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My CPA-FARmodule18

Notecards I made from Wiley's 2012 CPA Exam Review

QuestionAnswer
What are the 4 steps to account for a business combination? 1. identify the acquirer 2. determine the acquisition date 3. recognize and measure assets acquired, liabilities assumed, and noncontrolling interest in acquirer 4. recognize goodwill
If the assets and liabilities acquired do not constitute a business, how is the transaction accounted for? an asset acquisition, assets are recorded at amount of cash paid or cost of the assets. If acquired as group, cost of each determined by % of their relative fair values. DO NOT record goodwill
What is the definition of a business? integrated set of activities/assets capable of being managed for purpose of providing a return in the form of dividends, lower costs, or other economic benefits to investors or owners
What happens at the acquisition date? When is the acquisition date? 1. identifiable assets and liabilities of acquiree are measured at FV, acquirer can recognize net income of acquiree 2. date acquirer obtains control over the acquiree
In addition to the assets acquired, liabilities assumed, and noncontrolling interest all measured at FV, what may the acquirer have to also measure? assets not previously recognized on acquirees books if assets are identifiable (identifiable- asset arises from a contractual or legal right or separable, may be separated from the entity and sold, transferred, licensed, rented or exchanged)
At the acquisition date, can the acquirer change the classifications of the assets and liabilities of the acquiree? No, only if a lease contract is modified at the date of acquisition may a classification change
At acquisition, the acquirer must also recognize any newly identified intangible assets of the acquireee that are identifiable assets. What are some examples? trademarks, internet domain names, noncompetition agreements, customer lists, non contractual customer relationships, plays, literary works, musical works, photographs, trade secrets, licensing, franchise agreements, construction permits, broadcast rights
At acquisition, what should the acquirer do with any previously held equity interests in the acquiree? revalue them to FV
How is goodwill calculated? FV of cost to acquire + FV of previously held equity interests in acquiree + FV of noncontrolling interest - FV of net identifiable assets = Goodwill or gain from bargain purchase
What happens if the FV of assets acquired is less then the cost paid? A bargain purchase has occurred and a gain is recognized by the acquirer in the current period for the difference
What is the consideration transferred by the acquirer measured at? Could a gain or loss on the assets transferred by recognized? 1. FV 2. yes if FV of assets or liabilities transferred differ from the carrying values. A gain or loss is recognized in the earnings of the current period
In a step acquisition, a company invests in less then 50% of another entity before subsequently taking control. What happens with the previously held shares here? the acquisition date fair value of the previously held shares are included in the acquisition cost. If FV of shares from acquisition date don't equal carrying value, a gain or loss is recognized in the period
How is noncontrolling interest measured? What should it be classified as in the statement of financial position? 1. at the active market prices on the acquisition date for the equity shares not held by the acquirer 2. as equity
How are acquisition-related costs treated? as expense in the period in which the costs are incurred or services rendered. Examples are finders, legal, accounting, valuation, consulting, and advisory fees. Costs of registering/issuing debt and equity services are not expensed in acquisition period
With the requirement of preparing consolidated financial statements, what is done with the investment account relating to the acquired entity? investment account is eliminated and replaced with the specific assets and liabilities of the investee corporation
What are some exceptions to a business holding control of an investment even when it owns >50% of its stock? the investee is in legal reorganization or bankruptcy, the investee operates in a foreign country which places restrictions
What is a variable interest entity? When is it decided a company is a VIE? 1. when control over an entity is achieved without ownership or voting interests 2. date the reporting entity becomes involved with the legal entity
What happens if an entity has a controlling financial interest in the variable interest entity? How could that happen? 1. The entity is considered the primary beneficiary of the VIE and is required to consolidate the VIE in tis financial statements 2. entity has power to direct activities of a VIE, and has obligation to absorb losses/receive benefits of VIE
In regards to variable interest entities, what are kick-out rights? participating rights? 1. the ability to remove the controller of the VIE 2. ability to block the actions of the controller of the VIE
Where does the consolidation process take place? Only on a worksheet, no consolidation elimination entries are ever recorded on either the parent's or subsidiary's books
When revaluing and asset and its determined that the FV has increased and is greater than the BV. Is there anything done to the corresponding accumulated depreciation account? Yes, increase the accumulated depreciation by the same % that the asset increased by
In calculating goodwill, are there any steps necessary to find the FV of net identifiable assets? Yes, take the BV of the assets - liabilities and add asset write ups to FV and add newly identified intangibles
What two steps are taken on the date of acquisition to consolidate the trial balance worksheet? 1eliminate acquiree's equity accounts, acquirers investment account & find difference between acquisition cost & BV of acquiree's net assets 2eliminate the differential account & record asset write ups to FV, new identifiable intangible assets, & goodwil
What are the three general types of intercompany transactions that may occur? Sales of merchandise, transactions in fixed assets, debt/equity transactions
Describe the ramifications of intercompany inventory transactions where the sale is above cost. unrealized profit in ending inventory if asset is not resold to third parties. Sellers profit is overstated. Purchasers inventory is overstated at same amount.
