The Consolidation Of Financial Information Accounting Discussion Help

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1. Consolidation of financial information is required for external reporting purposes when one organization gains control of another, thus forming a single economic entity. In many combinations, all but one of the companies is dissolved as a separate legal corporation. Therefore, the consolidation process is carried out fully at the date of acquisition to bring together all accounts into a single set of financial records. In other combinations, the companies retain their identities as separate enterprises and continue to maintain their own separate accounting systems. For these cases, consolidation is a periodic process necessary whenever the parent produces external financial statements. This periodic procedure is frequently accomplished through the use of a worksheet and consolidation entries. 2. Current financial reporting standards require the acquisition method in accounting for business combinations. Under the acquisition method, the fair value of the consideration transferred provides the starting point for valuing the acquired firm. The fair value of the consideration transferred by the acquirer includes the fair value of any contingent consideration. The acquired company assets and liabilities are consolidated at their individual acquisition-date fair values. Direct combination costs are expensed as incurred because they are not part of the acquired business fair value. Also, the fair value of all acquired in-process research and development is recognized as an asset in business combinations and is subject to subsequent impairment reviews. 3. If the consideration transferred for an acquired firm exceeds the total fair value of the acquired firm’s net assets, the residual amount is recognized in the consolidated financial statements as goodwill, an intangible asset. When a bargain purchase occurs, individual assets and liabilities acquired continue to be recorded at their fair values and a gain on bargain purchase is recognized. 4. Particular attention should be given to the recognition of intangible assets in business combinations. An intangible asset must be recognized in an acquiring firm’s financial statements if the asset arises from a legal or contractual right (e.g., trademarks, copyrights, artistic materials, royalty agreements). If the intangible asset does not represent a legal or contractual right, the intangible will still be recognized if it is capable of being separated from the firm (e.g., customer lists, noncontractual customer relationships, unpatented technology). 1. The procedures used to consolidate financial information generated by the separate companies in a business combination are affected by both the passage of time and the method applied by the parent in accounting for the subsidiary. Thus, no single consolidation process that is applicable to all business combinations can be described. 2. The parent might elect to utilize the equity method to account for a subsidiary. As discussed in Chapter 1, the parent accrues income when earned by the subsidiary. The parent records dividend declarations by the subsidiary as reductions in the investment account. The effects of excess fairvalue amortizations or any intra-entity transactions also are reflected within the parent’s financial records. The equity method provides the parent with accurate information concerning the subsidiary’s impact on consolidated totals; however, it is usually somewhat complicated to apply. 3. The initial value method and the partial equity method are two alternatives to the equity method. The initial value method recognizes only the subsidiary’s dividends as income while the asset balance remains at the acquisition-date fair value. This approach is simple and typically reflects cash flows between the two companies. Under the partial equity method, the parent accrues the subsidiary’s income as earned but does not record adjustments that might be required by excess fair-value amortizations or intra-entity transfers. The partial equity method is easier to apply than the equity method, and, in many cases, the parent’s income is a reasonable approximation of the consolidated total. 4. For a consolidation in any subsequent period, all reciprocal balances must be eliminated. Thus, the subsidiary’s equity accounts, the parent’s investment balance, intra-entity income, dividends, and liabilities are removed. In addition, the remaining unamortized portions of the fair-value allocations are recognized along with excess amortization expenses for the period. If the equity method has not been applied, the parent’s beginning Retained Earnings account also must be adjusted for any previous income or excess amortizations that have not yet been recorded. 5. For each subsidiary acquisition, the parent must assign the acquired assets and liabilities (including goodwill) to individual reporting units of the combined entity. The reporting units should be at operating segment level or lower and serve as the basis for future assessments of fair value. Any value assigned to goodwill is not amortized but instead is tested annually for impairment. Firms have the option to perform a qualitative assessment to evaluate whether a reporting unit’s fair value more likely than not exceeds its carrying amount. If the assessment shows excess fair value over carrying amount for the reporting unit, a firm can forgo further testing. Otherwise, a two-step test is performed. First, if the fair value of any reporting unit below its carrying amount, then the implied value of the associated goodwill is recomputed. Second, the recomputed implied value of goodwill is compared to its carrying amount. An impairment loss must then be recognized if the carrying amount of goodwill exceeds its implied value.17 6. Subsequent to a business combination, any newly recognized subsidiary identifiable intangible assets (i.e., other than goodwill) considered to possess indefinite lives are not amortized but instead are assessed for impairment on an annual basis. Similar to goodwill impairment assessment, an entity has the option to first perform qualitative assessments for its indefinite-lived intangibles to see if further quantitative tests are necessary. For intangible assets with finite lives, amortization expense is recognized over the intangible asset’s useful life. The amortization method should reflect the pattern of decline in the economic usefulness of the asset. If no such pattern is apparent, the straight-line method of amortization should be used. 7. The acquisition-date fair value assigned to a subsidiary can be based, at least in part, on the fair value of any contingent consideration. For contingent obligations that meet the definition of a liability, the obligation is adjusted for changes in fair value over time with corresponding recognition of gains or losses from the revaluation. For contingent obligations classified as equity, no remeasurement to fair value takes place. In either case the initial value recognized in the combination does not change regardless of whether the contingency is eventually paid or not. ...
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1. Consolidation of financial information is required for external reporting purposes when one
organization gains control of another, thus forming a single economic entity. In many
combinations, all but one of the companies is dissolved as a separate legal corporation.
Therefore, the consolidation process is carried out fully at the date of acquisition to bring
together all accounts into a single set of financial records. In other combinations, the companies
retain their identities as separate enterprises and continue to maintain their own separate
accounting systems. For these cases, consolidation is a periodic process necessary whenever the
parent produces external financial statements. This periodic procedure is frequently
accomplished through the use of a worksheet and consolidation entries.
2. Current financial reporting standards require the acquisition method in accounting for
business combinations. Under the acquisition method, the fair value of the consideration
transferred provides the starting point for valuing the acquired firm. The fair value of the
consideration transferred by the acquirer includes the fair value of any contingent consideration.
The acquired company assets and liabilities are consolidated at their individual acquisition-date
fair values. Direct combination costs are expensed as incurred because they are not part of the
acquired business fair value. Also, the fair value of all acquired in-process research and
development is recognized as an asset in business combinations and is subject to subsequent
impairment reviews.
3. If the consideration transferred for an acquired firm exceeds the total fair ...

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