Chapter 5: Consolidation Subsequent to Acquisition Date

Cost Method:

 Records income when the investor established right to receive a dividend is established

Equity Method

 Captures investor’s share of any changes to the investee’s shareholder’s equity

 Captures net effect of any adjustments that would be made on the consolidated financial
statements

Dividend income and Equity method income from a subsidiary are usually not taxable

Consolidated net income will be the same regardless of whether the parent used the cost method or
the equity method for its internal accounting records.

*Could use cost method for internal reporting, but equity method for consolidated financial statements

 In recording, does parent pick cost method or equity method?

 Consolidated Balance Sheet: Parent’s investment does not appear, and some of the subsidiary’s
asset and liability are remeasured to reflect the fair value used in the consolidation process
 Consolidated Statement of Comprehensive income: parent’s investment income from subsidiary
does not appear, and some revenues and expenses are remeasured to reflect the amortization
and impairments of the fair values being used in the consolidated balance sheet
 If equity method used for recording, then retained earnings in internal records will be equal to
consolidated retained earnings

Consolidated net income attributable to the shareholders of the parent company = parent company’s %
share of the consolidated net income

Consolidated Income and Retained Earnings:

 Decline of the acquisition differential is reflected on consolidated financial statements, not

subsidiary’s own financial statements.
 Acquisition differential is amortized, written down, or de-recognized on consolidation as if the
parent had purchased these net assets directly.
 Inventory is not amortized, but is de-recognized and reflected on the income statement as cost
of goods sold expense when is sold
 Amount allocated to land, not amortized. Written down when impaired or de-recognized.
Included in gain or loss calculation in income of statement when sold.
 Consolidated retained earnings reflects only the parent’s share of the combined company’s
retained earnings

Testing Goodwill and Other Assets for Impairment

 Asset is impaired if it carrying amount exceeds its recoverable amount

 Recoverable amount is the higher of the FV less costs of disposable and value in use
 Can not be impaired at the subsidiary level, but be at the consolidated level
1. P,P & E, & intangible assets with definite useful lives (amortized over useful lives, test for
impairment only if suspected of impairment)
2. Intangible assets with indefinite useful lives or not yet available for use (not amortized, but
test for impairment annually no matter what)
3. Cash generating units and goodwill (asset assigned goodwill) (impairment must be assessed
on annual basis)

2-Step Process to determining if an impairment loss should be reported

Step 1: Determine if indicator exists that an asset may be impaired. If the preparer’s judgement says
indicator exists, then step 2 is performed to determine recoverable amount.

Step 2: The recoverable amount is determined and compared with the asset’s carrying amount.

 If recoverable amount is greater than carrying amount, no impairment exists, and the asset is
reported at carrying amount
 If the recoverable amount is less than the carrying amount, impairment exists, and the asset is
written down to its recoverable amount

Intangible Assets with Indefinite Useful Lives

 Intangible assets that is not subject to amortization is tested for impairment annually
 When certain criteria are met, the recoverable amount from a preceding period can be used
rather than determining a new recoverable amount for the current year

Cash-Generating Units and Goodwill

 Goodwill resulting from a business combination should be divided among each cash-generating
unit that will benefit from the goodwill
 Each unit to which goodwill is so allocated must be represented the lowest level applicable and
will not be larger than an operating segment determined in accordance to IFRS 8
 Goodwill is allocated to cash-generating units as follow:
o Total value of the subsidiary is allocated to each cash generating unit
o The FV of the subsidiary’s individual net assets is also allocated to each cash-generating
unit
o For each cash generating unit, the allocated value is compared with the fair value of the
unit’s identifiable net assets
o The difference = goodwill of the cash generating unit
o Sum of each cash generating unit’s goodwill = total acquisition goodwill of the
subsidiary’s
 Before goodwill impairment is tested, individual assets should be tested for impairment and any
losses recorded
 Then the recoverable amount of each cash-generating unit is compared to it carrying amount,
including goodwill. If recoverable amount>carrying amount then no goodwill impairment

 If recoverable amount < carrying amount, impairment should be recognised and should be
allocated to reduce the carrying amount of the assets in the following order
1. Reduce the carrying amount of any goodwill
2. Then to the other assets of the unit pro-rata based on the carrying amount of each
asset

Reversing an Impairment Loss

 Goodwill cannot be reversed

 Can be reversed on pre-loss carrying amount of the intangible asset
1. Assess if there are indications that the impairment loss either decreased or no longer exist
2. If decrease, the calculate recoverable amount
 Impairment loss is reversed only if there has been a change in the estimates used to determine
the asset’s recoverable amount, not is the present value of future flows has increased solely
 Reversal of impairment reported on net income
 Cannot be written up to higher amount than original value if impairment not recognized
 Reversal of an impairment loss for a cash-generating unit must be allocated to the assets of the
unit pro-rata with the carrying amounts of those assets

Consolidation of 100% Owned Subsidiary

 Investment account is replaced by CA of the subsidiary’s assets and liabilities + acquisition

differential
o Purchase prices consist of CA of the subsidiary’s assets and liabilities + acquisition
differential
 Dividends received or receivable from the subsidiary are recorded in the parent’s income when
the cost method is used
o These dividends are eliminated on consolidation

Consolidated net income, and the consolidated balance sheet accounts, are the same regardless of
whether the parent used equity or cost method

Only difference is consolidated retained earnings, Cost method need to recalculate Opening balance of
retained earnings

 Dividends on the consolidated statement of retained earnings are the dividends of the parent
 Consolidated financial statements represent the combined portion of the parent and subsidiary
as if the parent has acquired the subsidiary’s assets and liabilities directly

Goodwill and NCI are the only two accounts on the consolidated balance sheet that would be different
under the identifiable net asset’s method compared with the fair value enterprise method.

Equity of Recording:

Parent’s retained earnings under the equity method should be equal to consolidated retained earning

Cost Method:

Dividend is seen as income.

When converting to equity, got to remove it from net income

Consolidated Shareholder’s Equity = Common shares of the parent and the retained earnings from the
consolidated retained earnings statement.

Consolidated retained earnings after acquisition date = parent’s portion of retained earnings. NCI
portion is reported on a separate line in shareholder’s equity
Consolidated Net Income of parent any year after acquisition = Net income of Parent + parent’s share of
the net income of the subsidiary – parent’s share of the change in acquisitional differential for that year

Parent’s retained earnings under cost method includes dividend income from the subsidiary since date
of acquisition

Consolidated retained earnings after acquisition = parent’s share of subsidiary’s net income earned since
acquisition date – changes in acquisition differential to date