GIáo trình advanced accounting 7e by jeter

www.ebookslides.com www.ebookslides.com th EDITION ADVANCED ACCOUNTING DEBRA C JETER PAUL K CHANEY www.ebookslides.com EDITORIAL DIRECTOR AQUISITIONS EDITOR EDITORIAL MANAGER CONTENT MANAGEMENT DIRECTOR CONTENT MANAGER SENIOR CONTENT SPECIALIST PRODUCTION EDITOR COVER PHOTO CREDIT Michael McDonald Emily McGee Judy Howarth Lisa Wojcik Nichole Urban Nicole Repasky Ameer Basha © WHYFRAME/Shutterstock This book was set in 10/12 New Baskerville by SPi Global and printed and bound by Quad Graphics Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2018, 2015, 2012, 2010, 2008 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923 (Web site: www.copyright.com) Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, or online at: www.wiley.com/go/ permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at: www.wiley.com/go/returnlabel If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy Outside of the United States, please contact your local sales representative ISBN: 978-1-119-37320-9 (PBK) ISBN: 978-1-119-39259-0 (EVAL) Library of Congress Cataloging-in-Publication Data Names: Jeter, Debra C (Debra Coleman), author | Chaney, Paul K (Paul Kent), 1953- author Title: Advanced accounting / Debra C Jeter, Paul K Chaney Description: 7th edition | Hoboken, NJ : Wiley, [2019] | Includes index | Identifiers: LCCN 2018032336 (print) | LCCN 2018034799 (ebook) | ISBN 9781119373247 (Adobe PDF) | ISBN 9781119373254 (ePub) | ISBN 9781119373209 (pbk.) Subjects: LCSH: Accounting Classification: LCC HF5636 (ebook) | LCC HF5636 J38 2019 (print) | DDC 657/.046–dc23 LC record available at https://lccn.loc.gov/2018032336 The inside back cover will contain printing identification and country of origin if omitted from this page In addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct www.ebookslides.com ABOUT THE AUTHORS Debra Jeter is a Professor of Management in the Owen Graduate School of Management at Vanderbilt University She received her Ph.D in accounting from Vanderbilt University Dr Jeter has published articles in The Accounting Review, the Journal of Accounting and Economics, Auditing: A Journal of Practice & Theory, Contemporary Accounting Research, and Accounting Horizons, as well as in popular magazines including Working Woman and Savvy She has coauthored one previous book, “Managerial Cost Accounting: Planning and Control,” and chapters in others She has taught at both the graduate and undergraduate levels and is currently teaching financial reporting to MBA students and Masters students in accounting and finance Dr Jeter has also taught financial accounting in the Executive International MBA program for the Vlerick School of Management in Ghent and is a regular Visiting Research Professor at the University of Auckland Debra Jeter has served as an editor for Auditing: A Journal of Practice & Theory and Issues in Accounting Education and on a number of editorial boards She has won the research productivity award and three teaching awards from Vanderbilt, as well as an Outstanding Alumnus Award from her undergraduate university, Murray State University Her research interests extend to financial accounting and auditing, including earnings management, components of earnings, audit opinions, and the market for audit services She practiced as a CPA in Columbus, Ohio, before entering academia In 2011, professor Jeter was a screenwriter of the film Jess & Moss, which premiered in the New Frontier Films category at the Sundance Film Festival Paul Chaney is the E Bronson Ingram Professor of Accounting in the Owen Graduate School of Management at Vanderbilt University He has been at the Owen ­Graduate School since obtaining his Ph.D from Indiana University in 1983 He has taught both undergraduate and graduate students, and currently teaches the core financial accounting class for both the MBA and Executive MBA He has taught extensively in executive programs, including courses in Accounting and Finance for the Non-Financial Executive and specialized courses for specific businesses Dr Chaney has published articles in The Accounting Review, the Journal of Accounting Research, the Journal of Public Economics, the Journal of Business, Contemporary Accounting Research, the Journal of Accounting and Economics, and Accounting Horizons He has won three teaching awards and serves on the editorial board for Auditing: A Journal of Practice & Theory and is an editor for The International Journal of Accounting iii www.ebookslides.com PREFACE This book is designed for advanced courses dealing with financial accounting and reporting in the following topical areas: business combinations, consolidated financial statements, international accounting, foreign currency transactions, accounting for derivative instruments, translation of financial statements of foreign affiliates, segment reporting and interim reporting, partnerships, fund accounting and accounting for governmental units, and accounting for nongovernment—nonbusiness organizations The primary objective of this book is to provide a comprehensive treatment of selected topics in a clear and understandable manner The changes related to FASB ASC Topics 805 and 810 (SFAS No 141R and 160) are integrated throughout the edition As in previous editions, we strive to maintain maximum flexibility to the instructor in the selection and breadth of coverage for topics dealing with consolidated financial statements and other advanced topics We track the number and characteristics of mergers and acquisitions through various eras and allow this information to influence our coverage in the textbook For instance, the frequency of acquisitions with earnouts and with noncontrolling interests is approximately equal (each around 10% of acquisitions) Therefore, we have increased the number of examples and homework where contingent consideration is included In addition, because of the increase in cross-border acquisitions, we address the issue of consolidating multinational firms and of reporting performance over time when exchange rates change We have added a section in Chapter 13 on non-GAAP constant currency reporting One of the challenges of this revision relates to situations in which FASB spreads the effective implementation of a change in standard over several years, with early iv adoption allowed Thus, financial statements that will be observed over the next few years may reflect the new standards or the prior standards We have chosen to report the newest standard changes in the textbook (supplemented either by discussions of the prior rules or through the use of an appendix illustrating the former standards) We expanded the number and variety of exercises and problem materials at the end of each chapter In addition, we include financial statement analysis exercises that relate to real companies and practical applications in every chapter Two appendices (Appendix ASC at the back of the book and Appendix A to Chapter 1) are presented to assist the student in solving these exercises All chapters have been updated to reflect the most recent pronouncements of the Financial Accounting Standards Board and the Governmental Accounting Standards Board as of this writing We include codification exercises that require the student to research the FASB’s Codification to determine the appropriate GAAP for a variety of issues In teaching consolidation concepts, a decision must be made about the recording method that should be emphasized in presenting consolidated workpaper procedures The three major alternatives for recording investments in subsidiaries are the (1) cost method, (2) partial equity (or simple equity) method, and (3) complete equity (or sophisticated equity) method A brief description of each method follows Cost method The investment in subsidiary is carried at its cost, with no adjustments made to the investment account for subsidiary income or dividends Dividends received by the parent company are recorded as an increase in cash and as dividend income www.ebookslides.com v Preface Partial equity method The investment account is adjusted for the parent company’s share of the subsidiary’s reported earnings or losses, and dividends received from the subsidiary are deducted from the investment account Generally, no other adjustments are made to the investment in subsidiary account Complete equity method This method is the same as the partial equity method except that additional adjustments are made to the