Topic outline

  • COURSE DESCRIPTION

    AKL1This course discusses business combinations, the equity and cost methods of accounting for investment in common stock, and consolidated financial statements. It also discusses the accounting of derivative and foreign currency transaction.

    • OBJECTIVES Page

      After studying this course student should be able to :

      1. Understand the essence of business combination and properly account for variety of business combination transaction.
      2. Properly account for the stock stock acquisition by investor
      3. Understand the consolidated balance sheet at the date of stock acquisition and after stock acquisition, consolidated income statement.
      4. Understand the consolidation techniques and procedures under the equity method.
      5. Properly account for the intercompany profit transaction (inventories , plant assets and bond), changes in ownership interests, indirect and mutual holdings, subsidiary preferred
      6. stock, subsidiary convertible bonds.
      7. Understand the consolidated earning per share, consolidated income taxation, push-down accounting, and corporate joint venture.
      8. Understand and properly account for derivatives and foreign currency transactions.

    • TEXTBOOK AND OTHER REQUIRED MATERIALS Page
      Main Reference :

      Floyd A. Beams 2015 edisi 12, Joseph H. Anthony, Robin P. Clement, and Suzanne H. Lowensohn (2009), Advance Accounting, 10 th Edition, Pearson Prentice Hall.

      Additional Reference :

      PSAK, IFRS

  • Topic 1

    Business Combinations
    • Reason for Business Combinations
    • Antitrust Considerations
    • The Legal Form of Business Combinations
    • The Accounting Concept of Business Combinations
    • Accounting for Business Combinations under the Acquisition Method
    • Disclosure Requirements

  • Topic 2

    Accounting for Business Combinations

    1. Describe the major changes in the accounting for business combinations passed by the FASB in December 2007, and the reasons for those changes.
    2. Describe the two major changes in the accounting for business combinations approved by the FASB in 2001, as well as the reasons for those changes.
    3. Discuss the goodwill impairment test described in SFAS No. 142 [ASC 350–20–35], including its frequency, the steps laid out in the new standard, and some of the likely implementation problems.
    4. Explain how acquisition expenses are reported.
    5. Describe the use of pro forma statements in business combinations.
    6. Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method.
    7. Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method.
    8. Describe a leveraged buyout.
    9. Describe the disclosure requirements according to Current GAAP related to each business combination that takes place during a given year.
    10. Describe at least one of the differences between U.S. GAAP and IFRS related to the accounting for business combinations.


  • Topic 3

    Consolidated Financial Statements—Date of Acquisition

    1. Understand the concept of control as used in reference to consolidations.
    2. Explain the role of a noncontrolling interest in business combinations.
    3. Describe the reasons why a company acquires a subsidiary rather than its net assets.
    4. Describe the valuation and classification of accounts in consolidated financial statements.
    5. List the requirements for inclusion of a subsidiary in consolidated financial statements.
    6. Discuss the limitations of consolidated financial statements.
    7. Record the investment in the subsidiary on the parent’s books at the date of acquisition.
    8. Prepare the consolidated workpapers and eliminating entries at the date of acquisition.
    9. Compute and allocate the difference between implied value and book value of the acquired firm’s equity.
    10. Discuss some of the similarities and differences between U.S. GAAP and IFRS with respect to the preparation of consolidated financial statements at the date of acquisition.

  • Topic 4

    Consolidated Financial Statements After Acquisition

    1. Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors.
    2. Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method.
    3. Understand the use of the workpaper in preparing consolidated financial statements.
    4. Prepare a schedule for the computation and allocation of the difference between implied and book values.
    5. Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods.
    6. Describe two alternative methods to account for interim acquisitions of subsidiary stock at the end of the first year.
    7. Explain how the consolidated statement of cash flows differs from a single firm’s statement of cash flows.
    8. Understand how the reporting of an acquisition on the consolidated statement of cash flows differs when stock is issued rather than cash.
    9. Describe some of the differences between U.S. GAAP and IFRS in accounting for equity investments.

  • Topic 5

    Allocation and Depreciation of Differences Between Implied and Book Values Acquisition

    1. Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.
    2. Describe FASB’s position on accounting for bargain acquisitions.
    3. Explain how goodwill is measured at the time of the acquisition.
    4. Describe how the allocation process differs if less than 100% of the subsidiary is acquired.
    5. Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.
    6. Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment using the cost, the partial equity, and the complete equity methods.
    7. Understand the allocation of the difference between implied and book values to long-term debt components.
    8. Explain how to allocate the difference between implied and book values when some assets have fair values below book values.
    9. Distinguish between recording the subsidiary depreciable assets at net versus gross fair values.
    10. Understand the concept of push down accounting.


  • Topic 6

    Elimination of Unrealized Profit on Intercompany Sales of Inventory

    1. Describe the financial reporting objectives for intercompany sales of inventory.
    2. Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements.
    3. Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position.
    4. Distinguish between upstream and downstream sales of inventory.
    5. Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders.
    6. Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.
    7. Discuss the treatment of intercompany profit earned prior to the parent subsidiary affiliation.

  • Topic 7

    Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment

    1. Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements.
    2. Explain the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.
    3. Explain when gains or losses on intercompany sales of depreciable assets should be recognized on a consolidated basis.
    4. Explain the term “realized through usage.”
    5. Describe the differences between upstream and downstream sales in determining consolidated net income and the controlling and noncontrolling interests in consolidated income.
    6. Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company.
    7. Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.
    8. Compute consolidated net income considering the effects of intercompany sales of depreciable assets.
    9. Describe the eliminating entry needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.
    10. Explain the basic principles used to record or eliminate intercompany interest, rent, and service fees.


  • Topic 8

    Changes in Ownership Interest

    1. Identify the types of transactions that change the parent company’s ownership interest in a subsidiary.
    2. Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases.
    3. Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition.
    4. Compute the controlling interest in income after the parent sells some shares of the subsidiary company.
    5. Describe the effect on the eliminating process when the subsidiary issues new shares entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
    6. Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders.

  • Topic 9

    Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements

    1. Describe the term “constructive retirement of debt.”
    2. Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.
    3. Explain the impact on the consolidated financial statements when a company issues a note to an affiliated company, which then discounts the note with an outside company.
    4. Determine the effect on the consolidated financial statements when a subsidiary issues a stock dividend.
    5. Understand the difference in how stock dividends and cash dividends issued by a subsidiary company affect the consolidated financial statements.
    6. Determine the impact on the investment account when a subsidiary issues a stock dividend from preacquisition earnings and from postacquisition earnings.
    7. Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding. Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary