Ch5 _ Important

8/11/2019 Ch5 _ Important

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5 ALLOCATION AND DEPRECIATION OF DIFFERENCES BETWEEN COSTAND BOOK VALUE

Learning Objectives:1. Calculate and allocate the dierence bet!een cost and boo" value to thesubsidiar#$s assets and liabilities.

2. %&'lain ho! an# e&cess o( (air value over ac)uisition cost o( net assets isallocated to reduce the subsidiar#$s assets and liabilities in the case o(bargain 'urchases.3. %&'lain ho! good!ill is *easured at the ti*e o( the ac)uisition.+. ,escribe ho! the allocation 'rocess diers i( less than 100- o( thesubsidiar# is ac)uired.5. ecord the entries needed on the 'arent$s boo"s to account (or theinvest*ent under the three *ethods: the cost the 'artial e)uit# and theco*'lete e)uit# *ethods.. re'are !or"'a'ers (or the #ear o( ac)uisition and the #ears subse)uentto the ac)uisition assu*ing that the 'arent accounts (or the invest*entusing the cost the 'artial e)uit# and the co*'lete e)uit# *ethods.4. nderstand the allocation o( the dierence bet!een cost and boo" value tolong6ter* debt co*'onents.7. %&'lain ho! to allocate the dierence bet!een cost and boo" value !henso*e assets have (air values belo! boo" values.8. ,istinguish bet!een recording the subsidiar# de'reciable assets at netversus gross (air values.10. nderstand the conce't o( 'ush do!n accounting.

1


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C9A% 5

In the News:echnolog# billionaire aul Allen in his latest *ove to asse*ble a cablee*'ire agreed to 'a# ;2.5 billion in cash (or Charter Co**unications r*s to usecreative *eans to avoid de'ressing (uture earnings. One such *ethod is tocharge large a*ounts to in6'rocess research and develo'*ent e&'ense.

FASBs recently issued opinion fundamentally changed theaccounting for goodwill amortization. As a result of the recentrecommendations from FASB, goodwill is no longer amortized over anite life. Instead, goodwill is carried on the alance sheet, and theaccount is not ad!usted, unless an impairment e"ists.

As a result co*'anies !ho 'reviousl# clai*ed that 'urchaseaccounting ?drains@ (uture earnings via the a*ortiation o( good!ill !ill nolonger be able to cite this as a criticis* o( 'urchase accounting.


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rst 'rovide e&a*'les o( the allocation o( the dierence bet!een cost andboo" value on the acquisition ate. =e ne&t e&tend the e&a*'les to deal!ith the su!sequenteects on the consolidated >nancial state*ents underthe various *ethods o( accounting (or invest*ents that !e revie!ed inCha'ter +.

ALLOCATION OF DIFFERENCE BETWEEN COST AND BOOK VALUE TOASSETS AND LIABILITIES OF SUBSIDIAR"# Acquisition Date

=hen consolidated >nancial state*ents are 're'ared asset andliabilit# values *ust be adjusted b# allocating the dierence bet!een costand boo" value to s'eci>c recorded or unrecorded tangible and intangibleassets and liabilities.


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leave intact the categories considered *ost reliable. A true bargain is notli"el# to occur e&ce't in situations !here non6)uantitative (actors 'la# a role(or e&a*'le a closel#6held co*'an# !ishes to sell )uic"l# because o( thehealth o( a (a*il# *e*ber. t 'lans and assu*ed liabilities arerecorded at (air *ar"et value al!a#s.

2. An# 'reviousl# recorded good!ill on the seller$s boo"s is eli*inatedand no ne! good!ill recorded.

3. Long6lived assets including in6'rocess research and develo'*ent ande&cluding those s'eci>ed in 1 above are recorded at (air *ar"etvalue *inus an adjust*ent (or the bargain.

+. An e&traordinar# gain is recorded onl# in the event that all long6livedassets other than those s'eci>ed in 1 above are reduced to ero orto the noncontrolling 'ortion rather than ero i( the subsidiar# is not!holl# o!ned.

=hen needed the reduction o( noncurrent assets e&ce't invest*ents inlong6ter* *ar"etable securities is *ade in 'ro'ortion to their (air values indeter*ining their assigned values.+his allocation is illustrated later in thischa'ter.

