1、1Required Readings:Chapter 111.Alternative Consolidation Theories11.Parent company theory 1)characteristics assumption:CFS are an extension of Ps financial statements CFS are prepared for the benefit of Ps stockholders2 NCI is a liability,and NCI share is an expense2)comments inconsistent valuation
2、conflict with definitions of liability and expense 12.Entity theory(Contemporary theory)1)characteristics CFS reflect the viewpoint of the total business entity all resources controlled by the entity are valued consistently 3 NCI is a part of consolidated stockholders equity NCI share is an allocati
3、on of consolidated NI2)comments validity of consolidated concept consistent valuation of Ss net assets recognition of implied goodwill:conflict with GAAP13.Traditional theory compromise of parent company and entity theory42)other dif.among consolidation theories working paper entries reporting forma
4、ts(B/S,I/S)*note:the consolidation theories do not affect Ps accounting under the equity method3)illustration(p.402-411)2.Restructuring and Push-down Accounting21.Restructuring5 a change in financial structure or ownership:mergers and acquisitions leveraged buyouts(LBO)re-capitalization(reorganizati
5、on and quasi-)any major change in the character and amount of the outstanding capital stock or paid-in surplus of a corporation,including the absorption therein of a deficit buybacks of a corporations own stock spin-offs:transfer of assets;property dividend sell-offs:sell at a reduced price6resource
6、s2)organizational structures(p.*the purchase transaction between P and S oldreport their investments as equity investments elimination of R.2)organizational structures(p.*to share in the risks and rewards of undertakings assumption:CFS are an extension of Ps NCI is a part of consolidated stockholder
7、s equity1)condition for inclusion in CFSRequired Readings:Chapter 11FASB Interpretation No.illustration(p.sell-offs:sell at a reduced price2)commentsresources*to share in the risks and rewards of undertakings proponents:the price paid by the new owners to increase stock price(LBO,buybacks)to increas
8、e profitability(then go public)(sell-offs,re-capitalization)22.Push-down accounting1)definition(p.411)The SEC requires the use of push-down accounting for the SEC filings when a subsidiary is substantially wholly owned(97%)with no substantial public held debt or preferred stock outstanding.2)S accou
9、nting procedures7 elimination of R.Es to zero push-down capital set up 3)controversies proponents:the price paid by the new owners provides the most relevant basis for measuring the S assets,liabilities and results of operations critics:*the purchase transaction between P and S old stockholders does
10、 not justify a new accounting basis for S.8basis for S.46(R):Consolidation of Variable Interest entitiesfinancial statements undivided interestComparison of consolidation theories1)exhibit 11-1(p.1)off-balance sheet treatment18:Investors that can participate inParent company theory2)unincorporated j
11、oint ventures APB Opinion No.Restructuring and Push-down Accounting joint venturers S would have to be consolidated under the provision of FASB No.-measure and consolidate based on the fair values of assets,liabilities and noncontrolling interest at the date it becomes the primary beneficiary 3)disc
12、losure(p.18 addresses the applicability(this is proportionate consolidation method)2)other dif.3)controversies assumption:CFS are an extension of Ps1)definition(p.4)consolidation procedures if push-down accounting is applied to S,the consolidation process is simplified.5)illustration(p.412-416)3.Joi
13、nt Ventures31.Nature of Joint ventures1)characteristics each venturer is active in the management important decisions require consent of each v.9 temporary and relatively permanent objectives*to share in the risks and rewards of undertakings*to combine technology,markets,and human resources2)organiz
14、ational structures(p.392)corporate joint venture general partnership limited partnership undivided interest10 APB No.18:Investors that can participate in the management of a corporate JV should report their investments as equity investments If no significant influence over its JV investee for whatev
15、er reason,cost method is applied.an investment in the common stock of a corporate JV that exceeds 50%of the outstanding shares is a subsidiary investment.joint venturers S would have to be consolidated under the provision of FASB No.94 and 141 R.11 of Opinion No.18 to investments in partnerships and
16、 undivided interests in JV Opinion No.18 do not apply in some special industries(e.g.oil and gas)in which the investor-venturer accounts for its pro rata share of the assets,liabilities,revenues,and expenses of JV in its own financial statements.(this is proportionate consolidation method)illustrati
17、on(p.421-422)4.Accounting for variable interest entities(VIEs)41.Special purpose entitye.g.employee benefit plans(pension funds or other postretirement-benefit plan)1)off-balance sheet treatment separate account not included as part of CFS SPE deemed qualifying entities are excluded from consolidati
18、on under FASB Statement No.140.Life insurance companies are permitted to exclude certain accounts from consolidation2)SEC:Enron Corporation misleading investors42.FASB Interpretation No.46(R):Consolidation of Variable Interest entities1)condition for inclusion in CFS financial control exists because
19、 of contractual and financial arrangements other than ownership of voting interests2)Example:Disney(p.423)43.Identifying variable interest entities1)definition contractual,ownership,or other pecuniary interests in an entity that change with changes in the fair value of the entitys net assets exclusive of variable interests
