we are already given the fair value we could use the fair value plus goodwill to get to the purchase price in both scenarios that's exactly what we
• 59:30 - 60:00 have done these are the different gyrations surrounding purchase price on the s56 using the income approach okay now let's take a pause let's take a breather to get your protons and neurons fired up again let me present to you a trivial question for the day what word is spelled incorrectly in every single dictionary
• 60:00 - 60:30 [Music] okay doing the human thing thinking too hard use the kiss prince keep it stupid simple to reiterate i have reviewed with you transaction flows and it's important consult terminology the importance of the equity method how can the equity method be employed for investments accounting what are the 21 important cabinets as it
• 60:30 - 61:00 relates to equity investment of stocks how to journalize transactions relating to the equity method i've introduced to you the three categories of investment assets debt and equity securities i stress the importance of percentage as it relates to stock or equity investment i examine examined with you how the market method works versus the equity method
• 61:00 - 61:30 in recording the values for equity securities we examine this in the relation to peace books the investors books we looked at both journal entries and t accounts we examine special intra entity issues when you have over 20 percent or significant influence or over 50 percent control i introduce you to consolidations and a need for
• 61:30 - 62:00 consolidation in terms of transparency and reporting investments to investors from an external reporting perspective we examine briefly the three methods used in the past pooling of interest and purchase method and currently the acquisition methods in accounting for subsidiary acquisition i highlighted what drives consolidation what is a friendly offer versus a hostile takeover via tender
• 62:00 - 62:30 offers i discussed and share with you how a corporation can employ defensive tactics to twerk off hostile takeover we briefly examine what creates the complication for a consolidated result after researching and making a decision to move forward regarding the acquisition of a company i discuss what will be offered and how to calculate this offer price so i examine with you the various component
• 62:30 - 63:00 of purchase price book value excess fair market value and goodwill including contingency costs i discuss faz 142 and its requirement for allocation of purchase price meaning book value fair market value excess and goodwill we examine various payment options we discuss what is combination cost versus contingency costs and why they are not the same thing i illustrated how
• 63:00 - 63:30 contingency costs is calculated how it works and how it's journalized i explain how to find and determine fair market value under gaap as part of purchase price i explained gap three methods in assessing fair market value as part purchase price we illustrated and assess how to calculate goodwill as part of purchase price using the income approach
• 63:30 - 64:00 under asc 805-20 i discussed what are acceptable intangible assets as part of the purchase price and if you were wondering what the answer was to my trivial question the answer was incorrect incorrect is spelled incorrectly in every single dictionary so there you go let's turn our focus now to wall street m a
• 64:00 - 64:30 merge as an acquisition what is it how to account for it that is over 50 ownership how does the accounting works alongside the equity method and the acquisition method when do we need to invest in when do we need an investment account in subsidiary when do we don't need the investment in subsidiary account when do we use my formula the one that i have suggested to you that consolidation is p plus s
• 64:30 - 65:00 plus adjustments when do we not need it when do we need to the work papers when don't we need it when do we need to use the company's books as opposed to the work papers so let's first examine the various types of mergers and acquisitions we have what you call statutory mergers statutory consolidations acquisition of more than
• 65:00 - 65:30 50 voting common shares and variable interests if you notice the statutory mergers can't be acquisition of assets or capital stocks statutory consolidation the same you can either buy the stocks or the assets of a company the way i have explained it to you is that instead of four types here statutory merger statutory consolidation acquisition of voting shares over 50
• 65:30 - 66:00 and vie variable interest entities instead i consider it six to seven types just that you don't overlook a couple of important elements here so statutory merger of assets and capital stocks i consider one and two statutory consolidation of stocks
• 66:00 - 66:30 are assets i consider three and four over 50 percent voting stock i would consider that five what's missing here is leverage buyouts and the reason is leverage buyouts while it's handled exactly the way number five accounting deals with it it is still there are still some major differences in the way it's reported so i consider it by itself leverage bias and we'll look at that
• 66:30 - 67:00 later vie although we are not going to do much discussion in this way is the seventh so seven different m a types technically four let's focus a little on leverage buyouts we have leverage buyout when a management group contributes stocks they haul and then borrow to create a new company which acquires all the outstanding common shares of the employer's company what is going on here generally the
• 67:00 - 67:30 scenario is as follow you have a group of folks who have created a company and just simply doesn't want it to be taken out by a larger more powerful company what they can do is if these employees who love their jobs so much are who are also investors to the corporation their shareholders and employees at the same time they can resolve the situation by setting up a new company
• 67:30 - 68:00 then the employ employees can then dump their shares in the new company if they can achieve significant influence that is 20 or better then they can go to a local they could go to a bank that they have a relationship with and ask to finance the additional eighty percent or less in this way between their shares and the loan they can take out the company by simply create a new entity and then
• 68:00 - 68:30 invest in the subsidiary that they don't want to lose the important element in terms of reporting for lbos is that yes it is reported just the same way as a stock acquisition under the acquisition method however the value on the consolidated books are going to be reported based on not only fair market value but