Ac)uisitions leading to the recording o( good!ill have been (ar *ore

co**on in recent #ears than bargain ac)uisitions. he i*'act o( good!ill on(uture earnings has dra!n a great deal o( attention !ith standard6settersulti*atel# lightening the burden b# no longer re)uiring the a*ortiation o(good!ill. . Other ac)uired intangibles !ith >nite use(ul lives such as(ranchises 'atents and so(t!are *ust still be a*ortied over theiresti*ated use(ul lives not to e&ceed (ort# #ears. he e&a*'les 'resented inthis cha'ter (ocus 'ri*aril# on de'reciable assets and good!ill. Ioteho!ever that other identi>ed intangibles !ould be accounted (or in the sa*e*anner as de'reciable asssets !ith the ter* ?a*ortiation e&'ense@re'lacing the ter* de'reciation e&'ense.


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the a*ount 'aid b# the ac)uiring >r* rather than its historical cost to theac)uired >r*. G# allocating large a*ounts to E, in the 'eriod o( theac)uisition >r*s ta"e a large one6ti*e hit to earnings but avoid (uturere'eated charges. his 'ractice beca*e increasingl# 'o'ular in recent #earsa*ong high technolog# >r*s dra!ing the attention o( the B%C and causingthe >r*s to co*'lain that the# are being singled out (or scrutin#. t. he DABG subse)uentl#announced a decision to dela# its 'roject on in6'rocess E, until a(ter thebusiness co*binations 'roject !as co*'leted.

In the News:he B%C isn$t inclined to s#*'athie. Agenc# oNcials sa# the# are no!en(orcing *ore aggressivel# rules in 'lace since 1845. ?As the nu*ber o(co*'anies clai*ing larger in6'rocess E,P !rite6os increased in earl#1887 !e began to dig dee'er into the co*'an#$s a''raisal assu*'tions@

sa#s B%C Chie( Accountant L#nn urner. At issue is the sie o( !rite6os thatco*'anies ta"e (or the 're*iu*s the# 'a# !hen ac)uiring other co*'anies'articularl# high6tech concerns.... Gu#ers o( technolog# have ca'italied on arule that lets the* ta"e a large one6ti*e !rite6o (or the value o( as6#et6undevelo'ed 'roducts the# 'ic" u'. he bu#ers thus avoid incurringre'eated s*all charges that can de'ress earnings (or #ears. 5

CASE ONE# Acquisition Cost )in E*cess o+, Fai' Va%ue o+ Ienti-a!%eNet Assets o+ a Su!siia'&

o illustrate the allocation o( the dierence bet!een cost and boo"value to individual assets and liabilities o( a subsidiar# assu*e that on

Qanuar# 1 200+ B Co*'an# has ca'ital stoc" and retained earnings o(;1500000 and ;500000 res'ectivel# and identi>able assets and liabilitiesas 'resented in


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,ierence bet!een Cost and Goo" Jalue 450000Adjust inventor# u'!ard assu*e D


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assets o( B Co*'an# are understated b# ;450000.


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,ierence Get!een Cost and Goo" Jalue 00000

CASE TWO# Acquisition Cost )Less Than, Fai' Va%ue o+ Ienti-a!%eNet Assets o+ a Su!siia'&2 #ess than $holly %wned Susidiaries

e(er to


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Land 120000 20000 100000Other Ioncurrent 0 50000 50000otal ;+00000 ;100000 ;300000

he !or"'a'er entries to eli*inate the invest*ent account and to allocatethe dierence bet!een cost and boo" value *a# be su**aried in general

journal (or* as (ollo!s:

etained %arnings 6 B Co*'an# +00000Ca'ital Btoc" 6 B Co*'an# 1200000,ierence Get!een Cost and Goo" Jalue 300000


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Galance 0

Ietting the increases against the decreases in the various accounts #ieldsthe a*ounts needed in the journal entr# as sho!n belo!.