investment in subsidiary account to reflect the effects of (a) the elimination of unrealized intercompany profits, (b) the amortization (depreciation) of the difference between cost and book value, and (c) the additional stockholders’ equity transactions undertaken by the subsidiary that change the parent company’s share of the subsidiary’s stockholders’ equity All three are acceptable under both U.S GAAP and IFRS, so long as the appropriate consolidating entries are made While the FASB appears to prefer the complete equity method, the IASB, on the other hand, seems to prefer the cost method We continue to present all three methods, using generic icons to distinguish among the three methods The instructor has the flexibility to teach all three methods, or to instruct the students to ignore one or two If the student is interested in learning all three methods, he or she can so, even if the instructor only focuses on one or two In addition, we believe this feature makes the book an excellent reference for the student to keep after graduation, so that he or she can easily adapt to any method needed in future practice • • • • • • Post-Implementation Review of FASB Statement No 141R and to include more realistic real-world issues Chapter 11 on International Accounting has been completely rewritten to focus on International Financial Reporting Standards (IFRS) In addition, in Section 11.5, we have written a stand-alone section on accounting for mergers and acquisitions using IFRS that can be used with the material in Chapters 4 or 5 to embrace an international focus on cross-border mergers and acquisitions if desired Chapter  19 was revised to incorporate FASB’s new not-for-profit standards on the reporting of net assets and other significant changes to the not-for-profit model Chapter 2 was reorganized for improved flow of topics It has been updated for the new goodwill impairment standards and other changes in the standards (measurement period adjustments and contingent consideration) We continue to provide real-world examples and use these to motivate coverage in the textbook For instance, in Chapter  13, we have added a discussion of nonGAAP disclosures on constant currency amounts To conserve space, two chapters (Chapters  and  10) and some topics within chapters are now located online (see www.wiley.com/go/jeter/AdvancedAccounting7e; see table of contents for more details) A continuous consolidation problem is introduced in Chapters 4 and 5 This allows students to build on concepts learned in prior chapters WHAT’S NEW IN THE TEXT? OTHER HIGHLIGHTED FEATURES OF THE TEXT • We have updated the online videos explaining some of the critical concepts from each chapter and walk students through how to solve selected problems throughout the book • The partnership chapters have been updated to comply with FASB’s position regarding when goodwill should (and should not) be recorded in business transactions/ combinations However, since many partnerships are not required to comply with GAAP and are thus allowed greater flexibility with respect to goodwill, we continue to present the traditional goodwill method for accounting for changes in partnership composition; we clarify which approaches are (are not) GAAP compliant • The coverage of certain topics has been expanded (such as contingent consideration and bargain purchases) to incorporate information gleaned from the FASB’s For all mergers and acquisition problems involving workpapers, we provide printable excel templates that can be used to reduce student time required in solving the problems We include a discussion of international accounting standards on each topic where such standards exist and compare and contrast U.S GAAP and IFRS An IFRS icon appears in the margins where this discussion occurs We have written Chapter 11 to highlight IFRS We have added new analyzing financial statement problems; each highlights a specific difference in accounting between U.S GAAP and IFRS Also in this chapter, Section  11.5 on accounting for mergers and acquisitions using IFRS was written so that it can be used www.ebookslides.com viPreface as a stand-alone section and/or incorporated into the mergers and acquisition Chapters 4 or 5 Thus, if a professor would like to cover global mergers and acquisition, this can easily be accomplished FASB’s conceptual framework is discussed as it relates to Advanced Accounting in Chapter 1 We also include marginal references to Related Concepts throughout the book The GASB’s conceptual framework is discussed in Chapters 17 and 18 Questions or problems related to Business Ethics are included in the end-of chapter materials for every chapter We include real-company annual reports or excerpts from reports with related questions (Analyzing Financial Statements) in the end-of-chapter materials and/or online for most chapters excluding Chapters 15 and 16 In Chapter 9 of the 6th edition, the homework material includes the effective interest, in addition to the straightline method for amortization of bond premiums and discounts The 6th edition also includes online appendices on deferred taxes which are related to the topics in Chapter 6 and 7 (Go to www.wiley.com/go/ jeter/AdvancedAccounting7e.) The in-the-news boxes that appear throughout the book reflect recent business and economic events relevant to the subject matter We have integrated goodwill impairment into some illustrations in the body of Chapter 5, as well as in several homework problems We illustrate the newly modified goodwill impairment test The simplification of the goodwill impairment tests for smaller companies is also discussed, along with the role of qualitative factors for determining which steps are necessary There are exercises on this topic in Chapters 2 and 5 10 At the beginning of Chapter  4, we discuss three methods of accounting for investments, depending on the level of ownership and the presumption of influence or control We emphasize the importance of the complete equity method for certain investments that are not consolidated, or in the parent-only statements In addition, online materials include an expanded discussion of the accounting for investments (See www.wiley.com/go/jeter/AdvancedAccounting7e.) 11 Learning objectives are included in the margins of the chapters, and relevant learning objective numbers are provided with end-of-chapter materials 12 We continue the use of graphical illustrations, which was introduced in prior editions 13 A few short-answer questions (and solutions) are periodically provided throughout each chapter to enable students to test their knowledge of the content before moving on 14 The organization of the worksheets applies a format that separates accounts to the income statement, the statement of retained earnings, and the balance sheet in distinct sections The worksheets are placed near the relevant text 15 All illustrations are printed upright on the page and labeled clearly for convenient study and reference 16 Entries made on consolidated statements workpapers are presented in general journal form These entries are shaded in blue to distinguish them from book entries, to facilitate exposition and study To distinguish among parent company entries and workpaper entries in the body of the text, we present parent entries in gray and workpaper entries in blue 17 We include a feature that requires students to research the FASB Codification in order to locate the current standard that applies to various issues These exercises appear before the problems at the end of each chapter and often, but not always, relate to topics addressed in that chapter (Similar questions appear on the CPA exam.) 18 Summaries appear at the end of each chapter, and a glossary of key terms is provided at the end of the book 19 An appendix to Chapter  has been posted online at www.wiley.com/go/jeter/AdvancedAccounting7e This appendix illustrates a strategy or technique for analyzing a given company, such as a potential acquisition target This strategy may be applied in some of the end-of-the-chapter Analyzing Financial Statements (AFS) problems 20 Chapters  17 through  19 reflect the latest GASB and FASB pronouncements related to fund accounting Clearly, there are more topics in this text than can be covered adequately in a one semester or one-quarter course We believe that it is generally better for both students and instructors to cover a selected number of topics in depth rather than to undertake a superficial coverage