Chapter 4 - In Class Notes

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University of Notre Dame *

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Accounting

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Nov 24, 2024

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chapter 3 (recap) 2 business combination a) purchasing the net asset of the acquiree b) purchasing the share of the acquiree looking at the 100% ownership (wholly subsidiary) at chapter 4, we will be learning - parent owns less 100% of the sub (non-wholly subsidiary) parent acquired 80% of the subsidiary but IFRS requires consolidation at 100% we will need to show the 20% (Non-controlling interest - NCI) 2 questions a) how do we calculate the NCI b) how do we report on the consolidated statement of financial position IFRS will allow the following methods a) FVE (Fair value enterprise) NCI will be reported as part equity section! b) INA (identifiable net asset) NCI will be reported as part equity section! Fair value enterprise under FVE method, depending on the information given you will have the following 2 approaches! a) implied value approach - NCI will be estimated based on the fair value of the acquisition (80%) (20%) (100%) parent NCI Total Acquisition cost (80%) 72,000 72,000 NCI at 20% 18,000 18,000 72,000 18,000 90,000 Carrying value of the sub c/s 40,000 r/e 30,000 70,000 56,000 14,000 70,000 Acquisition differential 16,000 4,000 20,000 FV diff to net iden. Asset Inventory 2,000 Plant 9,000 patent - 1,000 LTD - 3,000 7,000 5,600 1,400 7,000 Goodwill 10,400 2,600 13,000 Consolidated goodwill that shows on the SFP is gonna be $13,000

we will now prepare the consolidated Statement of financial position immediately at the date of acquisition line by line adjustment Parent carrying value + Sub carrying value +/- adjustment Parent Company Consolidated Statement of Financial Position AS of June 30, Year 1 Cash ($100,000 + $12,000 - $72,000 purchase) 40,000 A/R ($90,000 + $7,000) 97,000 Inventory ($130,000 + $20,000 + $2,000) 152,000 Plant (280,000 + 50,000 + 9000) 339,000 Patent (0 + 11,000 - 1,000) 10,000 Inv in Sub (72,000 + 0 -72,000) - Goodwill 13,000 total 651,000 CL (60,000 + 8,000) 68,000 LTD (180,000 +22,000 + 3,000) 205,000 C/s (parent) 200,000 R/E (parent) 160,000 NCI 18,000 Total 651,000

FVE - 2nd approach. the share price of the remaining shares that were not purchased by the parent is available!! we will be looking at the share price… NCI will be calculated based on the share price assume the remaining share was trading at $7.75 per share (after few weeks) (80%) (20%) (100%) parent NCI Total Acquisition cost (80%) 72,000 72,000 NCI at (2,000 units x $7.75) 15,500 15,500 72,000 15,500 87,500 Carrying value of the sub c/s 40,000 r/e 30,000 70,000 56,000 14,000 70,000 Acquisition differential 16,000 1,500 17,500 FV diff to net iden. Asset Inventory 2,000 Plant 9,000 patent - 1,000 LTD - 3,000 7,000 5,600 1,400 7,000 Goodwill 10,400 100 10,500 Parent Company Consolidated Statement of Financial Position AS of June 30, Year 1 Cash ($100,000 + $12,000 - $72,000 purchase) 40,000 A/R ($90,000 + $7,000) 97,000 Inventory ($130,000 + $20,000 + $2,000) 152,000 Plant (280,000 + 50,000 + 9000) 339,000 Patent (0 + 11,000 - 1,000) 10,000 Inv in Sub (72,000 + 0 -72,000) - Goodwill 10,500 total 648,500 CL (60,000 + 8,000) 68,000 LTD (180,000 +22,000 + 3,000) 205,000 C/s (parent) 200,000 R/E (parent) 160,000 NCI 15,500 Total 648,500

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Identifiable Net Asset Method argument - we should not have goodwill that include the NCI portion!!!! INA method, the NCI will be evaluated based on the fair value of the net identifiable asset we will have the following ways to calculate 1) Total fair value of the asset - total fair value of the liablities 2) Sub's net asset +/- FV difference 2) approach will be preferred! Sub's net asset C/S 40,000 R/E 30,000 70,000 FV difference Inventory 2,000 Plant 9,000 patent - 1,000 LTD - 3,000 Fair value of iden asset 77,000 NCI % 20% NCI 15,400 (80%) (20%) (100%) parent NCI Total Acquisition cost (80%) 72,000 72,000 NCI at 20% 15,400 15,400 72,000 15,400 87,400 Carrying value of the sub c/s 40,000 r/e 30,000 70,000 56,000 14,000 70,000 Acquisition differential 16,000 1,400 17,400 FV diff to net iden. Asset Inventory 2,000 Plant 9,000 patent - 1,000 LTD - 3,000 7,000 5,600 1,400 7,000 Goodwill 10,400 - 10,400 Parent Company Consolidated Statement of Financial Position