• 68:30 - 69:00 also based on book values you see the way this is handled is the existing shareholders the ones who created the new company they will not be allowed to value their shares at market value so the company for their share or their work whatever percentage they will have to keep their value at book value the loan that you the monies you've borrowed to buy the additional
• 69:00 - 69:30 part of the company in order to gain control will be valued at market value so if we look on this graph this is how it will pan out let's say the original owners had 10 percent they managed to borrow 90 percent in order to finance the buyout of their company that they are employed with well if that 10 percent is equivalent to book value of 1000 then the 90
• 69:30 - 70:00 will be equivalent to nine thousand how the one thousand is equivalent to ten so therefore a hundred percent would be ten thousand if the existing shareholders has one thousand then nine thousand belongs to the new shareholders or in this case the monies that were borrowed from the bank was a tribute to nine thousand so what we're going to do is split the 10 000 book value and on the consolidated books we're going to
• 70:00 - 70:30 report these shareholders the existing ones the employees at book value or one thousand let's assume that the cost to acquire the ninety percent was thirty 31 500 keep the numbers small for illustration purposes here if the book value was 9 then it is safe to assume that 22 500 is the excess over book value
• 70:30 - 71:00 let's assume that the market value or the fair value over book value was 13 05 so 13 05 of the 13 5 had to do with fair value excess therefore the resulting difference is going to be goodwill this is the way lbo differs than a full stock acquisition everything is done the same it's just
• 71:00 - 71:30 that the financial result will be split between the existing shareholders those are the employees of the company previously versus the loans that were used in order to buy out the company in full or at least to gain control what you have in front of you is a gif this will improve your understanding of m a and filter out the complication so follow my lead to the left of this line
• 71:30 - 72:00 is what we have discussed thus far we can consider to the left of this line less than 50 percent we know what to do on peace books and we'll come back to that to the right of this line let's consider that over 50 reporting or control so in essence to the left is less than 20 greater than 20 less than 50 and equal to or significant influence
• 72:00 - 72:30 and to the right it's greater than 50 for this discussion we can forget about debt securities and asset we've discussed those previously let's focus on equity here equity security under 20 percent utilizes the market method over 20 and less than equal to 50 significant influence we know is accounted for using the full equity method as required by the accounting
• 72:30 - 73:00 principle let's connect the pieces mechanically as required by the accounting principles our focus remember is investment in subsidiaries stocks an asset if we look to the right this is over 50 the key points that i want to drive ov drive home here are as follows we do not need an investment in subsidiary account
• 73:00 - 73:30 on every sin in every scenario we need to first understand the different deals that we need to handle as discussed earlier we have seven deal type statutory merger statutory consolidation right there you have four stock asset of each we have four different deal types and then we have a deal type referred to as the stock acquisition
• 73:30 - 74:00 it's important to note to the right here that we don't need this investment in account for all these deal types we only need the investment account when we have an acquisition in common stock note vies and lbos are handled the same way so for that reason the only deals i have that we're looking at right
• 74:00 - 74:30 now statutory mergers two statutory consolidation two and one representing acquisition of common stocks because the acquisition on common stock whatever we do here we are going to do the same for vis if vi es take the common stock route and you would see that vis don't always do that they're mostly trust in terms
• 74:30 - 75:00 of uh their entity type partnership and trust but lbo would mirror this with one note what the what the point we have just made having to do with book value if you notice here for these deal types statutory mergers and statutory consolidation over 50 of course are done on company books whose books we will discuss but it's important to note that they're done in companies a set of books
• 75:00 - 75:30 as compared to stock acquisition we have a very interesting situation it's done on work papers we will have the need for an investment in common stock account when we have a stock acquisition and we will have the need for work papers the investment account will be on ps books and the work papers will be completed to represent consolidate the consolidated results
• 75:30 - 76:00 which is p plus s and its adjustments if you notice here is p plus s and the adjustments we know the adjustments are several and we will come back and i will address those adjustments the important point here previously we covered the investment t account and the various items that goes into the t account purchase cost equity and investee income
• 76:00 - 76:30 dividends market to market valuations unrealized gains adjustments depreciation amortization and even impairment to the asset this investment balance if it is a stock acquisition and we have the need to do the work papers will be the the exact amount that will be sitting in the company balance for investment in subsidiary
• 76:30 - 77:00 as demonstrated here at the end of the day once the consolidation is completed this investment in subsidiary account will be reduced to zero i will come back and discuss this in detail for now it is the big picture that i want you to focus on i want you to be able to connect the pieces of this big picture to the left under fifty percent to the
• 77:00 - 77:30 right over fifty percent to the left when it's under fifty percent uh investment in equity security market method for under twenty equity method for over twenty and we can make this conclusion now or draw this conclusion now on p's books once you have over 20 investment you will have the need for an investment in account once it's in common stock
• 77:30 - 78:00 if it's a statutory merger statutory consolidation again we don't have the need for the investment account it's only when it's investment in common stock however whatever we do for over 20 percent will be exactly what we need to do for over fifty percent in terms of the investment account on ps books for this reason i have this extra column here showing the two percentages making the point that whatever we do
• 78:00 - 78:30 here is what we're going to do here for consolidation purposes again to the right are all the m a types which assumes over 50 percent and to demonstrate that p plus s plus adjustment when is it appropriate to use when we have these deal types up here statutory merges an acquisition one through four there's no need for the investment in account and there's no need for p plus s plus adjustment or this work papers