of a larger number of topics Modules of material that an instructor may consider for exclusion in any one semester or quarter include the following: • Chapters 7–9 An expanded analysis of problems in the preparation of consolidated financial statements • Chapter 10 Insolvency—liquidation and reorganization www.ebookslides.com vii Preface • Chapters  11–14 International accounting, foreign currency transactions and translation, and segment and interim reporting • Chapters 15 and 16 Partnership accounting • Chapters  17 through  19 Fund accounting, accounting for governmental units, and accounting for nongovernment–nonbusiness organizations (NNOs) SUPPLEMENTS The following supplements are available on the book companion web site: Study Guide, Excel Templates, Power-Point Slides, Instructors’ Manual, Solutions Manual, Test Bank, and videos for each chapter These materials are accessible from www.wiley.com/go/jeter/AdvancedAccounting7e WILEYPLUS WileyPLUS is an online learning and assessment environment, where students test their understanding of concepts, get feedback on their answers, and access learning materials such as the eText and multimedia resources Instructors can automate assignments, create practice quizzes, assess students’ progress, and intervene with those falling behind ACKNOWLEDGMENTS We wish to thank the following individuals for their suggestions and assistance in the preparation of this edition Thank you goes to Barbara Scofield (Washburn University), Anthony Abongwa (Monroe College), Jonghyuk Bae Darius Fatemi (Northern Kentucky University), Edward Julius (California Lutheran University), Ron Mano (Westminster College), Kevin Packard (Brigham Young University, Idaho), Ashley Stark (Dickinson State University), Denise Stefano (Mercy College), Deborah Strawser (Grand Canyon University Online), Lucas (Luc) Ranallo (Vanderbilt University), Joseph Wall (Carthage College), and Sheila Reed (State of Tennessee) Thank you also goes to Sheila Ammons (Austin Community College) for preparing the PowerPoint slides, to TBD for preparing the Study Guide, to TBD for preparing the Test Bank, and to TBD for their helpful textbook, solutions manual, and test bank accuracy review comments Finally, we would like to acknowledge a few individuals at Wiley who helped all this come together: Ellen Keohane, Mary O’Sullivan, Christina Volpe, Beth Pearson, Joel Hollenbeck, Tai Harris, Karolina Zarychta, and Maddy Lesure www.ebookslides.com CONTENTS 1 INTRODUCTION TO BUSINESS COMBINATIONS AND THE CONCEPTUAL FRAMEWORK 1 Learning Objectives 1 1.1 Growth Through Mergers 1 1.2 Nature of The Combination 4 1.3 Business Combinations: Why? Why Not? 5 1.4 Business Combinations: Historical Perspective 7 1.5 Terminology and Types of Combinations 10 1.6 Takeover Premiums 13 1.7 Avoiding the Pitfalls Before the Deal 14 1.8 Determining Price and Method of Payment in Business Combinations 16 1.9 Alternative Concepts of Consolidated Financial Statements 20 1.10 FASB’S Conceptual Framework 25 1.11 FASB Codification (Source of GAAP) (Available to Instructors) Summary 31 Appendix 1A: Evaluating Firm Performance (Available to Instructors) Questions 32 Analyzing Financial Statements 32 Exercises 35 ASC Exercises 37 2 ACCOUNTING FOR BUSINESS COMBINATIONS 38 Learning Objectives 38 2.1 Accounting Standards on Business Combinations: Background 38 viii 2.2 Illustration of Acquisition Accounting 42 2.3 Bargain Purchase Accounting Illustration (Purchase Price Below Fair Value of Identifiable Net Assets) 46 2.4 Measurement Period and Measurement Period Adjustments 47 2.5 Goodwill Impairment Test 48 2.6 Contingent Consideration (Earnouts) 52 2.7 Pro Forma Statements and Disclosure Requirement 57 2.8 Leveraged Buyouts 59 Summary 59 Appendix 2A: Deferred Taxes in Business ­Combinations (Available to Instructors) Appendix 2B: Illustration 2-1 (Available to Instructors) Questions 61 Analyzing Financial Statements 61 Exercises 66 ASC Exercises (Available to Instructors) Problems 73 3 CONSOLIDATED FINANCIAL STATEMENTS— DATE OF ACQUISITION 77 Learning Objectives 77 3.1 Definitions of Subsidiary and Control 79 3.2 Requirements for the Inclusion of Subsidiaries in the ­Consolidated Financial Statements 82 3.3 Reasons for Subsidiary Companies 83 3.4 Consolidated Financial Statements 83 3.5 Investments at the Date of Acquisition 84 3.6 Consolidated Balance Sheets: The Use of Workpapers 86 www.ebookslides.com 800Glossary f­oundations, private elementary and secondary schools, and zoological and botanical societies as the uniting of two or more groups of shareholders into a single “pooled” entity, with no group being dominant Parent A company that controls another company, usually achieved by direct or indirect ownership of some or all of its voting stock Primary government  Part of the government including the government funds and the proprietary funds, but not including component units of the government Parent company concept A concept that emphasizes the interests of the parent’s shareholders in such a way that the consolidated financial statements reflect those stockholder interests in the parent itself, plus their undivided interests in the net assets of the parent’s subsidiaries “Parent only” financial statements The unconsolidated financial statements of a parent company, in which its subsidiaries are shown as investments Partial equity method A variation of the equity method, in which the reported income (loss) of the investee is used to measure the investor’s income from investment, without adjustment Partnership agreement A contractual agreement between or among legally competent persons to form a voluntary partnership (may also be called a partnership contract or articles of partnership) Pension (and other employee benefit) trust funds  Funds used to report resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, other postemployment benefit plans, or other employee benefit plans Permanent fund  A fund used to account for resources that are legally restricted to the extent that the earnings, and not principal, can be used to support the activities of the government Plant fund of an NNO  Fund used to account for (1) the property and equipment owned by the organization and the net investment, (2) the accumulation of financial resources for the acquisition or replacement of property and equipment, (3) the acquisition and disposal of property and equipment, (4) liabilities relating to the acquisition of property and equipment, and (5) depreciation expense and accumulated depreciation Pooling of interests method A method of accounting for business combinations, allowed prior to June 2001 in the United States in which the assets and liabilities of the combining firm are carried forward at their historical book values This method, which requires the use of stock as the medium of exchange, is sometimes justified Pro forma statements Financial statements prepared to show the effect of planned or contemplated transactions as if they had occurred during the period covered by the financial statements; sometimes called “as of” statements Profit or loss agreement  An agreement that indicates how a partnership’s profits or losses should be allocated Common agreements are based on a fixed ratio, a ratio based on capital balances, interest on capital balances, an allocation based on time or managerial talent, or some combination of these Proprietary (nonexpendable) fund entities  The activities of nonbusiness organizations that operate similar to those of business enterprises, such as water utilities Proprietary funds include enterprise and internal service funds Purchase method  See Acquisition accounting Push down accounting  The establishment of a new accounting and reporting basis for a subsidiary company in its separate financial statements based on the purchase price paid by the parent company to acquire a controlling interest in the outstanding voting stock of the subsidiary company Reciprocal stockholdings  A relationship created when two or more affiliates have ownership interests in each other; for example, the parent owns shares in a subsidiary that also owns shares in the parent Relevance One of the primary qualities of accounting information identified in SFAC No 2, referring to the characteristic of making a difference in a decision Reliability One of the primary qualities of accounting information identified in SFAC No 2, incorporating the characteristics of verifiability, representational faithfulness, and