Chapter 5 Steps Preparing Consolidated FS PDF

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Chapter 5: Steps to prepare consolidated F/S subsequent to acquisition date

Chapter 5 Steps to prepare consolidated financial statements subsequent to acquisition date Assumptions: acquisition method for consolidation, fair value enterprise (FVE) method for valuation of subsidiary, and cost method for parent’s separate entity financial statement. 1. Calculate and allocate the acquisition differential at acquisition date (discussed in Chapter 4). 2. Prepare Changes to Acquisition Differential Schedule from acquisition date to present consolidated financial statements date (e.g., Exhibit 5.14 page 234). 3. Calculate consolidated net income – current year (e.g., Exhibit 5.14 Section 2, page 234). Parent’s current year net income - Dividend income from subsidiary if any +Subsidiary’s current year net income - Changes in acquisition differential during current year (check step 2) =Consolidated net income Attributable to Parent and NCI respectively 4. Prepare the consolidated income statement – current year (e.g., Exhibit 5.15 Section 1, page 236). a. Combine revenues and expenses of both parent and subsidiary on an item-by-item basis. b. Eliminate dividend income from subsidiary if any. c. Adjust changes in acquisition differential based on calculations in Step 2. d. Allocate consolidated net income between parent and NCI 5. Prepare the consolidated retained earnings statement It starts with calculating current-year’s beginning balance of consolidated retained earnings (e.g., Exhibit 5.14 Section 3, page 235.) Parent’s retained earnings at the beginning of current year +increase/-decrease of subsidiary’s retained earnings from acquisition date to the beginning of current year * parent’s ownership - accumulated changes in acquisition differential from acquisition date to the beginning of current year (check step 2) * parent’s ownership =Consolidated retained earnings at the beginning of current year Then prepare consolidated statement of retained earnings (e.g., Exhibit 5.15 Section 2, page 236).

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Chapter 5: Steps to prepare consolidated F/S subsequent to acquisition date

Consolidated retained earnings at beginning of current year (refer to formula above) +current year’s net income attributable to parent - parent’s current year dividend =Consolidated retained earnings at end of current year *If required to calculate the balance of consolidated retained earnings at the end of current year instead of preparing consolidated statement of retained earnings, use the following formula: Parent’s retained earnings at the end of current year +increase/-decrease of subsidiary’s retained earnings from acquisition date to the end of current year * parent’s ownership - accumulated changes in acquisition differential from acquisition date to the end of current year (check step 2) * parent’s ownership =Consolidated retained earnings at the end of current year 6. Calculate NCI at the end of current-year for preparing consolidated balance sheet Method 1 (e.g., Exhibit 5.14 Section 4, page 235) Subsidiary’s shareholders’ equity at the end of current year * NCI’s ownership + remaining acquisition differential at the end of current year (check step 2) * NCI’s ownership =NCI at the end of current year Method 2 (e.g., Additional Calculations, page 237) NCI at acquisition date +increase/-decrease in Subsidiary’s retained earnings (from acquisition date to currentyear end) * NCI’s ownership - accumulated changes in acquisition differential from acquisition date to the end of current year (check step 2) * NCI’s ownership =NCI at the end of current year 7. Prepare a consolidated balance sheet – current year end (e.g., Exhibit 5.15 Section 3, page 236). a. Eliminate parent’s investment in subsidiary and subsidiary’s shareholder’s equity items. b. Combine the remaining balance sheet items of both parent and subsidiary on an itemby-item basis. c. Adjust items with fair value excess based on remaining acquisition differential and setup goodwill account if any (check Step 2) d. Adjust retained earnings (check Step 5). e. Set up NCI account for non-100% control (check Step 6)

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