• 78:30 - 79:00 another note the word papers in textbooks tend to say that they're temporary it is not temporary it's previously disclosed to you yes they're referred to as work papers but it's a consolidation module typically these books are sitting in the financial module when the books are closed all the companies books then you hit a switch and it's dumped into the consolidation module these books the subsidiaries books and
• 79:00 - 79:30 then you go ahead and make your adjustments create your non-controlling interests in order to achieve your consolidated results let's drill down a little bit on the side where we just need to make the entries or journalize this m a on a set of companies books as opposed to work papers so assume the scenario here january twenty twenty you purchase a hundred percent of s p use ten thousand common stock ten
• 79:30 - 80:00 dollar par market value fifty five if you notice there's no investment in account here is the subsidiaries results subsidiaries financial statements and we're going to account for this acquisition let's take a look let's drill a little deeper in into what statutory mergers are versus statutory consolidations yes we know both of them can be done for asset or stock asset or
• 80:00 - 80:30 stock here's what's important parent subsidiary relationship doesn't exist for these guys there was never an investment in sub what happens legally in a statutory merger a and b company a and company b becomes company a r company b that means one of these entity ts are going to be dissolved
• 80:30 - 81:00 if not dissolved it can become a division of the surviving company let's survive let's assume a survives and b dissolves for dissolution b will be dissolved or become a division of a there are no minority interests on the statutory merger so no investment account no minority or non-controlling interest for both assets and stock what we're going to do is we're going to go
• 81:00 - 81:30 on a's books since a is the surviving company and debit all the assets at fair market value for market value and we're going to credit the liabilities at fair market value we're then going to issue the shares for the acquisition and the plug is going to be to goodwill statutory consolidation is pretty much the same whatever we did up here is the same down here for statutory consolidation be it asset or stocks
• 81:30 - 82:00 the only difference is whose books you're going to do this transaction on in statutory consolidation be it asset or stock we're going to do it on a new set of books so we're going to dissolve both a and b so under the solution both a and b is going to be gone unless if you want to keep them around we can keep them under
• 82:00 - 82:30 the new company in a division a division for a and a division for b the accounting rules requires that they must be dissolved and legally it is also true in what we call the statutory consolidation but if you look at the accounting for the deal it is exactly a mirror image of statutory merger again the only difference is on a new set of books mind you everything we discuss
• 82:30 - 83:00 is under the acquisition method all the m a types that we are accounting for are accounted for under the acquisition method fair market value not only for the majority holders but also for the minority holders fez 142 fans 160. so coming back to our big picture to the left market method equity method to the right ps books
• 83:00 - 83:30 equity method plus if it's stock acquisition p plus s plus adjustments plus non-controlling interest equals consolidation yes p plus s plus adjustment plus none controlling interest each equals consolidation that's if it's deal type stock acquisition if it's not stock acquisition vie or leverage buyout and it's a stock statutory merger or statutory consolidation be it asset
• 83:30 - 84:00 or stock no need for the investment in account all we need are transactions to be placed on a set of company companies books so now let's turn our attention to the work papers let's assume we have a stock acquisition what are some key things or key points to keep in mind so again the investment in account will be reflective over 50
• 84:00 - 84:30 just as over 20 and less than 50. equity method and piece books we're going to get this account up to date and then once the company books are done the investment account will equal to whatever is sitting on the company's books at the end of the day it has to be zeroed out p plus s plus adjustment is the complicated consolidation process at work here it
• 84:30 - 85:00 only is complicated as you can see now when we're talking about stock acquisitions leverage buyouts and vies that resembles a stock acquisition so what are some important items in the adjusting column here we know non-controlling interest has two very important items
• 85:00 - 85:30 they have a share in net income so we must show the non-controlling interest in net income and they have a share in the equity of the subsidiary remember this is the subsidiaries books that we're going to plus to the parents books and remember this is at book value and this is at book value we know in the end according to acquisition method we must convert the subsidiaries books to fair market value
• 85:30 - 86:00 the parent books will remain at book value now we have none controlling interest because we own eighty percent so none controlling is twenty what are some other important elements to recognize if we use the equity method then it is necessary to to use the equity in earnings
• 86:00 - 86:30 of a subsidiary so if you use the equity method you can expect in the trial balance to find the equity in earnings account for this for the parent which houses its share of the income from the subsidiary how did you get that via the investment equity entries [Music] this investment as we said has to be eliminated
• 86:30 - 87:00 how it gets eliminated is pretty interesting at the end of the year we're going to have a balance and what we're going to do is first undo all the current year activities so if you notice the equity pickup we're going to debit it and then credit the investment account remember when we account for it under the equity method we did the reverse because at that point we weren't eliminating the account we were accounting for the investment but for
• 87:00 - 87:30 consolidation purposes under the acquisition method we must eliminate the investment in account because it creates duplication in the consolidated results why because we're already picking up the subsidiary's assets here along with its liabilities what is sitting in the investment account exactly the assets and the liabilities plus goodwill well we are going to also set up a goodwill account