AS of June 30, Year 1 Cash ($100,000 + $12,000 - $72,000 purchase) 40,000 A/R ($90,000 + $7,000) 97,000 Inventory ($130,000 + $20,000 + $2,000) 152,000 Plant (280,000 + 50,000 + 9000) 339,000 Patent (0 + 11,000 - 1,000) 10,000 Inv in Sub (72,000 + 0 -72,000) - Goodwill 10,400 total 648,400 CL (60,000 + 8,000) 68,000 LTD (180,000 +22,000 + 3,000) 205,000 C/s (parent) 200,000 R/E (parent) 160,000 NCI 15,400 Total 648,400 FVE vs INA it will only impact the NCI value and the Goodwill Goodwill under the FVE contains both the Parent and NCI Goodwill under the INA contains only Parent NCI under the FVE - it contains the goodwill value NCI under the INA - it does not the goodwill value

When subs has it existing goodwill at the of the acquistion, you will simply remove the sub's existing goodwill in the net asset calculation of thesub carrying value C/S 40,000 R/E 30,000 Less: sub existing goodwill - 11,000 59,000 chapter 5 - we will take a look at the amortization of the acq differential!

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Problem 4-9 Part a) we will use the INA we will need to calculate the NCI based on the fV of the net ident. Asset Sub's Net asset C/S 46,600 R/E - 13,750 net asset value of the sub 32,850 FV diff of the net iden. Asset Plant - 5,950 LTD 3,400 FV of the net asset 30,300 NCI % 30% NCI 9,090 Parent (70%) NCI (30%) Total (100%) Acquisition cost (497 shares x 40/share 19,880 19,880 NCI 9,090 9,090 total 19,880 9,090 28,970 Carrying value of the sub c/s 46,600 R/E - 13,750 32,850 22,995 9,855 32,850 Acq differential - 3,115 - 765 - 3,880 FV difference Plant - 5,950 LTD 3,400 - 2,550 - 1,785 - 765 - 2,550 negative goodwill - 1,330 the negative goodwill will be added to the r/E negative goodwill is treated as gain on purchase Journal entry Investment in sub 19,880 common share 19,880 (cost method to record the investment in sub) acquisition expense 2,590 Cash 2,590 Common share 1,780 Cash 1,780 E Ltd Consolidated Balance Sheet

as of Dec 31, Year 6 Parent Sub Adj adj Cash | A/R 96,450 20,400 - 2,590 - 1,780 Inventory 57,900 9,450 Plant asset 229,800 71,400 - 5,950 Intangible asset 24,450 6,900 Investment in sub 19,880 - - 19,880 Total Current liabilities 63,900 30,100 LTD 98,400 45,200 - 3,400 C/s 154,800 46,600 - 46,600 19,880 R/E 91,500 - 13,750 13,750 1,330 NCI - - 9,090

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adj total 112,480 67,350 295,250 31,350 - 506,430 94,000 140,200 - 1,780 172,900 - 2,590 90,240 9,090 506,430

Problem 4-9 Part b - using the FVE since the share price of the sub is not given, we will use the implied value approach Parent (70%) NCI (30%) Total (100%) Acquisition cost (497 shares x 40/share 19,880 19,880 NCI (30%) 8,520 8,520 Total 28,400 Carrying value of the sub c/s 46,600 R/E - 13,750 32,850 22,995 9,855 32,850 Acq differential - 22,995 - 9,855 - 4,450 FV difference Plant - 5,950 LTD 3,400 - 2,550 - 1,785 - 765 - 2,550 negative goodwill - 1,900 E Ltd Consolidated Balance Sheet as of Dec 31, Year 6 Parent Sub Adj adj Cash | A/R 96,450 20,400 - 2,590 - 1,780 Inventory 57,900 9,450 Plant asset 229,800 71,400 - 5,950 Intangible asset 24,450 6,900 Investment in sub 19,880 - - 19,880 Total Current liabilities 63,900 30,100 LTD 98,400 45,200 - 3,400 C/s 154,800 46,600 - 46,600 19,880 R/E 91,500 - 13,750 13,750 1,900 NCI - - 8,520