10


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Iet


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,ierence Get!een Cost and Goo" Jalue ;00000

A co*'arison o( the recorded and consolidated carr#ing values o( the assetsand liabilities o( B Co*'an# on Qanuar# 1 200+ is 'resented in


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loss o( continuit#. Dirst though it is !orth noting that there are onl# threebasic accounts that are re'orted dierentl# in the boo"s o( the 'arent. Abrie( revie! o( the entries *ade b# the 'arent under the three *ethods seeo'ening o( Cha'ter 3 reveals t!o o( these accounts: the invest*ent accountitsel( and the inco*e recognied (ro* the subsidiar# dividend inco*e ore)uit# in subsidiar# inco*e. Bince the a*ount o( inco*e recognied (ro*

the subsidiar# is added into retained earnings o( the 'arent each #ear it(ollo!s that the third i*'ortant account that diers a*ong these *ethods isretained earnings o( the 'arent.

nder all three *ethods the !or"sheet entries !ill se'arate current #eareects (ro* the eects o( the 'revious #ears because the current #earinco*e state*ent accounts are o'en and need to be re'orted se'aratel# andcorrectl#. 9ence !or"sheet entries to retained earnings !ill al!a#s adjustthe balance at the e'innin'o( the current #ear or the date o( ac)uisition i(it is the >rst #ear under the cost and 'artial e)uit# *ethods. nder theco*'lete e)uit# *ethod beginning retained earnings o( the 'arent is thesa*e as beginning consolidated retained earnings and hence needs noadjust*ent. Digures 561 through 563 'resent three #ears o( entries (or a'arent co*'an# and (or a consolidating !or"sheet under all three *ethods.


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%ntries recorded on the boo"s o( the Co*'an# under the cost *ethod toreHect the 'urchase o( its interest in B Co*'an# and the recei't o( dividendsin 200+ are as (ollo!s:AU GOVc assets and liabilities see rst #ear under a Drst6in >rst6out cost Ho!assu*'tion the inventor# that necessitated the ;+0000 adjust*ent !ould

have been sold. ecall that at the date o( ac)uisition this adjust*ent !as torst #ear ho!ever the entr# is to Cost o( oodsBold or to Geginning


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Ho! !ere assu*ed the ;+0000 !ould be allocated to ending inventor# inthe balance sheet rather than to Cost o( oods Bold.

his entr# to Cost o( oods Bold is a''ro'riate onl# in the #ear o(ac)uisition. c identi>able assets or liabilities is treated in the consolidated>nancial state*ents as good!ill. reviousl# good!ill !as a*ortied usingthe straight6line *ethod over an a''ro'riate 'eriod not to e&ceed +0 #ears.9o!ever under DABG$s latest 'ronounce*ent on business co*binationsco*'anies are not currentl# re)uired to a*ortie good!ill.


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"ea' Su!sequent to Acquisition

(ntries on Boo's of ) *ompany + --3 1 /ear Suse0uent toAc0uisition


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rst in a co*bined single entr#

and then alternativel# in its co*'onents. he authors >nd the seconda''roach co*'onents easier to understand though less s'ace eNcient.

+ Geginning etained %arnings 6 Co*'an#Geginning Consolidated etained %arnings +0000W2+000

+000

,e'reciation %&'ense ;2+0000/10 2+000

%)ui'*ent net ;2+0000 6 ;2+000 6 ;2+000 182000Land 120000%&cess o( Cost over Dair Jalue ;200000 6 200000


o allocate and de'reciate the dierence bet!een cost and boo" value.

Be(innin( conso%iate 'etaine ea'nin(s .ust !e a4uste each&ea' +o' the cu.u%ati1e a.ount o+ e/'eciation an othe'euctions that ha1e !een .ae +'o. conso%iate net inco.e!ecause o+ the e/'eciation o+ the i6e'ence !et$een cost an !oo01a%ue in the conso%iate state.ents $o'0/a/e's o+ /'io' &ea's. G#reducing 'reviousl# re'orted consolidated net inco*e these !or"'a'eradjust*ents also reduce 'reviousl# re'orted consolidated retained earnings.

he reduction o( beginning consolidated retained earnings is acco*'lished b#a debit to the beginning retained earnings o( the 'arent co*'an# in theconsolidated state*ents !or"'a'er. he ;+000 debit to beginning retainedearnings is e)ual to the ;+0000 charged to cost o( goods sold 'lus the;2+000 charged to de'reciation e&'ense. =here 'art o( the dierencebet!een cost and boo" value is allocated to de'reciable assets the!or"'a'er adjust*ent to the beginning retained earnings o( the 'arentco*'an# !ill beco*e 'rogressivel# larger each #ear.