• 87:30 - 88:00 for any possible goodwill if we have goodwill in the deal we're going to set up as an adjustment goodwill so in the consolidated results there's goodwill so what we're going to do and how we're going to get rid of this investment in account is by doing the opposites of what we did when we were accounting for it so you can see we're going to credit the book value whatever we we paid in terms of acquiring
• 88:00 - 88:30 the subsidiary we're going to debit the dividends previously we credited we're going to do the reverse and then we're going to go ahead and account for items that were not previously accounted for such as depreciation that was not on the books we're going to credit the investment for that inventory on realize gains we're going to for ending inventory
• 88:30 - 89:00 we're going to do the reverse and for the beginning inventory we're going to do the reverse well actually for the ending inventory we know that profits are overstated and so we're going to credit the investment and we know that if the inventory was not sold and moved to the following year it becomes beginning inventory and now we are going to realize the gains so we're going to debit the investment in account so to
• 89:00 - 89:30 recap this investment account is we're going to get rid of this investment and then we're going to make certain entries that were not made on s's books such as the excess depreciation expense such as the unrealized gains we are going to undo because of duplications or affiliations another point to note is that because of
• 89:30 - 90:00 duplications any inter intra transaction must be removed purchase sales will go against each other so we're going to make entries here to undo it receivable payable the same so if you were to find the receivables here any receivables that is in the balance sheet is going to get removed at any rate let's see if we could identify these adjusting entries and see what they are the ti entry is
• 90:00 - 90:30 purchase and sale so 100 000 here sales is debited to undo it and the cost of goods sold is where the purchase is so we're going to credit it if we take a look at the g entry that is the gains and that's gains on ending inventory so we're going to debit cost a good soul as you recall
• 90:30 - 91:00 cost a good sole treatment for ending inventory we're going to debit the cost of goods sold in order to adjust net income we're going to credit it for the beginning inventory so this is the ending and this is the beginning this is the armatization that has to be adjusted for so that's going to be debited to increase depreciation expense and we will reduce the assets then you have
• 91:00 - 91:30 dividends that needs to be adjusted for remember we had credit the investment in account so the investment account is going to get debited now so we'll continue with these journal entries in an example so that you can see all of them but now it's just for you to start to get accustomed to what these adjustments are if you notice an s entry here this is to remove the equity of the subsidiary the
• 91:30 - 92:00 subsidiaries equity has to be removed in two pieces the beginning piece and the current piece yes i know this is all confusing to you at this point but treat it as an intro to what is yet to come let's come back to our macro point here when things are below 20 versus investments of that's our above 50 we must be careful what deal type we're
• 92:00 - 92:30 talking about and the most complicated part is if we have a stock deal so i'm going to move on to push down accounting when we acquire a subsidiary there are issues that involves valuation the subsidiary value obviously if we're acquiring the company on uh stocks the company still remains the company does not go out of business
• 92:30 - 93:00 it doesn't get dissolved all we did is bought their shares and the stock the the corporation continued the value for that company that will be reported on their separated financial statements will still be book values but we know we paid fair market value for the company with possibly goodwill involved so the question is can we write up the subsidiaries value to what
• 93:00 - 93:30 we paid fair market value well that's the issue that is referred to as push down accounting an organization for example might acquire a company and work to improve it business model and subsequently offer the shares back to the public in hopes of making a large profit what valuation basis should be used in reporting the subsidiaries financial statement that the company is going to use for the initial public offering so they bought this company fix
• 93:30 - 94:00 it up and now want to sell it the company is recorded at book value but they paid greater than book value they want to increase the value to fair market value and then go ahead and and make their transaction so assume that the strand companies own one asset it's a corporation and in that corporation strand company has one asset that's all they have we bought them a production machine with carrying value of 200 000 that's on the books and that's all they have fair market value
• 94:00 - 94:30 is 900 000 almost 700 thousand excess parker corporation paid 900 in in cash so they don't have any goodwill for strat the consolidation offers no real problem here because consolidation is going to record this company at fair value when we take p plus s on the consolidated results it's going to be at nine hundred thousand so there's no issue there however if the corporation
• 94:30 - 95:00 continue to report on its own which it will because it's a stock acquisition it will be reported at two hundred thousand so the machine will be reported by the uh combined or consolidated reports at nine hundred thousand however if strand continues to issue separate financial statements should the machine be reported at two or nine the solution to address this valuation issue of a subsidiary separately reporting a report
• 95:00 - 95:30 reporting in its financial statement was addressed in fafsa asu number 2014-17 business combination referred to as pushdown accounting in november of 2014. the principle requires that a newly newly acquired entity may elect the option of applying pushdown accounting in the reporting of period immediate the period immediately following the
• 95:30 - 96:00 acquisition so they have the option alternatively a newly acquired company may simply choose to continue using their book value so they have a choice they can use their fair market value or their book value for their their separate financial statement reporting this is referred to as push down on the asu 2014-17 let's take a look at a quick example how
• 96:00 - 96:30 this works let's say smallport is the company we're going to acquire in the asset category we're going to replace all of those book values with fair value for the liabilities we'll do the same under the acquisition method all assets and liabilities are typically reported at fair value 100 and that's exactly what we will do on the pushdown accounting but that creates a problem because the common stock in the apic will be at book value so the balance sheet will not balance
