Consolidating subsidiaries with different year ends
When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company.
Control in this context is defined as ability to direct policies and management.
Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.
Consolidated financial statements show the parent and the subsidiary as one single entity.
During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account.
The purchasing company uses the cost method to account for this type of investment.
Impairment loss : An impairment loss occurs when there is a decline in the value of the investment other than temporary.The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.Liquidating dividends : Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition.Treatment to the acquired company: The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock.FASB 141 Disclosure Requirements: FASB 141 requires disclosures in the notes of the financial statements when business combinations occur.