reasonable freedom from error and bias Remeasurement The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency (often used to refer to the temporal method) Remeasurement gain or loss Gain or loss arising from the application of the temporal method to convert accounts from a nonfunctional foreign currency into U.S dollars Reportable segment  A segment considered to be significant to an enterprise’s operations; specifically one that has passed one of three 10% tests or has been identified as being reportable through other criteria (aggregation, for example) Reporting currency  The currency in which a company reporting entity prepares its financial statements, usually the domestic currency of the country in which the company is domiciled Restricted fund entities  An expendable fund whose current financial resources are limited as to use because of externally imposed restrictions Safe payment approach  A schedule used in an installment liquidation that guarantees that before any cash is distributed to partners, the partners’ remaining capital balances are sufficient to absorb any potential loss Segment assets  Those tangible and intangible assets directly associated with, or used by, a segment, including any allocated portion of assets used jointly by more than one segment Segment operating profit or loss  All of a segment’s revenue minus all operating expenses, including any allocated revenues or expenses (e.g., common costs) Segment revenue  The revenue from sales to unaffiliated customers and from intersegment sales or transfers Service-type special assessment An assessment levied against property owners for services that benefit them Settlement date Date at which a payable is paid or a receivable is collected Simple liquidation  A procedure in which all noncash assets are converted into cash before any assets are distributed to creditors and partners Sound value  The fair value of used assets in appraisal reports Special items Significant fund accounting transactions within the control of management that are either unusual or infrequent Special revenue fund  A fund used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specified purposes Spot rate  An exchange rate quoted for immediate delivery of a currency Statutory consolidation A consolidation resulting when a new corporation is formed to acquire two or more other corporations through an exchange of voting stock; the www.ebookslides.com 801 Glossary acquired corporations then cease to exist as separate legal entities Statutory merger  A legal term referring to the loss of a subsidiary’s corporate legal entity status by canceling its corporate charter The parent takes title to the newly acquired subsidiary’s assets and assumes responsibility for its liabilities, and the subsidiary ceases to exist as a separate legal entity, although it may be continued as a separate division of the acquiring company Stock acquisition  A business combination in which one corporation pays cash or issues stock or debt for all or part of the voting stock of another company, and the acquired company remains intact as a separate legal entity Stock exchange ratio  A ratio generally defined as the number of shares of the acquiring company to be exchanged for each share of the acquired company, thus constituting a negotiated price Subsidiary A company that is controlled by another company through direct or indirect ownership of some or all of its voting stock 20-F statement  A form filed annually with the Securities and Exchange Commission (SEC) by foreign firms that list in the U.S stock exchanges Takeover premium  The excess of the amount offered, or agreed upon, in an acquisition over the prior stock price of the acquired firm Temporal method A method of converting accounts from a foreign currency into the functional currency, in which monetary assets and liabilities are translated at the current exchange rate; assets and liabilities carried at historical cost are translated at historical exchange rates; and assets and liabilities carried at current values are translated at the current exchange rate (also called remeasurement) Tender offer An offer made directly to the shareholders of a company targeted by another company in a potential business combination Usually published in a newspaper, a tender offer typically provides a price higher than the current market price for shares made available by a certain date Totally held subsidiary  A subsidiary in which a parent or the parent’s other majorityowned subsidiaries hold substantially all the subsidiary’s outstanding equity securities and where the subsidiary is not materially indebted to any party other than the parent and/or the parent’s other totally held subsidiaries Transaction gain or loss  The gain or loss that arises from holding foreign currency receivables or payables and resulting from changes in exchange rates between the transaction date and the settlement date Transfer pricing  The pricing of products or services between operating segments or geographic areas Translation  Term is used in the two following ways: (1) as a generic term to apply to any restatement of foreign currency units into the reporting currency and (2) more specifically, to apply to the restatement of foreign currency units that are already measured in the functional currency into dollars (current rate method) Translation adjustments  Dual-meaning term referring either to: (1) any gains or losses resulting from the effects of converting financial statements from foreign currency into the parent’s reporting currency or (2) those gains and losses arising from the application of the current method to convert from the functional currency into U.S dollars Treasury stock method An accounting method under which a reciprocal stockholding is presented as treasury stock on the consolidated balance sheet from the perspective of the parent firm, and the noncontrolling shareholders’ interest in the parent is essentially ignored Undistributed subsidiary income  The difference between the parent’s share of the s­ubsidiary’s income, which is included in consolidated net income, and the amount of dividends received from the subsidiary, which is included in its taxable income if the affiliates file separate tax returns Unlimited liability  A feature of a general partnership, establishing that each partner is jointly and severally liable for the debts and obligations of the partnership Thus creditors, in a liquidation, can proceed against the personal assets for recovery of claims Unrealized intercompany profit (loss) Profit (loss) that has not been realized from the point of view of the consolidated entity through subsequent sales to third parties and must be eliminated in the preparation of consolidated financial statements Upstream sales  Sales by subsidiary companies to the parent company Variable interest entity (VIE)  A legal entity subject to consolidation (generally, the investor has obtained less than a majorityowned interest) VIEs are entites whose equity investors not have sufficient equity at risk such that the entity cannot finance its own activites VIEs often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, reinsurance, or other transactions or arrangements Vertical combination (vertical integration)  A business combination among companies within the same industry operating at different levels (supplier and customer) Voluntary health and welfare organizations (VHWOs)  Organizations that derive their revenues from voluntary contributions of the general public to be used for purposes connected with health, welfare, or community services Wholly owned subsidiary A subsidiary in  which all of the subsidiary’s outstanding  voting stock is owned by the parent and/or the parent’s other wholly owned subsidiaries www.ebookslides.com www.ebookslides.com INDEX A Accounting policy conformity, 410–411, 413 Accounting Principles Board (APB) Opinions: No 18, 556 Accounting Research Bulletin (ARB) No 51, 39 Accounting Series Release No 242 (SEC), 502 Accounting Standards Codification (ASC), 25, 385 See also under Financial Accounting Standards Board (FASB) Accounting Standards for Business Enterprises (ASBEs), 415 Accounting standards, international, see International accounting Accretion concept, 20 Accretive acquisitions, 20 Accrual accounting: modified accrual accounting, 642 nongovernmental organizations and, 764–765 Accumulated depreciation, 238–240 Acquisition (purchase) accounting See also Business