• 96:30 - 97:00 anymore it is going to be out by 2.5 million because of fair value what we're going to do in the equity section is add this account call additional paid in push down accounting and plug that difference there it's like a valuation account this is the way we will handle push down accounting on the books of the subsidiary and now the subsidiary can continue including in their audited results going forward fair market value again they have an option
• 97:00 - 97:30 they can keep it at book value let's talk impairment what surrounds this issue of impairment first you must understand that in the past we used to armatize goodwill but because of manipulation of net income take for instance where time warner acquired a company for 25 billion dollars call aol the company had no value so all of it was goodwill time warner had the ability to use goodwill amortization to
• 97:30 - 98:00 up their income or reduce it at their choice many companies were doing this so the accounting facts be 141 eliminated some of these abuse well we talked about eliminating pool of in pulling of interest via fast 141 in addition it eliminated the armatization of goodwill which created a problem for for transparent net income but even after fast 141 the abuse continued so in fast
• 98:00 - 98:30 142 it was completely eliminated and fast 121 was subsequently adjusted to do what i'm about to discuss with you under asc paragraph 350-20-35-28 goodwill cannot be amortized but it must be tested at least once a year for impairment
• 98:30 - 99:00 impairment simply means the asset we have purchased that we valued so highly that we paid access over fair value called goodwill for it we need to test it every year to see if that value is still there impairment of goodwill is a two-step dance we're going to check is the carrying value of and we're going to do it by reporting units so it's not going to be done on a company or subsidiary basis it's going to be done
• 99:00 - 99:30 by reporting unit for every legal entity and that's the requirement on the paragraph three fifty two step dance step one and step two by reporting units says the carrying amount of the reporting unit more than its fair value each reporting unit fair value is then compared to its carrying value and that will tell us if there's potential impairment if step one indicates there is potential impairment then step two kicks in
• 99:30 - 100:00 is good will implied value less than this carry carrying amount so step two then we'll compare the fair values of goodwill to its carrying values on the books in order to write off or generalize a loss having to do with goodwill impairment it's important to note that the ifrs the international accounting standards embraces the u.s
• 100:00 - 100:30 gap both require recognition in business combination both ifrs and the us gaap require an assessment at least once a year or even more frequently of goodwill to see if it's been impaired where the differences lies between ifrs and u.s gaap has to do in how it's tested for impairment it is also import important to note that
• 100:30 - 101:00 in 2016 there were some talk to eliminate step two and just have one step in calculating this impairment let's examine via an illustration to illustrate the testing procedure for goodwill impairment assume in january 1 investors of new call corporation to consolidate their telecommunication operation of a company called dsm inc nv
• 101:00 - 101:30 vision talk company into a deal value 2.2 billion so apparently they made a purchase and they want to combine these results new call organized each former firm as an operating unit so new call bought these three uh companies and then made each of them a division within its company here is the related information their goodwill on purchase were as follows and
• 101:30 - 102:00 these numbers are usually very large this is why we got rid of armatization of goodwill the numbers are never small so here are the numbers of goodwill here are the balance on the books at fair value well what was paid in january first 2017 the fair value that caused these goodwill numbers assumed one year later in december at the end of the year new call performs their analysis and each of the three reporting units
• 102:00 - 102:30 had to go through step one and step two in step one they revealed that ds wireless fair market value dropped from 748 million to 600 million this indicates that there is potential for impairment so step two new call will now compare the implied fair market value to its carrying value to see the true number
• 102:30 - 103:00 of actual goodwill so here's the new implied fair market value it's going to go to its books and get a new fresh set of fair market value by whatever means they have that gives us 55596 tells us that the new goodwill number should be 4 million on the books not 155 so that goodwill must be written off for 151 million that means net income is
• 103:00 - 103:30 going to be hit debit impairment lost the net income and credit the asset goodwill to add to your toolkits that you are going to use to carry forward let's examine a few more questions that might be a little bit more involved looking before you is a statutory merger situation big net and small port let's assume
• 103:30 - 104:00 that big net will survive small port is a subsidiary small port will be dissolved this is the situation of a statutory merger where a or b will survive a or b will dissolve or can become a division within the surviving company so big net is going to survive this is the financial statement
• 104:00 - 104:30 of small port here are the the book values and these are the fair market values if you notice we have fair market values for all the assets there are no liabilities here and everything else is the equity which includes the income statement we know that for a statutory merger that first we're going to have to close small
• 104:30 - 105:00 ports books that part of it we're not going to be addressing now we're just addressing the merger on the parent as it regards to the parent in this case there is no parent subsidiary but in fact a survivor and a dissolved company so we're addressing the survivors perspective
• 105:00 - 105:30 in the survivor's book we're going to transfer all of smallport's assets and liabilities so we're going to pick up all the assets including the 250 liability at fair market values and then we're going to show what we paid in order to facilitate the situation we had to issue these shares along with some cash payment
• 105:30 - 106:00 in order to acquire this company so the bottom line is a statutory merger has a surviving company the dissolved company books are going to be transferred over to the survivor there is no need for investment in account here there is no need for an investment account because