o se'arate the above entr# into its *ore digestible co*'onents begin!ith the allocation o( the dierence bet!een cost and boo" value and then'roceed to record e&cess de'reciation as (ollo!s:

+a Geginning etained %arnings S Co*'an# 'revious #ear$s cost o( goods sold

+0000

%)ui'*ent net 2+0000 Land 120000 ood!ill 200000 ,ierence Get!een Cost and Goo" Jalue 0000

o allocate the a*ount o( dierence bet!een cost and boo" value at date o(ac)uisition to s'eci>c assets and liabilities see


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%ntr# +a is identical to that recorded in the 'receding #ear !ith thee&ce'tion that the entr# to Cost o( oods Bold is a''ro'riate onl# in the #earo( ac)uisition. hus the adjust*ent in #ear 2 and (uture #ears is toGeginning etained %arnings.

+b ,e'reciation %&'ense current #ear 2+000

Geginning etained %arnings S Co*'an#'revious #ear$s de'reciation e&'ense

2+000

%)ui'*ent net or Accu*ulated,e'reciation

+7000

o de'reciate the a*ount o( dierence bet!een cost and boo" valueallocated to e)ui'*ent.

his entr# diers (ro* the >rst #ear entr# in that the e&cess de'reciation(ro* the #ear 200+ is no! reHected in Geginning etained %arnings6 Co*'an#. Although the adjust*ent to %)ui'*ent net !as alread# *ade inthe 'rior #ear !or"'a'er (or one #ear$s de'reciation adjust*ent it !as not

'osted to the boo"s o( B Co*'an# and hence *ust be *ade again.


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he debit to the beginning retained earnings o( the 'arent co*'an# in 200;+000 W ;2+000 T ;77000 is e)ual to the a*ount b# !hichconsolidated net inco*e and consolidated retained earnings have beenreduced because o( the allocation and de'reciation o( the dierence bet!eencost and boo" value in the 200+ ;+0000 W ;2+000 T ;+000 and 2005;2+000 consolidated state*ents !or"'a'ers see illustration 565 also see

entries 3a and 3b in ned to acco**odate the eect o( the allocationand de'reciation o( the dierence bet!een cost and boo" value.

*onsolidated net income is the parent company7s income from itsindependent operations plus 2minus5 its share of reportedsusidiary income 2loss5 plus or minus ad!ustments for the periodrelating to the depreciation8amortization of the di9erence etweenmar'et and oo' value.

he calculation o( #ontrollin' an& non(#ontrollin' interests in #o!ine&in#o!e(or the #ear ended ,ece*ber 31 2005 'resented in


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Geginning Consolidated etained %arnings ;1717000lus: Consolidated Iet able intangibles arising in theac)uisition in its invest*ent account. hese adjust*ents *ust beacco*'lished through the use o( wor'paper entriesin the 're'aration o(the consolidated state*ents !or"'a'er.

o illustrate assu*e the (ollo!ing:

1. Co*'an# ac)uires an 70- interest in B Co*'an# on Qanuar# 1 200+(or ;2200000 at !hich ti*e B Co*'an# has ca'ital stoc" o(;1500000 and retained earnings o( ;500000. Co*'an# uses the'artial e)uit# *ethod to record its invest*ent in B Co*'an#.

2. he allocation o( the dierence bet!een cost and boo" value in thea*ount o( ;00000 ;2200000 6 .70;2000000P is as 'reviousl#'resented in


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Cash 2200000o record 'urchase o( 70- interest in B Co*'an#.

2 Cash 1000


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c assets and liabilities see rst #ear under a Drst6in >rst6out cost Ho!assu*'tion the inventor# !hich necessitated the ;+0000 adjust*ent !ouldhave been sold. ecall that at the date o( ac)uisition this adjust*ent !as torst #ear ho!ever the entr# is to Cost o( oods

Bold or to Geginning


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%)ui'*ent net ;2+0000 6 ;2+000 21000Land 120000ood!ill 200000


his co*bined entr# is not needed i( entries 2a and 2b are *ade

individuall#.

