AFAR: CONSOLIDATION (Part II) | SUBSEQUENT TO DATE OF ACQUISITION | BUSINESS COMBINATION

Summary

The video discusses key concepts of consolidation after acquisition, focusing on preparing consolidated financial statements for parent and subsidiary companies. It covers three essential journal entries for eliminating subsidiary equity, adjusting asset values to fair market, and recognizing goodwill. The video also delves into calculating the non-controlling interest (NCI) in profits, consolidated profits, and retained earnings, as well as how to handle depreciation, dividends, and intercompany transactions. The tutorial aims to simplify complex accounting principles with clear examples and problem-solving strategies for effective consolidation analysis.

Takeaways

• 📊 Consolidation after acquisition involves preparing the consolidated financial statements using separate financial statements (FS) of the parent and subsidiary.
• 📈 Three key working paper entries: elimination of subsidiary's equity, measurement of assets/liabilities at fair value, and recognition of goodwill.
• 📅 January 1 is the acquisition date, and subsequent consolidation occurs on December 31 of the same year and future years.
• 💼 Depreciation and cost of goods sold (COGS) adjustments need to be allocated to the parent and non-controlling interest (NCI) based on their respective ownership percentages.
• 🧾 NCI’s share in the subsidiary's profit is computed as a percentage of the subsidiary’s net income.
• 📉 Consolidated profit includes 100% of the parent’s and subsidiary’s income, with adjustments for depreciation and dividends.
• 💸 Dividends declared by the subsidiary to the parent are eliminated in consolidated financial statements.
• 🔄 Retained earnings attributable to the parent are calculated based on the parent’s net income, share in the subsidiary’s income, and depreciation adjustments.
• 💼 NCI’s share in equity is adjusted by their share in the subsidiary’s profit and the dividends they receive.
• 📊 The consolidated statement of financial position presents the NCI as part of the equity section.

Q & A

What are the key steps in preparing consolidated financial statements at the date of acquisition?

At the date of acquisition, the key steps are: obtaining the separate financial statements (FS) of both the parent and subsidiary, reflecting working paper entries such as eliminating the subsidiary's equity, measuring the subsidiary's assets and liabilities at fair value, and recognizing goodwill or a gain.

What adjustments need to be made for assets and liabilities post-acquisition in subsequent years?

After acquisition, adjustments must be made to reflect the depreciation of assets measured at fair value over book value. For inventory, adjustments involve debiting the cost of goods sold and crediting inventory. These adjustments impact the P&L and should be allocated between the parent and non-controlling interest (NCI).

What is the purpose of working paper entry number two, specifically related to post-acquisition depreciation?

Entry number two adjusts for additional depreciation of PPE (property, plant, and equipment) valued at fair market value during acquisition. This depreciation is then allocated between the parent and NCI in subsequent periods.

How do you calculate NCI's share of profits?

To calculate NCI's share of profits, take the subsidiary's net income and multiply it by NCI's ownership percentage. For example, if NCI owns 20% and the subsidiary's net income is $525,000, NCI's share is $105,000.

What is the consolidated profit on December 31, and how is it calculated?

The consolidated profit is $1,710,000. It is calculated by adding the parent company's net income of $1,425,000 and the full net income of the subsidiary ($525,000), then subtracting depreciation of $60,000 and eliminating intercompany dividends of $180,000.

How are intercompany transactions, such as dividends, handled in consolidation?

Intercompany dividends between the parent and subsidiary are eliminated in the consolidated financial statements. In this example, the dividend of $180,000 paid by the subsidiary to the parent is removed to avoid overstating consolidated income.

How is the consolidated retained earnings attributable to the parent calculated?

The consolidated retained earnings attributable to the parent is calculated by adding the parent’s beginning retained earnings of $7.8 million, the parent’s net income of $1,425,000, and 80% of the subsidiary’s net income ($420,000), then subtracting adjustments for depreciation ($40,000), intercompany dividends ($180,000), and dividends declared by the parent ($690,000), resulting in $8,727,000.

How do you compute the NCI’s ending balance in the consolidated statement of financial position?

The NCI’s ending balance is calculated by taking the beginning NCI balance of $810,000, adding the NCI’s share of the subsidiary’s profit ($93,000), and subtracting NCI’s share of dividends declared by the subsidiary ($45,000), resulting in an ending NCI balance of $858,000.

What is the impact of excess depreciation on consolidated financial statements?

Excess depreciation arises from valuing PPE at fair value rather than book value at the date of acquisition. This additional depreciation must be subtracted from consolidated profits, and the share of this expense must be allocated between the parent and NCI.

Why is NCI considered an equity account in consolidated financial statements?

NCI represents the equity interest in a subsidiary that is not owned by the parent. It is classified as an equity account because it reflects the claim of minority shareholders in the net assets of the subsidiary.