• 106:00 - 106:30 it is a merger type that is a statutory merger there is no need for p plus s plus adjustment and non-controlling interest and all of that it's a statutory merger or statutory consolidation investment in account is not necessary let's examine another situation here on december 31st 2020 the trial balance
• 106:30 - 107:00 of pledge company and its subsidiary stem company were as follows income statement for pledge and some we have equity in it subsidiary income we have none controlling interest so that means that the company was not fully acquired by pledge pledge did not fully acquire all of the shares of stum this is right away
• 107:00 - 107:30 you can assume it is a stock acquisition because of the fact that it has an equity in subsidiary income in its trial balance that means that it's using the equity method to account for the subsidiary the only time you need the equity method is if you have an investment in stocks a stock acquisition another notable account is the investment in stump
• 107:30 - 108:00 right now it's at 478 as of december 31 2020 and if you could look far down here you would see a non-controlling interest in equity fletch company purchased 80 000 of stems common stock on january 1 2015 six years ago for 300 000 on that date stamp sam company's shareholders equity was as
• 108:00 - 108:30 follows so the subsidiaries equity at the point of purchase was a hundred thousand one dollar share other contribut other capital which is apic is eighty thousand retained earnings 160 000 treasury is 10 000. as always would be a subtraction from the equity for total equity of 320 this is the book value
• 108:30 - 109:00 a point to note if you have the equity side of a balance sheet then you have what the asset minus liabilities is equal to it's just a different view of the ass the the equity value of a company if the shares were one dollar each and a hundred thousand is on the balance sheet we know that the number of shares issued
• 109:00 - 109:30 was a hundred thousand if you acquired eighty thousand it means that you own eighty percent of stem additional information receivable of pledged company include fifty five thousand twelve percent note receivable from stump company interest amounting of to sixty six hundred has been accrued to each company on the note from stamp to
• 109:30 - 110:00 pledge some company has not yet paid this interest so that means that there are inter intra activities in the way of receivable and payable also since this is interest one company would have the interest income the other company will have the interest expense since it's been accrued one company would have a payable and the other company will have irreceivable
• 110:00 - 110:30 the difference between cost and book value are all attributable to land so the access over book value that you have purchased is attributable attributable to len prepare the consolidated statement as of december twenty twenty first let's assess the purchase price allocation on the fast 142. now forgive me but when you're trying to
• 110:30 - 111:00 to to load up on so many things just so that i can connect the points for you all in one place this is what it looks like so yes it's very small and hopefully you can follow along here the bigger the screen the better it is for you so here's the consideration purchase price 300 000 book value what did we acquire 80 percent of 320
• 111:00 - 111:30 that is 256 000. 300 less 256 000 gives us 44 000. premium what is this premium well they have said to us all of the excess over book value is attributable to len that means goodwill is zero okay so let's go to the consolidation
• 111:30 - 112:00 work papers if you notice in this scenario it was a statutory merger there was no need for work paper there was no need for p plus s plus adjustments there was no need for the equity in investment in sub-account and therefore no need for the equity method so it was done in company books
• 112:00 - 112:30 not on work paper but a stock acquisition involves this involves the equity method and will be done on work papers and the investment account must be updated so let's take a look let's analyze the trial balance we know the first thing we're going to do is once the financial statement of the parent is done you push a button and it's dumped into the financial consolidation module and here it is we
• 112:30 - 113:00 know this company was purchased 115 date of acquisition the current year is january 1st beginning of period and 12 31 2020 end of period the full equity method was used because from the parent trial balance we spotted the equity in subsidiary income once you see that you know the equity method was used
• 113:00 - 113:30 the idea however is that we're going to take p because it's a stock acquisition plus a 2s note this is ps book value ss book value but we know according to the acquisition method to account for a stock acquisition the consolidated results must include book value fp book value of s along with the excess fair market value
• 113:30 - 114:00 which is the 44 000 to get it to fair market value in the consolidated results we know the hundred percent of this uh is going to be shared eighty percent with the uh parent company and twenty percent with non-controlling interest so how we are going to how are we going to go about consolidating well
• 114:00 - 114:30 the p and the s is easy once these subsidiary trial balances are completed separately we push the button and it dumps the results into the consolidation module now we have them together now we can make the adjustment entry on this work paper again we're calling it work papers but in the real world this is a permanent set of books in a consolidation module this is in the fi financial module
• 114:30 - 115:00 and the combined results are in the consolidation module okay so we were told that there are some inter-company intra-activities in receivable payable interest income interest expense along with a payable receivable how should we attack this these adjustments there's a method to the madness so
• 115:00 - 115:30 let's go to the investment account remember in peace books there is an investment account keeping track of this 478. so how did p end up at 478 on december 31 2020. it's because they started out with 428 as a beginning balance we'll come to that because this beginning balance of 428
• 115:30 - 116:00 occurred between january 115 to january 1 20 5 years later that's made up of five years of past equity pickup and dividends because if you notice we paid 256. we paid 300 000 forgive me and today from january 115 to january 120 it is 428
• 116:00 - 116:30 but we're asked for the consolidation 1231-2020 so we really don't care or have the need to assess all the individual people pieces that took us from january 1 2015 to january 1 2020. we're gonna just assume that's correct but for the current year we have added equity in investing income seventy four thousand four hundred