combinations; Consolidated financial statements acquisition of interest, 572–582 See also Ownership interest contingent considerations (earnouts), 52–56 cost methods and, 132–144 equity methods and, 144–155 explanation and illustration of, 42–45 interim acquisitions, 156–162 treatment of expenses, 45 Acquisition date, 373 Activity classifications, fund accounting and, 646–647 Adjusted investment account, 142 Adjusting entries, 91 ADR, see American Depository Receipts (ADR) Aetna Corp., 13 Affiliated companies, 78 See also Business combinations; Consolidated financial statements Agency (custodial) fund accounting, 774–775 Agency funds, governmental, 688, 711 Aggregation criteria, operating segments, 523–524 AICPA, see American Institute of Certified Public Accountants (AICPA) Allocation and depreciation of differences between implied and book values: accumulated depreciation and, 238–242 acquisition cost less than fair value, 197–199 assets and liabilities of subsidiary and, 193–199 consolidated net income and, 199–202, 213–214 consolidated retained earnings and, 210–232 debt and, 233–238 depreciable assets used in manufacturing, 242 fair values less than book value, 290–294 implied value in excess of fair value, 244–247 using complete equity method, 276–287 using cost method, 202–212 using partial equity method, 215–223 Allocation problems, partnerships and, 565–566 Allstate Corp., Amazon, 375 American Depository Receipts (ADR), 419 American Institute of Certified Public Accountants (AICPA), 685, 750–751 Amortization: expense, 194 intangible assets and, 41, 194 schedules for bonds, 715 Annuity fund accounting, 775–776 AOL Time Warner, 271 APB Opinions, see Accounting Principles Board (APB) Opinions Appropriations, 642 fund accounting and, 648 lapsing of, 664–665 ASBEs (Accounting Standards for Business Enterprises), 415 ASC, see Accounting Standards Codification (ASC) “As if” statements, see Pro forma statements Assets: acquisition of, 10, 78, 83 contingent assets, 15 definition of, 28 group, 401 impairments, 401 marshaling of, 604 valuation of, 52 Assumed liabilities, 14 Australian dollar, 438 B Balance sheet statement, 146 Bankruptcy See also Bankruptcy Reform Act of 1978; Insolvency and mergers, 3, Bankruptcy Reform Act of 1978, 379 See also Insolvency Bargain acquisitions, 42, 46, 96, 194 803 www.ebookslides.com 804Index Basis of accounting, 642–643 Beresford, Dennis, 26 Bid rates, 434 BlackRock, 128 Board designated funds, 764 Bond holdings, intercompany, see Intercompany bonds Bonds, intercompany, see Intercompany bonds Bonuses, partnerships and, 564 Bonus method, 560, 571, 576, 583 Book values, 23, 88 See also Allocation and depreciation of differences between implied and book values; Consolidated financial statements Brazilian real, 438 Budgetary fund entities, 641–642 Bunge Ltd., 278 Business combinations See also Consolidated financial statements accretive acquisitions, 20 assumed liabilities and, 14 avoiding pitfalls, 14–16 book values and, 23 consolidated balance sheet values and, 23–24 consolidated financial statements and, 20–24 consolidated net income and, 23 contingent considerations (earnouts), 52–56 defense tactics and, 4–5 definition of, 3, deregulation and, 9–10 dilutive acquisitions, 20 diversification and, 6–7 divestitures and, due diligence and, 14 earnings accretion and, 19, 20 earnings dilution and, 19, 20 economic entity concept and, 21–22 fair value and, 23, 24 financial synergy and, friendly combinations, goodwill and, 18–20 goodwill impairment test, 48–51 historical perspective on, 7–10, 38–41 horizontal integration, income tax consequences in, 45 income tax laws and, intercompany profit and, 24 interpreting percentages, 14 leveraged buyouts, 59 merger mania, most active industries, nature of, 4–5 negotiated price and, 17 net asset and future earnings contributions, 17–20 new disclosure requirements, 51 noncontrolling interest and, 22–23 operating synergies and, parent company concept and, 21 pro forma statements, 57–58 reasons for, 5–7 statutory consolidations, 11 statutory mergers, 11, 12 stock acquisitions, 11 stock exchange ratio and, 17 stock vs asset acquisitions, 10 strategic acquisitions, takeover premiums, 13 treatment of acquisition expenses, 45 unfriendly (hostile) combinations, vertical integration, C Cadbury, 10, 33–35 CAD Schedule, see Computation and Allocation Difference (CAD) Schedule Call options, 460 Capital assets, governmental accounting and, 712–714 Capital balances, partnerships and, 562–563 Capital expenditures, fund accounting and, 649 Capital interest, partnership agreements and, 557 Capital investment, partnerships and, 562, 563 Capital project funds, 687, 689–695 Capital transactions, partnerships and, 558–559 Capitation revenues, hospital, 776 Cash distributions, partnership liquidation and, 610–616 Cash flow: consolidated statement of, 162–168 hedges, 454–456, 458, 461–463 nongovernment nonbusiness organizations, 754–755 year after acquisitions, 163–165 year of acquisition, 166–169 Cash generating unit (CGU), 401 CBS Corp., 50 Center for Audit Quality (CAQ), 489 Charity care, 776 Chief operating decision maker, 522 China, 415 Chinese Yuan Renminbi, 495 Chrysler Corp., 4, 12 COGS, see Cost of Goods Sold (COGS) Colleges and university accounting: current fund accounting and, 765 expenditure and expense classifications, 757 issues relating to, 776 mandatory transfers, 765–766 nonmandatory transfers and, 766 operating vs nonoperating income and, 776 plant funds and, 766–771 service fee revenue and, 776 Commission Statement in Support of Convergence and Global Accounting Standards, 382 Company’s assets and liabilities, 143 Company’s revenues and expenses, 143 Comparability, 27, 524 Complete equity method: on books of investor, 128–131 consolidated balances, 276 downstream sales and, 275–278 implied and book values and, 232 intercompany sales and, 345–351 property and equipment disposal by purchasing affiliate and, 350–351 recording investments in subsidiaries—equity method, 144–155 significant influence and, 123–124 upstream sales and, 332–342 Component units, governmental, 721 Comprehensive income: currency translations and, 496 distinguishing between earnings and, 28–30 statement of, 30 Computation and Allocation Difference (CAD) Schedule, 88, 93, 95, 134, 146, 151, 236, 373 Comsat Corp., 14 www.ebookslides.com 805 Index Condorsement, 383, 384 Conglomerate mergers, Consolidated balances intercompany sales and, 271–280 sheets, 23–24 Consolidated financial statements, 20–24, 376, 377 accounting for investments, 123–131 accumulated depreciation as separate balance, 238–240 adjusting entries, 91, 102 allocation and depreciation of differences, 193–199 balance sheet values and, 23–24 cash flows, 162–165 consolidated net income see Consolidated net income controlling and noncontrolling interests, 213–214 cost and book value differences, 95–98 cost method after acquisition, 124–134 economic entity concept and, 21–22 equity method recording investments in subsidiaries, 144–155 expense item elimination, 155–156 implied and book value differences, 88, 90–92 intercompany interest, rent, service fees, 352–355 intercompany profit, 24 intercompany revenue elimination, 155–156 intercompany sale of depreciable property, 325–332 intercompany sales and consolidated balances, 271–280 intercompany sales of land, 322–325 interim acquisition of subsidiary stock, 156–162 investment elimination and, 87–90 investment recorded using complete equity method, 224–232 investment recorded using cost method, 202–212 investment recorded using partial equity method, 215–222 letter notation, 91 limitations of, 106–107 more than one subsidiary, 103–106 noncontrolling interest and, 21, 92, 93 number notation, 91 parent company concept and, 21–24 paying more than book value, 97–98 preaffiliation profit, 301–302 purchase price below book value, 98–100 purpose of, 83–84 requirements regarding subsidiaries, 82 retained earnings analysis, 287–288 revenue recognition principle and, 87 subsidiary treasury stock holdings, 100–101 upstream sales, 281–286 workpapers and, 86–102 Consolidated net income: cash flows and, 162–163 implied and book values and, 213–214, 222–223, 232 intercompany sale of inventory and, 287, 301 intercompany sale of property and equipment and, 342–344, 352 under parent company and economic entity concepts, 23 recording investments in subsidiaries and, 138, 149 workpapers and, 134 Consolidated retained earnings: implied and