What is the process for intercompany fixed asset transactions? represents internal transfer of assets and no gain/loss should be recognized. If is, must eliminate gain/loss and carrying value of asset returned to initial BV. If gain shown, depreciation expense overstated too must eliminate in consolidation process
What are the reciprocal items that need to be eliminated when one company buys bonds of another consolidated company? investment in bonds and bonds payable, interest income and interest expense, and interest payable and interest receivable. Gains/losses cannot arise from direct intercompany bond purchases. Consolidated views bonds as retired
When consolidating intercompany inventory transactions to third parties, what amount of COGS should be recognized? the original COGS from the first company, not the COGS that the subsidiary listed it as
Where is noncontrolling interest disclosed on the balance sheet? How do you recognize the noncontrolling interests portion of net income and comprehensive income? How about dividends? 1. separate line item in owners equity 2. disclosed on the acquirer's income statement 3. portion of net income and dividends of acquiree are allocated to the noncontrolling interest
If a company acquires >50% but <100% of an entity, creating a noncontrolling interest, what happens to the effects of intercompany transactions? they are eliminated
How do the consolidated financial statements show the noncontrolling interest portion of income? parent includes all of the acquiree's revenue and expenses after date of acquisition with the noncontrolling interests portion is shown as a deduction on the consolidated income statement
Can the noncontrolling interest show goodwill? A bargain purchase? 1. Yes if FV of the noncontrolling interests shares were greater than the noncontrolling interests portion of net identifiable assets 2. No entire gain of bargain purchase is recognized by the acquirer
When there is a noncontrolling interest present, what are the date of acquisition entries? 1Eliminate acquiree's equity accounts/acquirer's investment account, difference acquisition cost & BV acquiree's net assets, record FV of noncontrolling interest 2Eliminate difference account, record asset writeup to FV, new indentifiable assets, goodwil
How is the income of a company recognized to noncontrolling interest? Subtract portion of dividends paid from the noncontrolling interests carrying value. Add portion of income to noncontrolling interests carrying value.
Is the FV of a contingent consideration transferred by the acquirer included in consideration transfered? how about the liabilities incurred by the acquirer? 1. Yes 2. Yes
If at the date of acquisition some of the information for valuing assets were incomplete, how would the incomplete information be prepared in its financial statements? How long could the measurement period last? 1.record uncertain items at a provisional amount measured at the date of acquisition 2.1 year or date information needed is received, whichever is first
If a provisional amount needed to be recognized because of a lack of information on an asset, and information came in within the measurement causing a revaluation. How is the change accounted for? Revaluation needed after the measurement period? 1. remeasure the asset to its correct fair value, recognize a gain or loss in this amount to goodwill 2. make a prior period adjustment and restate the financial statements
If the acquirer transfered assets as part of consideration, what should it be measured at? How should a gain or loss in this measurement be handled? How measure if assets remain with combined entity afterwards or acquirer retains control? 1. FV 2. include gain or loss of revaluing assets in earnings for the period 3. the assets would be measured at their carrying values
What is contingent consideration measured at on the acquisition date? If a change in the value occurs during the measurement period how is it accounted for? after the measurement period? If the contingent consideration is classified as equity? 1. FV 2. treat like a change in a provisional amount and adjust goodwill 3. change is reported in earnings for the period 4. equity is not remeasured and settlement of the contingent consideration is accounted within owners equity
If the acquiree is a lessee in an operating lease, what happens if the acquirer determines the lease terms are favorable? unfavorable? 1. an intangible asset is recognized apart from goodwill 2. a liability is recognized
How is accounting different for contractual and noncontracual contingencies? When can it be de recognized? Contractual are measured at FV at acquisition date Noncontractual -likely to meet definition of asset, measure at FV -not likely, contingencies rules are applied (distinction of probably, reasonably possible, or remote) 2. only when resolved
When and what are an acquiree's income taxes measured at? Employee benefits? indemnification asset? allowances for uncollectible or uncertain accounts? assets held for sale? 1. acquisition date, its value 2. acquisition date, its value 3. seller indemnifies (garuntee against loss) acquirer creates indemnification asset measure at FV on acquisition date 4. considered in FV measurements so no recognize 5. FV less cost to se
What are combined financial statements? How are the accounted for? 1. used by companies that own several subsidiaries, but are not consolidated 2. same way as consolidated financial statements
What happens in push down accounting? subsidiary records entry for revaluing assets & liabilities with balancing entry to revaluation capital account which is eliminated in consolidation against acquirer's investment in subsidiary account. subsidiarys financials reported at FV not historical
Under IFRS, what are noncontrolling interests valued at? Either FV or proportionate share of value of identifiable net assets of acquiree
Under IFRS, can an entity choose not to include a subsidiary in its consolidated financial statements even if it owns >50% of the voting shares? Yes, if all 3 are met 1. wholly or partially owned and other owners do not object to non consolidation 2. no debt or equity instruments are publicly traded 3. parent prepares consolidated financial statements that comply with IFRS
Under IFRS, how is push-down accounting done? Its NOT, IFRS disallows use
Created by: Bsantoro