• 116:30 - 117:00 we the subsidiary has paid dividends of twenty four thousand now if you notice there's the income statement here's a retained earnings statement here's the balance sheet the way this works is the income is computed then that drops into the retained earnings the retained earnings is computed and then that drops into the balance sheet it is no difference it's a little different as part of the consolidation process we're going to complete the net income
• 117:00 - 117:30 then drop it into retain earnings statement complete the retained earnings and drop that down too the balance sheet equity section and all of the numbers will drop down across the board all of the numbers will drop down if you do not do this you can never get the consolidation done
• 117:30 - 118:00 correctly this is why the adjustments must be done in certain order so that you can facilitate this drop down and this is more practical in real world than you will find in textbooks i find textbooks sometimes and and it's it's hard for me to make the statement because i don't like to do this but i find the textbook ignore the real world and they just make it up
• 118:00 - 118:30 it is what it is okay so the process entails operating this way for your project you should have a fast 142 if you have a stock acquisition allocating the purchase price you should have an investment t account to show the pieces you should have p plus s the elimination entries
• 118:30 - 119:00 none controlling if there is any and consolidated you don't have to have all of these lines for the project you could roll up your income statement to total revenues equity and investee operating expense net income done retained earnings can be these items it's hard to make this any shorter the balance sheet can be very short cash like one more or two more asset accounts
• 119:00 - 119:30 can combine condense it the investment in account long term one short term liability then the equity section you don't need to use all the accounts that you're going to find when you're doing your research of the company that you're working on for your project condense it okay coming back to this question here p plus s let's work on the adjustments and the non-controlling interest
• 119:30 - 120:00 we know that purchase price is represented or consolidation excuse me is represented by p plus s plus adjustment plus none controlling interest so that is exactly what we will do here coming back to the t account so from 428 the current period activities between january to 20
• 120:00 - 120:30 uh 20 12 31 2020 we had equity and investee income we had dividends equity method don't consider market value write-ups we had no inventory at beginning or ending on realized gains to make adjustment to investment the investment account we had no impairments to adjust the investment account so the account just had these two transactions along with the beginning
• 120:30 - 121:00 balance so the year end balance is 478. we know that at the end of the day this investment account must be zero now it could have a balance in there and that's for a later discussion the on let me make that point now the only way you are going to end up with a balance here it's if that investment in account also includes investment
• 121:00 - 121:30 there are less than 50 percent when it's less than 50 percent we're not going to eliminate it we're gonna only eliminate the investments that are over 50 percent stock acquisition okay let's continue here so how are we to undo this 478 we're going to break it into prior p a prior period entry and entry
• 121:30 - 122:00 and a current period entry reversal so what is this 428 made up of if we want to get rid of this to credit this what do we need to credit we're going to credit we're going to credit this account and debit the common stock we can credit this account the investment account and debit apic and then we're going to credit this account
• 122:00 - 122:30 and debit retained earnings what are these accounts it's the equity section of the subsidiary at the beginning and we know that purchase price include the book value plus fair value which was the inc which includes the 44 000 and it would have also include any goodwill but there's no goodwill so in order to eliminate this 428 we're going to have to debit the equity of the subsidiary
• 122:30 - 123:00 and then credit the investment then we are going to have to credit it for the fair market value but faz 142 wants you to put that fair value on the books so that the consolidated results takes book value plus fair value to a hundred percent fair value what is left the current period activities
• 123:00 - 123:30 after treasury the current period active we know treasury is a negative equity account and therefore we're going to debit the investment account it's an offset to these equity items the equity in investee we had debited here we are reversing we're eliminating so we're going to credit it the dividends
• 123:30 - 124:00 were credited over here we're eliminating the investment in account so we're going to debit it so you can see folks these entries are not that difficult it gets a little quirky when you can't see this big picture the investment account is now fully eliminated by making these adjustment entries here i summarized it for you the current p the current portion entry will be simple debit
• 124:00 - 124:30 the equity in investee and credit the dividends the difference is going to be credited the sum of those two is going to be offset to the investment in the account so here's that entry entry one entry one entry one so it impact the income statement the retained earnings statement along with the investment in account
• 124:30 - 125:00 what is item two item two we're going to deal with all the receivable situation they said that there was a payable receivable of pledge company include 55 000 so we're gonna undo that in [Music] on the books in the receivable account there is 55 000 that was debited we're going to credit it because it was intro
• 125:00 - 125:30 activity stem had payable for the same amount because it was intro between pledge and sum so we're going to go to stum and we're going to debit it so there's the intra transaction for payable receivable removed also there's another payable receivable as i mentioned interest amounting to 66 has
• 125:30 - 126:00 been accrued by each company on the note payable from stump to pledge stump company has not yet paid this so they have an interest income and interest expense and a payable and a receivable so let's deal with the income statement as i said first interest income was credited we're going to debit it remove the intra activity the subsidiary has the expense in operating expenses so we're going to credit it it
