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ACCT2542 Lecture Notes - Lecture 4: Contingent Liability, Financial Statement

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School
UNSW, UNSW Sydney
Department
Accounting
Course
ACCT2542
Professor
All

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Document Summary

Entities try to maximise profit by seeking opportunities to expand. Expansion may take two forms: acquiring additional assets (e. g. ppe and intangibles, acquiring additional business(es) - utilise synergies. Directly by acquiring assets/liabilities constituting a business. Indirectly by acquiring sufficient shares (equity) in an entity to obtain control, which gives rise to a relationship between a controlling entity (the parent) and the controlled entities (subsidiaries). An acquisition in which the acquirer purchases assets, and possibly assumes liabilities, of the acquiree, and subsequently recognises these assets and liabilities in its own accounts. The firm has to account for purchase of a& l in its own account. Involves the preparation of a single set of financial statements. Involves combining the financial statements of the individual entities in a group line-by-line method. So that they show the financial position and financial performance of the group of entities. Presented as if they were a single economic entity.

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Related Questions

In considering its proposed statement of financial accountingstandards on business combinations, the FASB received numerouscomment letters. Many of these letters addressed the FASB'sproposed adoption of the economic unit concept as a valuation basisfor less-than-100-percent acquisitions. A sampling of these lettersincludes the following observations:

•Bob Laux, Microsoft: Microsoft agrees with the Board that theprinciples underlying standards should strive to reflect theunderlying economics of transactions and events. However, we do notbelieve the Board's conclusion that recognizing the entire economicvalue of the acquiree, regardless of the ownership interest in theacquiree at the acquisition date, reflects the underlyingeconomics.

•Patricia A. Little, Ford Motor Company: We agree thatrecognizing 100 percent of the fair value of the acquiree isappropriate. We believe that this is crucial in erasing anomalieswhich were created when only the incremental ownership acquired wasfair valued and the minority interest was reflected at itscarryover basis.

•Sharilyn Gasaway, Alltel Corporation: One of the underlyingprinciples … is that the acquirer should measure and recognize thefair value of the acquiree as a whole. If 100 percent of theownership interests are acquired, measuring and recognizing 100percent of the fair value is both appropriate and informative.However, if less than 100 percent of the ownership interests areacquired, recognizing the fair value of 100 percent of the businessacquired is not representative of the value actually acquired. Inthe instance in which certain minority owners retain theirownership interest, recognizing the fair value of the minorityinterest does not provide sufficient benefit to financial statementusers to justify the additional cost incurred to calculate thatfair value.

•PricewaterhouseCoopers: We agree that the noncontrollinginterest should be recorded at its fair value when it is initiallyrecorded in the consolidated financial statements. As such, whencontrol is obtained in a single step, the acquirer would record 100percent of the fair value of the assets acquired (includinggoodwill) and liabilities assumed.

•Loretta Cangialosi, Pfizer: While we understand the motivationof the FASB to account for all elements of the acquisitiontransaction at fair value, we are deeply concerned about thepractice issues that will result. The heavy reliance on expectedvalue techniques, use of the hypothetical market participants, thelack of observable markets, and the obligation to affix values to“possible” and even “remote” scenarios, among other requirements,will all conspire to create a standard that will likely prove to benonoperational, unauditable, representationally unfaithful,abuse-prone, costly, and of limited (and perhaps negative)shareholder value.

Do you think the FASB made the correct decision in requiringconsolidated financial statements to recognize all subsidiary'sassets and liabilities at fair value regardless of the percentageownership acquired by the parent?

From page 152 in the eText

In considering its proposed statement of financial accountingstandards on business combinations, the FASB received numerouscomment letters. Many of these letters addressed the FASB'sproposed adoption of the economic unit concept as a valuation basisfor less-than-100-percent acquisitions. A sampling of these lettersincludes the following observations:

Bob Laux, Microsoft: Microsoft agrees with theBoard that the principles underlying standards should strive toreflect the underlying economics of transactions and events.However, we do not believe the Board's conclusion that recognizingthe entire economic value of the acquiree, regardless of theownership interest in the acquiree at the acquisition date,reflects the underlying economics.

Patricia A. Little, Ford Motor Company: Weagree that recognizing 100 percent of the fair value of theacquiree is appropriate. We believe that this is crucial in erasinganomalies which were created when only the incremental ownershipacquired was fair valued and the minority interest was reflected atits carryover basis.

Sharilyn Gasaway, Alltel Corporation: One ofthe underlying principles … is that the acquirer should measure andrecognize the fair value of the acquiree as a whole. If 100 percentof the ownership interests are acquired, measuring and recognizing100 percent of the fair value is both appropriate and informative.However, if less than 100 percent of the ownership interests areacquired, recognizing the fair value of 100 percent of the businessacquired is not representative of the value actually acquired. Inthe instance in which certain minority owners retain theirownership interest, recognizing the fair value of the minorityinterest does not provide sufficient benefit to financial statementusers to justify the additional cost incurred to calculate thatfair value.

PricewaterhouseCoopers: We agree that thenoncontrolling interest should be recorded at its fair value whenit is initially recorded in the consolidated financial statements.As such, when control is obtained in a single step, the acquirerwould record 100 percent of the fair value of the assets acquired(including goodwill) and liabilities assumed.

Loretta Cangialosi, Pfizer: While we understandthe motivation of the FASB to account for all elements of theacquisition transaction at fair value, we are deeply concernedabout the practice issues that will result. The heavy reliance onexpected value techniques, use of the hypothetical marketparticipants, the lack of observable markets, and the obligation toaffix values to “possible” and even “remote” scenarios, among otherrequirements, will all conspire to create a standard that willlikely prove to be nonoperational, unauditable, representationallyunfaithful, abuse-prone, costly, and of limited (and perhapsnegative) shareholder value.

Do you think the FASB made the correct decision in requiringconsolidated financial statements to recognize all subsidiary'sassets and liabilities at fair value regardless of the percentageownership acquired by the parent?