book values and, 213–214, 222–223, 232 intercompany sale of inventory and, 287, 301 intercompany sale of property and equipment and, 342–344, 352 of parent, 207 recording investments in subsidiaries—equity method, 150 Consolidation See also Consolidated financial statements consolidated sales, 272–275, 342 statutory, 11 Consumption method, expendable fund entities and, 665 Consumption of benefit, 30 Contingent assets, 15 Contingent considerations (earnouts), 52–56 Contractual agreements composition agreements, 466–467 Contractual allowances, hospitals, 776 Contributions, 757–763 donated collection items, 760–761 donated services, 760 donor-imposed restricted, 761–762 pledges, 759 Control, definitions of, 79–82 Controlling interest See also Noncontrolling interest complete equity method analysis and, 232 in consolidated net income, 134, 138, 149–150 cost method analysis and, 213–214 partial equity method analysis and, 222–223 Convergence (of standards), 384 Convergys Corp., Cost method, 404 conservative view and, 136 consolidated statements after acquisition and, 124–134 historical cost principle and, 134 implied and book values and, 208–214 intercompany sale of inventory and, 352–354 interim acquisitions and, 158–162 investments and, 123–127, 202–212 property/equipment disposal by purchasing affiliate, 340–342 upstream sales and, 281–286, 332–342 workpaper format and, 132–139 Cost of Goods Sold (COGS), 207, 226 Cost of sales assuming downstream sales, 272–275 Cost/partial equity method, 376 Crooch, F Michael, Cumulative undistributed income, 145 Current exchange rate, 483 Current fund accounting: board designed funds, 764 colleges and universities, 765 current restricted funds, 763–764 current unrestricted funds, 763 mandatory and nonmandatory transfers, 765–766 nongovernmental nonbusiness organizations and, 763–766 other nongovernment nonbusiness organizations, 764–765 revenue and support from fund-raising events, 766 Current method, functional currency is local currency, 492–496 Current rate conversion method, 486 Current restricted funds, 763–764 Current unrestricted funds, 763 CVS Health Corp., 13 CVS Inc., 10 D Daimler-Benz, 12 DaimlerChrysler, 12 Dean Witter Discover & Co., 2, Debt allocating difference between implied and book value to, 233–236 long-term, 711–716 Debt issue proceeds, fund accounting and, 644 Debt service funds, 687, 695–704 Defensive tactics, business combinations and, 4–5 Definitions of financial statement elements, 28 Dell Inc., 281 www.ebookslides.com 806Index Depreciable assets: disposal by subsidiary, 240–242 at net and gross values, 238 used in manufacturing, 242 Depreciable property: financial reporting objectives, 326 intercompany sale of, 327–328 realization through usage and, 325–326 Depreciation: accumulated, 238–240 of differences see Allocation and depreciation of differences expense, 194 intangible assets and, 194 Derivative instruments, 442–443 Dilution, earnings, 19, 20 Direct acquisition expenses, 45, 60 Direct exchange quotations, 434 Disaggregated financial data, 521 See also Segment reporting Disbursements, fund accounting and, 649 Disclosure requirements: for business combinations, 51 for fair value measurements, 459–460 Disney, 233 Dissolution, partnerships, 569 Distributions to owners, 28 Diversification, 6–7 Divestitures, Dividends, liquidating, 125, 127 Donated collection items, 760–761 Donated services, 760 Donor-imposed restricted, 761–762 Downstream sales, 271 consolidated sales and, 272–275 cost method and, 288 cost of sales and, 272–275 Due diligence business combinations and, 14 reports, 14 E Earnings See also Consolidated retained earnings dilution and accretion, 19, 20 distinguishing from comprehensive income, 29–30 in establishing goodwill, 18 Eastman Kodak Company, 19 eBay, 62–64, 171, 244–245 Economic entity concept, 21–22 consolidated balance sheet values and, 23–24 consolidated financial statements, 83 consolidated net income and, 23 noncontrolling interest and, 21 ownership, 373 parent concept vs., 26 Eliminating entries: after acquisition (equity method), 151 basic workpaper eliminating entries, 154–155 downstream sales and, 272–275 expense items, 155–156 intercompany dividends, 148 intercompany revenue, 155–156 investment carried at equity and, 148–149 reasons for, 91 summary for intercompany sales, 301–302 year of acquisition (cost method), 134–135 Emerging Issue Task Force (EITF), 386 Encumbrances, fund accounting and, 648, 652 Endorsement (of standards), 384 Endowment fund accounting, 771–772 not-for-profit organizations for, 754 Enron Corp., 41 Enterprise funds, 687, 708–709 Enterprisewide disclosures, segment reporting and, 528–529 Equipment: cost method and, 340–342 disposal by purchasing affiliate, 340–342, 350–351 intercompany sale of, 342–344, 352 Equity: definition of, 28 investments carried at, 145–151 Equity method, 404 See also Complete equity method; Partial equity method Ernst & Young, 10 Esmark, European Commission, 384, 415 Excess earnings approach, to estimating goodwill, 18 Exchange rates See also Foreign currency transactions current exchange rate, 483 definitions regarding, 433–434 direct exchange rate, 437 historical exchange rate, 483 means of translation, 433–436 table, 435–436 Expendable fund entities, 638–640 Expenditure, fund accounting and, 645–656, 648–649 Expense classification, nongovernment nonbusiness, 757 Expenses: definition of, 28 direct acquisitions and, 45 interim financial reporting and, 536 item elimination, 155–156 matching to revenues, 30 Exporting of goods and services, 438–441 Exporting transactions, 438–441 Exposed liability, forward contracts and, 446–449 External expansion, see Business combinations Extraordinary gains, 46 Exxon, 10 ExxonMobil, 415, 427 F FAF, see Financial Accounting Foundation (FAF) Fair value, 59 accounting, 26, 39 acquisition costs less than, 197–199 disclosure requirements, 459–460 hedges, 452–453, 458–459 of net assets, 23, 24 FASB, see Financial Accounting Standards Board (FASB) FCPA (Foreign Corrupt Practices Act), 502 Federal Trade Commission (FTC), 10 Fiduciary funds, 641, 687–688, 711 FIFO (first in, first-out), 207, 226, 276, 420, 421 Financial Accounting Foundation (FAF), 416, 685 Financial Accounting Standards Board (FASB): advanced accounting issues and, 27–28 ASC section 805-20-25 (Recognition), 15 ASC section 815-20-50, 458 ASC subparagraph 805-10-50-2(h), 58 ASC subtopic 740-270 (Income Taxes—Interim Reporting), 537 ASC subtopic 830-30, 484 ASC topic 220 (Statement of Comprehensive Income), 30 ASC topic 260 (Earnings per Share), 539 www.ebookslides.com Index ASC topic 280 (Interim Reporting), 521, 534–538 ASC topic 350 (Intangibles—Goodwill and Other), 232 ASC topic 805 (Business Combinations), 3, 15, 21, 24, 40 ASC topic 810 (Consolidations), 3, 24, 39 ASC topic 820 (Fair Value Measurement), 233 ASC topic 958 (Not-for-profit Entities), 751 business combinations and, 2, codification project of, 30 comprehensive income and, 496 Concepts Statement No 2, 751 Concepts Statement No 4, 27, 635, 751, 752 Concepts Statement No 5, 29, 30, 221 Concepts Statement No 6, 29, 751 Concepts Statement No 7, 27 conceptual framework of, 25–30 on contingent assets, 15 earnings vs comprehensive income, 29–30 economic entity vs parent concept, 26 roles, 385 similarities and differences, 387 standards for business combinations, 39 Statement No 14, 521 Statement No 21, 521 Statement No 52, 483 Statement No 131, 521, 536 Statement No 133, 442 Statement No 141, 38 Statement No 160, 24 Statement No 168, 385, 386 Statement No 141R, 3, 21, 24, 38 Financial affiliates, see Consolidated financial statements Financial assets disclosures, 755 Financial resources, 639, 650 Financial synergy, Fines and forfeits, fund accounting and, 645 First-in, first-out (FIFO), 207, 226, 276, 420, 421 Fixed ratio, in partnerships, 562 Flextronics Software Systems, 59 Floating rates, 434 Flow of current financial resources concept, 683 Flow of economic resources approach, 684 Ford Motor Company, Forecasted transactions, hedging of, 453–456 Foreign affiliates See also Translation of foreign financial statements accounting for operations of, 482–483 financial statement disclosure, 502–503 functional currency identification, 486–487 high inflationary economies and, 489 objectives of translation (SFAS No 52), 484–485 operating in economies not highly inflationary, 490–492 translating financial statements of, 483–484 translation adjustment, 484 translation gain or loss, 