• 126:00 - 126:30 was debited before so that takes care of the income statement we can compute our net income adjustments the only thing now we need to do is the non-controlling interest but that's easy none controlling interest is the net income of the subsidiary for twenty percent ninety three thousand times twenty percent is eighteen six hundred now mind you that would have been a little bit more complicated had we had inventory
• 126:30 - 127:00 or sale of assets property plant and equipment where there's gains on the sale or land for that matter so where the second entry a entry we take taken care of is b the b entry i call it number five here but really and truly it's the third thing we're going to do here are the pieces we said we were
• 127:00 - 127:30 going to take take care of and in that process we're going to set up the fair value on the books as part of phas 142 allegation and credit the sum which is the beginning balance of 4 28. so that entry you would see will offset 64 of the sub why because 80 is 100 eighty percent of sixty four twenty percent is sixteen thousand going
• 127:30 - 128:00 towards the non-controlling interest the treasury share will do the same the only difference is that we're going to credit the treasury eighty percent twenty percent and then we're going to set up the fair value so when we take stems book value and plus the fair value we're going to come up
• 128:00 - 128:30 with consolidated fair value let's focus now so we have one covered we have entry two covered let's take a look and see where if we have an item three and it we took care of item three well let's see yes we did that was the income versus the expenses
• 128:30 - 129:00 so now item four is what we will focus on which is the offset to this the income will give you the receivable the expense will give you the payable so we're going to subtract or we're going to credit the receivable and we're going to debit the payable payable receivable receivable payable undone eliminated
• 129:00 - 129:30 because it's intra transaction so we got four covered we're done with five we got six which is to put the 44 000 on land so if you notice this really shouldn't be here it should really be in six it's one
• 129:30 - 130:00 entry and then credited to the investment in account so it's current period entries first beginning of period entry second then the the payable receivables taken care of and if you had any inventory on realized gains loss sale of assets then those would have been taken care of
• 130:00 - 130:30 this is the full equity method we take p plus s plus these adjustments plus non-controlling interest and we get consolidated results the non-controlling interest retained earnings 320 20 percent belongs to non-controlling net income drops down completely here
• 130:30 - 131:00 completed retained earnings drops down completely here we add things down debits equals credit elimination entries or adjusting entries are good we know the trial balances are good none controlling interest is 108 600. we know we have done the individual calculations so we know that the pieces are correct the total will be correct the consolidated results we must prove
• 131:00 - 131:30 in one or two ways first it must work it must balance financial statements and a good way to look at it is the equity section is always reflective of the parent once combined let's take a look p is 300 it's 300. p is 150 it's 150 p is 776 is 776. the only way this is
• 131:30 - 132:00 going to be somewhat different is if p used shares to acquire the common stock of the the subsidiary then they would have had to issue additional shares and that would have drive this up this is always a good check first the balance sheet works and then the consolidated result is a reflection equity section of the parent
• 132:00 - 132:30 so to summarize peace bucks is affected for investment in asset debt and equity equity can be 20 more than less than 20 percent market less than 20 more than less than 50 equal to 50 equity method over 50 percent in ps books equity
• 132:30 - 133:00 method but we must know what m a type we're dealing with when it's over fifty percent and it's stock acquisition p plus s plus adjustment plus non-controlling interest when it is transactions that are similar to stock option stock acquisition such as vies and leverage bias
• 133:00 - 133:30 m a types that are not stock acquisition does not require the work papers and does not require p plus s plus adjustment and does not require the investment in account or the equity method all you need to do is to know whose books you are going to do the merger on the survivor the new company
• 133:30 - 134:00 so as i said to you before there were three prior there were two prior methods two account for m a's pooling of interest is gone purchase method which is similar to the acquisition method can still be used this is a fair value method but the acquisition method is much more
• 134:00 - 134:30 in compliance with fair value than the purchase method ever was a couple of key things under the acquisition method when you are acquire a company how much income do you pick up of the subsidiary you're going to pick up the subsidiaries income because you're entitled to it from the date of acquisition compared to the purchase method you were
• 134:30 - 135:00 allowed to pick up the income from january 1 regardless if you purchased the company 1231. the assets on the balance sheet regardless of minority interest or non-controlling interest under the acquisition method you will combine 100 of the subsidiary and 100 of the parent 100 of the subsidiary at fair market value under the purchase method you did
• 135:00 - 135:30 something similar but not quite the same yes you took p is book value 100 of s's book value but not a hundred percent of the excess fair market value here we take a hundred percent of the excess fair market value here we take our book value of p book value of s a hundred percent each but the percentage of ownership
• 135:30 - 136:00 on excess fair market value when it comes to the expenses really relating to business combination it was also treated slightly differently the purchase met capitalize any direct expenses indirect was expensed and any flotation cost was charged against aapic over here under the acquisition met direct costs and indirect costs
• 136:00 - 136:30 it's treated as part it's treated as expense and any flotation clause is offsetted against apic so you see they were similar with some differences [Music] it is helpful to note that the ifrs is much closer to the acquisition method [Music]
• 136:30 - 137:00 so i know this was a pack session but it it is what it takes to get your head wrapped around the subject matter in summary i have given you a nice push forward here so continue to do your part and i know you will be in good shape for the cpa exam and to compete please place a comment about the subject matter for credit in the dedicated blackboard and continue to be safe keep healthy and
• 137:00 - 137:30 as always stay awesome [Music] [Applause] [Music]
• 137:30 - 138:00 do [Music]
• 138:00 - 138:30 do [Music] do [Music] you