Ie&t the !or"'a'er entries to reverse the eect o( 'arent co*'an#entries during the #ear (or subsidiar# dividends and inco*e *a# bese'arated to record the reversal o( dividends in one entr# and the reversal o(inco*e in another as (ollo!s and as sho!n in ??5 9 "ea' Su!sequent to Acquisition = Pa'tia%Equit& 3etho

23


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Ie&t a consolidated state*ents !or"'a'er under the 'artial e)uit#*ethod (or the #ear ended ,ece*ber 31 2005 is 'resented in gure to balance the entr# and is e)ual to thea*ount o( the dierence bet!een cost and boo" value on the date o(ac)uisition. he a*ount does not change subse)uent to ac)uisition and *a#

be obtained (ro* the Co*'utation and Allocation Bchedule


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2a Geginning etained %arnings S Co*'an# 'rior#ear$s COB entr#

+0000

%)ui'*ent net 2+0000 Land 120000 ood!ill 200000 ,ierence Get!een Cost and Goo" Jalue 0000

o allocate the a*ount o( dierence bet!een cost and boo" value at date o(ac)uisition to s'eci>c assets and liabilities see rst #ear entr# in that the e&cess de'reciation(ro* the #ear 200+ is no! reHected in Geginning etained %arnings6 Co*'an#. Although the adjust*ent to %)ui'*ent !as alread# *ade in the'rior #ear !or"'a'er (or one #ear$s de'reciation adjust*ent it !as not'osted to the boo"s o( B Co*'an# and hence *ust be *ade again.


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PARTIAL E


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adjusted to reHect the allocation and de'reciation o( the dierences bet!eencost and boo" value.

=hen the 'arent accounts (or its invest*ent using the co*'lete e)uit#*ethod the 'arent records e&cess de'reciation arising in the ac)uisition inits invest*ent account. he inco*e state*ent eects are recorded asadjust*ents to the a*ount recognied as ?e)uit# in subsidiar# inco*e@ each

#ear. %ven under this *ethod ho!ever adjust*ents are needed to recordthe eects in the 'ro'er accounts (or the consolidated entit#. Dor e&a*'lethe account ?e)uit# in subsidiar# inco*e@ !ill be eli*inated in theconsolidated >nancial state*ents and the eects need to be sho!n directl#in ?de'reciation e&'ense.@ Bi*ilarl# the invest*ent account !ill beeli*inated and the adjust*ents (or an# dierences bet!een cost and boo"value need to be sho!n directl# in the a''ro'riate asset inventor# lande)ui'*ent good!ill etc. and/or liabilit# accounts. hese adjust*ents *ustbe acco*'lished through the use o( wor'paper entriesin the 're'arationo( the consolidated state*ents !or"'a'er.

o illustrate assu*e the (ollo!ing:

1. Co*'an# ac)uires an 70- interest in B Co*'an# on Qanuar# 1 200+(or ;2200000 at !hich ti*e B Co*'an# has ca'ital stoc" o(;1500000 and retained earnings o( ;500000. Co*'an# uses theco*'lete e)uit# *ethod to record its invest*ent in B Co*'an#.

2. he allocation o( the dierence bet!een cost and boo" value in thea*ount o( ;00000 ;2200000 6 .70;2000000P is as 'reviousl#'resented in


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3


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o allocate the a*ount o( dierence bet!een cost and boo" value at date o(ac)uisition to s'eci>c assets and liabilities see rst #ear under a Drst6in >rst6out cost Ho!assu*'tion the inventor# !hich necessitated the ;+0000 adjust*ent !ouldhave been sold. ecall that at the date o( ac)uisition this adjust*ent !as torst #ear ho!ever the entr# is to Cost o( oods

Bold or to Geginning


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Ie&t !e reverse the eect o( 'arent co*'an# entries during the #ear (orsubsidiar# dividends and inco*e. 9ere also entries *a# be co*bined orse'arated to record the reversal o( dividends in one entr# the reversal o(re'orted inco*e in a second entr# and the reversal o( adjust*ents tosubsidiar# inco*e in a third.