484 translation methods, 486 translation of foreign currency financial statements, 487–492 Foreign company exposed liability, 446–449 Foreign Corrupt Practices Act (FCPA), 502 Foreign currency exposed asset, 450 Foreign currency movements, forward contracts and, 457–458 Foreign currency transactions, 437–446 See also Exchange rates Foreign currency translation of financial statements, 487–492 Foreign exchange rates, see Exchange rates Formation, partnership, 559–561 Form 20-F, 415–416 Form 10-K, 416 Form 10-Q, 533 807 Forward-based derivatives, 442–443 Forward contracts See also Hedging foreign exchange risk cash flow hedges, 454–456 economic hedges of net investment in foreign entities, 456–457 fair value hedge, 450–453 hedge of foreign company exposed liability, 446–459 hedge of foreign currency exposed asset, 450 speculation in foreign currency movement and, 457–458 Forward exchange contracts, 434, 443–446 Forward rates, 434, 445 Friendly combinations, F-1 statement, 417–418 20-F statement, 417 FTC (Federal Trade Commission), 10 Full-year reporting alternative: cost method, 157–158 equity method, 158–162 Functional currency: concept of, 484–485 economies not highly inflationary, 490–492 highly inflationary economies, 489 identification of, 486–487 IFRS, 392–393 indicators, 485 local currency as, 492–496 U.S dollar as, 497–501 Function classifications, fund accounting and, 646–647 Fund accounting, 633 See also Nonbusiness organizations analysis of financial statements, 668–669 appropriations and, 648 basis of accounting, 642–643 budgetary fund entities (governmental funds), 641–642 capital expenditures and, 649 comprehensive illustration of, 656–665 debt issue proceeds and, 644 disbursements and, 649 encumbrances and, 648, 652 expendable fund entities, 638–640 expenditure classification, 645–647 expenditures and, 648–649 fiduciary fund entities, 641 financial statements and, 662–664 fines and forfeits and, 645 function and activity classifications and, 646–647 fund balance and, 652 income taxes and, 645 inventory and, 665–666 lapsing of appropriations and, 664–665 nongovernment nonbusiness organizations, 756–757 object class classifications and, 647 organizational unit classifications and, 647 pledges and grants and, 645 prepayments and, 666 property taxes and, 645 proprietary fund entities, 640–641 recognition of expenditures, 648–650 recognition of revenue, 644–645 recording revenues and expenditures, 652–656 resource outflows, 645–647 restricted and unrestricted fund entities, 640 revenue classifications, 643–644 role of, 638 sales of property and, 645 sales taxes and, 645 transfer of resources from other funds, 644 transfers to other funds, 647–648 www.ebookslides.com 808 Fund-raising events, 766 Fundraising expenses, not-for-profit organizations, 755 Future earnings contributions, 17–20 Future rates, 434 G GAAP, see Generally Accepted Accounting Principles (GAAP) Gains, definition of, 28 General Electric (GE), 106 General funds, governmental, 686–687 Generally Accepted Accounting Principles (GAAP), 374 See also U.S GAAP: and FASB codification project, 30 minimum information required for fair presentation, 684 General Motors (GM), 378 General partnerships, 554 See also Partnerships limited or uncertain life, 554–555 mutual agency and, 554 right to dispose and, 554 unlimited liability and, 554 General revenues, governmental, 724 Geographic area disclosures, segment reporting and, 529 Globalization, see International accounting Goodwill amortization of, 192 book vs implied value and, 136 disclosures mandated by FASB, 50–51 estimation of value of, 18–20 excess earnings approach to estimating, 18 impairment of, 221, 401, 411 impairment tests, 48–51 recording in consolidated statements, 96 Goodwill method, partnerships and, 560, 571, 576–577, 583–584 Government Accounting Standards Board (GASB), 635, 643, 751 Concepts Statement No 1, 636 Concepts Statement No 2, 636 Concepts Statement No 3, 636 Concepts Statement No 4, 636 Concepts Statement No 5, 636 establishment of, 685 Statement No 15, 751 Statement No 34, 640, 642, 650, 665, 683–684, 689, 707, 711–713, 716–717, 723, 751, 755 Statement No 35, 755 Statement No 45, 660 Governmental accounting, see State and local government Governmental fund entities, 641–642, 686–707 capital project funds, 687, 689–695 debt service funds, 687, 695–704 general funds, 688 permanent funds, 687, 704–707 special revenue funds, 686–687, 689 Government Finance Officer’s Association (GFOA), 683 Government fund balances, net assets and, 718–720 Government fund-based reporting, 717–720 Government-wide financial statements, 642 See also Fund accounting Government-wide reporting: infrastructure asset reporting issues, 723–724 statement of activities, 724–725 statement of net assets, 643, 721–724 Greenmail, Green Mountain Coffee Roasters, 305 Gross profit rate, intercompany sales and, 278 Guidant Corp., 46 Index H Harris, Trevor, 41 Health care providers, 750 See also Nongovernment nonbusiness organizations (NNO) Hedging foreign exchange risk, 437, 442–443 cash flow hedge, 453–456 disclosure requirements of, 458–459 economic hedge of net investment in foreign entity, 456–457 fair value hedge, 450–453 fair value vs cash flow hedges, 453 foreign currency exposed asset, 450 foreign currency exposed liability, 446–449 forward contracts and, 445–446 options and foreign currency changes, 460–463 split accounting and, 463 Hewlett-Packard, Historical costs, 27, 134, 274 Historical exchange rate, 483 Historical perspective on business combinations, 7–10 Horizontal integration, Horizontal sales, 271, 279–280 Hospitals See also Nongovernment nonbusiness organizations (NNO) charity care, 776 contractual allowances, 776 current fund accounting and, 764 expenditure and expense classifications, 758 issues relating to, 776 malpractice and, 776 plant funds and, 768–769 House Ways and Means Committee, 415 I IAS, see International Accounting Standards (IAS) IASB, see International Accounting Standards Board (IASB) IASC, see International Accounting Standards Committee (IASC) IFRS, see International Financial Reporting Standards (IFRS) Implied values, see Allocation and depreciation of differences between implied and book values; Consolidated financial statements Importing of goods and services, 438–441 Importing transactions, 439–440 Inco Ltd., Income adjustment of prior years, partnerships and, 568 Income statement, 137, 138, 146 Income tax fund accounting and, 645 interim financial reporting and, 536–538 Incorporation of partnership, 616–618 Indirect acquisition costs, 45 Indirect exchange quotations, 434 Inflationary economy, affiliates operating in, 489 Infrastructure assets, 711 Insolvency, 378–379 See also Reorganizations Installment liquidation, partnership, 608–616 Intangible assets, amortization of, 41 Intel, 122 Intercompany bonds: constructively retired, 377 holdings, 375–377 Intercompany dividends, elimination of, 137 Intercompany interest, 352–355 Intercompany pricing adjustments, 278 Intercompany profit: intercompany sales and, 278–279 prior to affiliation, 301–302 www.ebookslides.com 809 Index Intercompany rent, 352–355 Intercompany revenue elimination, 22, 155–156 Intercompany sales See also Upstream sales complete equity method and, 295–300 consolidated balances determination and, 271–280 cost method and, 281–289 of depreciable property, 325–332 determination of intercompany profit and, 278 determination of noncontrolling interest and, 330–332 eliminating intercompany profit and, 279 financial reporting objectives and, 271–272 inventory pricing adjustments, 278 of land, 322–325 noncontrolling interest and, 279–280 of nondepreciable property, 322–325 partial equity method and, 289–294 property/equipment disposal by purchasing affiliate, 350–351 realization through usage and, 325–326 subsidiary stock and see Subsidiary company(-ies) summary of workpaper elimination entries, 301 Intercompany service fees, 352–355 Interest: noncontrolling, 22–23 partnerships and, 563–565 Interim acquisitions: cost method full-year reporting, 157–158 cost method partial-year reporting, 157–158 equity method full-year reporting, 158–162 equity method partial-year reporting, 158–162 Interim disclosures, segment reporting and, 528 Interim financial reporting, 533–539 accounting changes in interim periods, 538 costs and expenses and, 536 costs associated with revenues and, 535–536 current requirements, 533–534 income tax provisions, 536–537 interim operating