CHAPTER 03

CONSOLIDATIONSSUBSEQUENT TO THE
DATE OF ACQUISITION
I.

Several factors serve to complicate the consolidation process when it

occurs subsequent to the date of acquisition. In all combinations within
its own internal records the acquiring company will utilize a specific
method to account for the investment in the acquired company.
A. Three alternatives are available
1. Initial value method (formerly called the cost method) b.
2. Equity method
3. Partial equity method
B. Depending upon the method applied, the acquiring company will
record earnings from its ownership of the acquired company. This
total must be eliminated on the consolidation worksheet and be
replaced by the subsidiarys revenues and expenses.
C. Under each of these three methods, the balance in the Investment
account will also vary. It too must be removed in producing
consolidated statements and be replaced by the subsidiarys assets
and liabilities.

II.

For combinations subsequent to the acquisition date, certain

procedures are required. If the parent applies the equity method, the
following process is appropriate.
A. Assuming that the acquisition was made during the current fiscal
period
1. The parent adjusts its own Investment account to reflect the
subsidiarys income and dividend payments as well as any
amortization expense relating to excess acquisition-date fair
value over book value allocations and goodwill.
2. Worksheet entries are then used to establish consolidated figures
for reporting purposes.
a. Entry S offsets the subsidiarys stockholders equity
accounts against the book value component of the
Investment account (as of the acquisition date)
b. Entry A recognizes the excess fair over book value
allocations made to specific subsidiary accounts and/or to
goodwill
c. Entry I eliminates the investment income balance
accrued by the parent
d. Entry D removes intercompany dividend payments
e. Entry E records the current excess amortization expenses
on the excess fair over book value allocations.
f. Entry P eliminates any intercompany payable/receivable
balances.

III.

B. Assuming that the acquisition was made during a previous fiscal

period
1. Most of the consolidation entries described above remain
applicable regardless of the time that has elapsed since the
combination was formed.
2. The amount of the subsidiarys stockholders equity to be
removed in Entry S will differ each period to reflect the balance
as of the beginning of the current year
3. The allocations established by entry A will also change in each
subsequent consolidation. Only the unamortized balances
remaining as of the beginning of the current period are
recognized in this entry.III.
For a combination where the parent has applied an accounting method
other than the equity method, the consolidation procedures described
above must be modified
A. If the initial value method is applied by the parent company, the
intercompany dividends eliminated in Entry I will only consist of the
dividends transferred from the subsidiary. No separate Entry D is
needed.
B. If the partial equity method is in use, the intercompany income to
be removed in Entry I is the equity accrual only; no amortization
expense is included. Intercompany dividends are eliminated through
Entry D.
C. In any time period after the year of acquisition.
1. The initial value method recognizes neither income in excess of
dividend payments nor excess amortization expense. Thus, for
all years prior to the current period, both of these figures must
be entered directly into the consolidation. Entry*C is used for
this purpose; it converts all prior amounts to equity method
balances.
2. The partial equity method does not recognize excess
amortization expenses. Therefore, Entry*C converts the
appropriate account balances to the equity method by
recognizing the expense that relates to all of the past years.

IV.

Bargain purchases
A. As discussed in Chapter Two, bargain purchases occur when the
parent company transfers consideration less than net fair values of
the subsidiarys assets acquired and liabilities assumed.
B. The parent recognizes an excess of net asset fair value over the
consideration transferred as a gain on bargain purchase.

V.

Goodwill Impairment
A. When is goodwill impaired?
1. Goodwill is considered impaired when the fair value of its related
reporting unit falls below its carrying value. Goodwill should not

be amortized, but should be tested for impairment at the

reporting unit level (operating segment or lower identifiable
level).
2. Goodwill should be tested for impairment at least annually.
3. Interim impairment testing is necessary in the presence of
negative indicators such as an adverse change in the business
climate or market, legal factors, regulatory action, an
introduction of competition, or a loss of key personnel.
B. How is goodwill tested for impairment?
1. All acquired goodwill should be assigned to reporting units. It
would not be unusual for the total amount of acquired goodwill to
be divided among a number of reporting units. Goodwill may be
assigned to reporting units of the acquiring entity that are
expected to benefit from the synergies of the combination even
though other assets or liabilities of the acquired entity may not
be assigned to that reporting unit.
2. Goodwill is tested for impairment using a two-step approach.
a. The first step simply compares the fair value of a
reporting unit to its carrying amount. If the fair value of
the reporting unit exceeds its carrying amount, goodwill is
not considered impaired and no further analysis is
necessary.
b. The second step is a comparison of goodwill to its
carrying amount. If the implied value of a reporting units
goodwill is less than its carrying value, goodwill is
considered impaired and a loss is recognized. The loss is
equal to the amount by which goodwill exceeds its
implied value.
3. The implied value of goodwill should be calculated in the same
manner that goodwill is calculated in a business combination.
That is, an entity should allocate the fair value of the reporting
unit to all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination and the fair value of the
reporting unit was the value assigned at a subsidiarys
acquisition date. The excess acquisition-date fair value over
the amounts assigned to assets and liabilities is the implied
value of goodwill. This allocation is performed only for purposes
of testing goodwill for impairment and does not require entities
to record the step-up in net assets or any unrecognized
intangible assets.
C. How is the impairment recognized in financial statements?
1. The aggregate amount of goodwill impairment losses should be
presented as a separate line item in the operating section of the
income statement unless a goodwill impairment loss is
associated with a discontinued operation.

2. A goodwill impairment loss associated with a discontinued

operation should be included (on a net-of-tax basis) within the
results of discontinued operations.
VI.

Contingent consideration
A. The fair value of any contingent consideration is included as part of
the consideration transferred.
B. If the contingency results in a liability (typically a cash payment),
changes in the fair value of the contingency are recognized in
income as they occur.
C. If the contingency calls for an additional equity issue at a later date,
the acquisition-date fair value of the contingency is not adjusted
over time. Any subsequent shares issued as a consequence of the
contingency are simply recorded at the original acquisition-date fair
value. This treatment is similar to other equity issues (e.g., common
stock, preferred stock, etc.) in the parents owners equity section.

VII.

Push-down accounting
A. A subsidiary may record any acquisition-date fair value allocations
directly onto its own financial records rather than through the use of
a worksheet. Subsequent amortization expense on these allocations
could also be recorded by the subsidiary.
B. Push-down accounting reports the assets and liabilities of the
subsidiary at the amount the new owner paid. It also assists the
new owner in evaluating the profitability that the subsidiary is
adding to the business combination.
C. Push-down accounting can also make the consolidation process
easier since allocations and amortization need not be included as
worksheet entries.