3a


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c assets and liabilities see


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ending retained earnings and in the invest*ent account. Gecause theinvest*ent account *ust be eli*inated in the consolidating 'rocess theentr# to COB is re'laced here and in (uture #ears b# an entr# ;+0000debit to


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CO3PLETE Er*reassesses the ade)uac# o( the ac)uired >r*$s accounting (or contingentliabilities 'urchase co**it*ents reserves etc. 'rior to its allocation o( an#dierence bet!een cost and boo" values. r* had 'reviousl# disclosed it onl# in a note becauseit !as dee*ed reasonabl# 'ossible but not 'robable. G# adjusting liabilitiesu'!ard the dierence to be allocated to assets and 'otentiall# to good!illis increased.

3+


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r*s have been criticied (or *ani'ulatingearnings to avoid recording good!ill the =alt ,isne# Co*'an# in itsac)uisition o( Ca'ital Cities/AGC !as accused b# so*e sources o( *anagingearnings via liabilities to record e%#essivegood!ill. he in#rease in re#or&e&liailitiesin such a case could be vie!ed as 'roviding a sort o( cushion or*anage*ent tool (or (uture earnings *ani'ulation.

In the News:?9o! did ,isne#$s accountants justi(# the creation o( that huge reserve S

justi(# adding so*e ;2.5 billion in liabilities to its balance sheetY %s'eciall#liabilities that +0 da#s be(ore hadn$t e&isted on Ca' Cities/AGC$s balancesheetY Gasicall# b# asserting that Ca' Cities/AGC$s accounting had ignoredthe i*'act o( ti*ing on antici'ated cash Ho!s (ro* (uture 'rogra**ing thatthe net!or" had agreed at least in 'art to >nancehe reason ,isne# !entout on a li*b to create its undisclosed reserve is clear enough: He&ibilit#. ts.@4

Allo#ation of i/eren#e etween +ost an& Boo0 alue to ,on'(Ter! et.Iotes 'a#able long6ter* debt and other obligations o( an ac)uired co*'an#should be valued (or consolidation 'ur'oses at their (air values. Fuoted*ar"et 'rices i( available are the best evidence o( the (air value o( the debt.


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Dro* the 'oint o( vie! o( the consolidated entit# bonds 'a#able areoverstated on Qanuar# 1 200+ b# ;4571 ;500000 6 ;+2+17+ and acorres'onding a*ount o( the total dierence bet!een cost and boo" value onthe date o( ac)uisition *ust be allocated to Zuna*ortied discount on bonds'a#able.Z rst >ve #ears subse)uent to Co*'an#Rs ac)uisition o( BCo*'an# are su**aried belo!.

Cost an Pa'tia% Equit& 3ethos

,ece*ber 31 200+ 2005 200 2004 2007

,ebit Credit ,ebit Credit ,ebit

Credit

,ebit Credit ,ebit

Credna*ortied,iscount

on Gonds a#able4571 4571 4571 4571

4571

,ierenceGet!een

Cost and Goo"Jalue

4571 4571 4571 4571 4571

Geginning etained%arnings 6 Co*'an#

Consolidatedetained %arnings

66066 12+17 2047 +110+ 5433


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nancial state*ents in 'rior #ears.


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values and boo" values o( identi>able assets and liabilities are 'resented inve#ears using the straight6line *ethod8and that the e)ui'*ent has are*aining li(e o( (our #ears.

(nd of rst year after ac0uisition 2wor'sheet entries5At the end o( the >rst #ear the !or"'a'er entries are:BLUE S;ADE

1 Becurities 120000Land 5+0000ood!ill 10000 %)ui'*ent net 200000 na*ortied re*iu* on Gonds a#able 100000 ,ierence Get!een Cost and Goo" Jalue 520000

o allocate the dierence bet!een cost and boo" value on the date o(ac)uisition

Iote that the assets accounts increased are recorded b# debits andthose decreased b# credits %)ui'*ent !hile a credit records an increase ina liabilit# increase in na*ortied re*iu* on Gonds a#able.

2 %)ui'*ent net 50000,e'reciation e&'ense 50000

o adjust de'reciation e&'ense do!n!ard ;200000/+ #ears.

8The straight-line method is illustrated here as a matter of expediency. Where differences between thestraight-line method and the effective interest rate method of amortization are material, the effectiveinterest rate method as shown in Illustration 5-! should be used.

37


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3 na*ortied 're*iu* on bonds 'a#able 20000


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inco*e that resulted (ro* the reduction o( de'reciation e&'ense ;50000and the reduction in interest e&'ense ;20000 in the 'rior #earRs !or"'a'er.nder the co*'lete e)uit# *ethod no such adjust*ent to retained earningsis needed since the 'arent$s retained earnings reHects accuratel# theconsolidated retained earnings each #ear.


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in the a''raisal re'ort. Alternativel# these a*ounts *a# be in(erred.


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Geginning etained %arnings 6 arent Co*'an# 0000 de'reciation e&'ense adjust*ent (or #ears 200+ and2005

ain on ,is'osal o( %)ui'*ent eli*inates gain alread#recorded

70000

Loss on ,is'osal o( %)ui'*ent creates loss account +000

0 ,ierence Get!een Cost and Goo" Jalue 17000

0

GL% B9A,%Co./%ete Equit& 3etho

ne*ents are o(ten ignored on the basis o(

*aterialit# and all the current #earRs additional de'reciation is charged tocost o( goods sold.

);S< =%$> A**%;>?I>@

)ush down accountingis the establish*ent o( a ne! accounting andre'orting basis (or a subsidiar# co*'an# in its se'arate >nancial state*entsbased on the 'urchase 'rice 'aid b# the 'arent co*'an# to ac)uire a

+2


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controlling interest in the outstanding voting stoc" o( the subsidiar# co*'an#.his accounting *ethod is re)uired (or the subsidiar# in so*e instances suchas in the ban"ing industr# an industr# over!hel*ed b# the (re)uenc# ande&tent o( *erger activit# in recent #ears.

he valuation i*'lied b# the 'rice o( the stoc" to the 'arent co*'an# isZ'ushed do!nZ to the subsidiar# and used to restate its assets including

good!ill and liabilities in its se'arate >nancial state*ents. nancial state*ents. Gecause 'ushdo!n accounting has not been addressed in authoritative 'ronounce*ents o(the DABG or its 'redecessors 'ractice has been inconsistent. Bo*e ac)uiredco*'anies have used a ne! 'ushed do!n basis and others in essentiall#the sa*e circu*stances have used 'reac)uisition boo" values.

A'(u.ents Fo' an A(ainst Push Do$n Accountin(ro'onents o( 'ush do!n accounting believe that a ne! basis o(

accounting should be re)uired (ollo!ing a 'urchase transaction that results ina signi>cant change in the o!nershi' o( a co*'an#Rs outstanding votingstoc". nancial state*ents. nancial state*ents *a# create 'roble*s indeter*ining or *aintaining co*'liance !ith various >nancial restrictionsunder debt agree*ents.

ush do!n accounting is an issue onl# i( the subsidiar# is re)uired to issuese'arate >nancial state*ents (or an# reason (or e&a*'le because o( the

+3


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e&istence o( noncontrolling interests or >nancial arrange*ents !ithnonaNliates. hree i*'ortant (actors that should be considered indeter*ining the a''ro'riateness o( 'ush do!n accounting are:

1. =hether the subsidiar# has outstanding debt held b# the 'ublic.2. =hether the subsidiar# has outstanding a senior class o( ca'ital stoc" not

ac)uired b# the 'arent co*'an#.3. he level at !hich a *ajor change in o!nershi' o( an entit# should bedee*ed to have occurred (or e&a*'le 100- 80- 51-.

ublic holders o( the ac)uired co*'an#Rs debt need co*'arative data toassess the value and ris" o( their invest*ents. hese 'ublic holders generall#have so*e e&'ressed or i*'lied rights in the subsidiar# that *a# beadversel# aected b# a ne! basis o( accounting. Bi*ilarl# holders o('re(erred stoc" 'articularl# i( the stoc" includes a 'artici'ation (eature *a#have their rights altered signi>cantl# b# a ne! basis o( accounting.

Jie!s on the 'ercentage level o( o!nershi' change needed to a''l# ane! basis o( accounting var#. Bo*e believe that the 'urchase o( substantiall#all the voting stoc" 80- or *ore should be the threshold level othersbelieve that the 'ercentage level o( o!nershi' change should be that needed(or control that is *ore than 50-. A related 'roble* involves the a*ountsto be allocated to the individual assets and liabilities noncontrolling interestand good!ill in the se'arate state*ents o( the subsidiar#. Bo*e believe thatvalues should be allocated on the basis o( the (air value o( the subsidiar# as a!hole i*'uted (ro* the transaction. hus i( 70- o( the voting stoc" isac)uired (or ;32 *illion the (air value o( the net assets should be i*'uted tobe ;+0 *illion ;32 *illion/.70 and values allocated on that basis. Othersbelieve that values !ould be allocated on the basis o( the 'ro'ortionalinterest ac)uired. he# believe that ne! values should be reHected on the

boo"s o( the subsidiar# onl# to the e&tent o( the 'rice 'aid in the transaction.hus i( 70- o( a co*'an# is ac)uired (or ;32 *illion the basis o( thesubsidiar#Rs net assets should be adjusted b# the dierence bet!een the'rice 'aid and the boo" value o( an 70- interest. his latter a''roach !illresult in the assign*ent o( the sa*e values to assets and liabilities on theboo"s o( the subsidiar# as that 'reviousl# illustrated in the !or"'a'er entr#to allocate the dierence bet!een cost and boo" value in the consolidatedstate*ents !or"'a'er.

STATUS OF PUS; DOWN ACCOUNTIN:

he as" Dorce on Consolidation roble*s Accounting Btandards ,ivision

o( the A


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'urchase transactions. he B%C believes that 'urchase transactions thatresult in an entit# beco*ing substantiall# !holl# o!ned as de>ned inegulation B6 V should establish a ne! basis o( accounting (or the 'urchasedassets and liabilities. =hen the (or* o( o!nershi' is !ithin the control o( the'arent co*'an# the basis o( accounting (or 'urchased assets and liabilitiesshould be the sa*e regardless o( !hether the entit# continues to e&ist or is

*erged into the 'arent co*'an#Rs o'erations. As a (ene'a% 'u%e@ the SEC'equi'es /ush o$n accountin( $hen the o$ne'shi/ chan(e is('eate' than 5 an o!4ects to /ush o$n accountin( $hen theo$ne'shi/ chan(e is %ess than G?H


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nancial state*ents on,ece*ber 31 200+ under 'ush do!n accounting is 'resented in


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reHecting the decision to 'ush do!n the (ull value o( B Co*'an# i*'lied b#the a*ount 'aid b# Co*'an# (or its 70- interest. his a*ount can beveri>ed as (ollo!s:

he noncontrolling interestRs share o( revaluation ca'ital.20;450000

;150000

Less: de'reciation thereon .20;70000 1000Galance ;13+000

Iote also that no !or"'a'er entries !ere necessar# in rst to adjust the individual assets and liabilities totheir (air values on the date o( ac)uisition. able assets less liabilities the residual a*ount !ill be

positivea debit balance. A 'ositive residual dierence is evidence o( anuns'eci>ed intangible and is accounted (or as good!ill.2. 7%plain how any e%#ess of fair value over a#"uisition #ost of net assets isallo#ate& to re&u#e the susi&iary2s assets an& liailities in the #ase ofar'ain pur#hases. =hen the 'urchase 'rice ac)uisition cost is belo! theaggregate (air value o( identi>able assets less liabilities the residual a*ount!ill be negative a credit balance. A negative residual dierence is evidenceo( a bargain 'urchase !ith the dierence bet!een ac)uisition cost and (air

value designating the a*ount o( the bargain. =hen a bargain ac)uisitionoccurs so*e o( the ac)uired assets *ust be reduced belo! their (air values.B'eci>call# long6lived assets other than invest*ents in *ar"etablesecurities are recorded at (air *ar"et value *inus an adjust*ent (or thebargain.


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subsidiar# inco*e on its boo"s.


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o( the 'arent co*'an#Rs share o( the dierence bet!een the (air value andthe boo" value o( the asset !ill result in a reduction o( the asset.

Ch5 _ Important

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