losses and, 538 minimum disclosures in interim reports, 539 problems in, 533–534 revenues and, 534 Internal expansion, Internal service funds, 687, 709–710 International accounting See also Foreign affiliates; Foreign currency transactions; Forward contracts exchange rate translation, 433–436 financial statement disclosure, 502–503 foreign currency transactions, 437–441 functional currency is local currency, 492–496 functional currency is U.S dollar, 497–500 hedging foreign exchange risk, 446–449 and increased focus on standards, 380–382 measured vs denominated transactions, 436–437 objectives of translation, 484–485 operations of foreign affiliates, 482–483 translating financial statements of foreign affiliates, 483–484 translation of foreign currency financial statements, 487–492 International Accounting Standards (IAS), 381 International Accounting Standards Board (IASB), 381–385 and FASB, 38, 382–384, 502–503 similarities and differences, 387 International Accounting Standards Committee (IASC), 380 accountability and funding, 383–384 International convergence issues LIFO inventories, 414–416 non-U.S companies, 416–418 private-, small-, and medium-sized entities, 416 International Financial Reporting Standards (IFRS): adoption approaches for, 384–385 business combination and consolidation, 396–414 comprehensive consolidation, 402–409 condorsement, 383–385 consolidated statement of cash flows, 395 definitions, 381, 382 financial reporting system, 383 vs U.S GAAP, 385–387 Intrinsic value of forward contracts, 444 Inventory(-ies): downstream sales and, 273, 275 fund accounting and, 665–666 Investee, 123 Investment accounting, nongovernment nonbusiness organizations, 772–773 Investment elimination in consolidated financial statements, 87–90 Investment pools, 773 Investment returns, 754 Investments in subsidiaries, 83, 123–131 carried at complete equity, 154 carried at equity year after acquisition, 150–153 carried at equity year of acquisition, 145–150 complete equity method for, 128–131, 144–155, 224–232 cost method for, 126–127, 202–212 partial equity method for, 127–128, 144–155, 215–222 Investment trust funds, 687 Investor, 123 Irvine Biomedical, Inc., 42 J Joint ventures, 555–556 Junk bond market, merger financing and, K Kerschner, Edward, 13 Kohlberg Kravis Roberts & Co., 59 KPMG Peat Marwick, 10, 14 Kraft Foods, 10, 33–34 L Land, intercompany sale of, 322–325 Lands’ En, 453 Last-in, first-out (LIFO), 420, 421 LBO, see Leveraged buyouts (LBO) Legal entity, 83 Letter notation of adjusting entries, 91 Leveraged buyouts (LBO), 5, 59 Liabilities, assumed, 14, 42 Liability, in general partnerships, 554 Life income fund accounting, 775–776 LIFO (last-in, first-out), 420, 421 Limited liability partnerships (LLP), 555 Limited life, in general partnerships, 554–555 Limited partnerships, see General partnerships; Partnerships Liquidation, 378–379 of dividends, 125, 127 of partnerships see Partnership liquidation LLP (limited liability partnerships), 555 Loan fund accounting, for nongovernment nonbusiness organizations, 774 Local governmental units, see Fund accounting; State and local government Lockheed Martin Corp., 14 LoJack, 245–246 Long-term debt, governmental accounting and, 715–716 www.ebookslides.com 810Index Losses, definition of, 28 Loss or lack of benefit, 30 Lucent Technologies Inc., M M&A, see Mergers and acquisitions (M&A) Major customer disclosures, segment reporting and, 529, 530 Malpactice, hospital, 776 Mandatory transfers, 765–766 Manufacturing, depreciable assets used in, 242 Market value accounting, 26 Mattel, 465–466 McAfee, 122 MCI, 2, 10 Measured vs denominated transactions, 436–437 Measurement period, adjustments during, 47, 64–65 Medianet Group, 303–305 Merger mania, Mergers and acquisitions (M&A), 1–3 See also Business combinations and bankruptcies, 3, conglomerate mergers, earnings dilution and accretion, 19, 20 junk bond market and, merger mania, planning for, statutory merger, 11, 12 stock prices and, 14 Merrill Lynch, 128 Method of payment in business combinations, 16–20 MFOA (Municipal Finance Officers Association), 684 Microsoft, 10 Minimum disclosures, in interim reports, 539 Minority interest, 94 Modified accrual accounting, 642 Morgan Stanley, Morgan Stanley Dean Witter, 41 Municipal Finance Officers Association (MFOA), 684 Mutual agency, in general partnerships, 554 N National Council on Governmental Accounting (NCGA), 685 National GAAP, 415 NCGA (National Council on Governmental Accounting), 685 Negotiated price, in business combinations, 17 Net assets: government fund balances and, 718–720 not-for-profit organizations, 753 in price determination in business combinations, 16–20 Net financial resources, 650 Net income, see Consolidated net income Net income or loss, allocation in partnerships, 561–565 Net investment hedges, 456–457 News Corp., 10 NNO, see Nongovernment nonbusiness organizations (NNO) Nonbusiness organizations See also Fund accounting classifications of, 633 debt issue proceeds, 644 distinctions from profit-oriented enterprises, 633–634 financial accounting for, 634–638 reporting standards for, 634–638 Noncontrolling interest, 60 See also Controlling interest cash flows and, 201 consolidated net income and, 138–139, 149 cost method analysis and, 213–214 definition of, 78 determination in intercompany sales, 279–280 partial equity method analysis and, 222–223 subsidiary as intercompany seller and, 337 for upstream sales, 279–280 Nondepreciable property, intercompany sale of, 322–325 Nonexhaustible assets, 771 Nongovernment nonbusiness organizations (NNO): accrual basis of accounting for, 757 agency (custodial) fund accounting, 774–775 annuity and life income fund accounting, 775–776 classifications of, 750 college and university issues, 776 contributions and, 757–763 current fund accounting, 763–766 endowment fund accounting, 771–772 financial reporting for not-for-profit organizations, 752–755 financial reporting for public colleges and universities, 755 fund accounting, 756–757 generally accepted accounting standards for, 750–752 hospital issues, 776 investment accounting, 772–773 loan fund accounting, 774 plant fund accounting, 766–771 revenue and expense classification, 757 Nonmandatory transfers, 766 Nonoperating income, colleges and universities and, 776 Nonprofit institutions of higher learning, 750 See also Nongovernment nonbusiness organizations (NNO) Nonrecurring items boosting earnings, 15 Nortel Networks, 376 Northrop Grumman Corp., Norton-Simon, Not-for-profit organizations, 752–755 basic financial statements, 752–753 cash flows, statement, 754–755 endowment funds, 754 financial assets disclosures, 755 fundraising expenses, 755 investment returns, 754 net assets, 753 placed-in-service approach, 754 public colleges and universities, financial report for, 755 reporting of expenses, 753 Number notation, eliminating entries and, 91 O Object class classifications, 647 Offer rates, 434 ONNOs, see Other nongovernment nonbusiness organizations (ONNOs) Open-market transaction, 372 Operating income, colleges and universities and, 776 Operating losses, interim, 538 Operating segments, 523 See also Segment reporting Option-based derivatives, 443 Options, in hedging foreign currency changes, 460–463 Oracle, 10 Organizational unit classifications, 647 Other nongovernment nonbusiness organizations (ONNOs), 750 current fund accounting and, 765 expenditure and expense classifications, 758 nonexhaustible assets, 771 plant funds and, 769–770 Ownership changes, partnerships and, 569–571 Ownership interest changes in, 372–374 www.ebookslides.com 811 Index P Pac-man defense, Parent company concept, 21–24, 79 Partial elimination, intercompany profit and, 24 Partial equity method, 276 accounting for investments by, 123–128 downstream sales and, 275–278 implied and book values and, 222–223 intercompany sale of inventory and, 294–295 property/equipment disposal by purchasing affiliate and, 340–342 recording investments in subsidiaries and, 144–155, 215–222 upstream sales and, 332–333 Partnership agreements, 556–557 Partnership equity, 558 Partnership liquidation See also Partnerships advance plan for cash distributions, 610–616 installment liquidation, 608–616 marshaling of assets, 604 preparing a schedule of, 607–608 priorities of partnership and personal creditors, 604–606 safe payment approach and, 608–610 simple liquidation illustrated, 606–608 steps in, 602–603 Partnerships See also Partnership liquidation accounting for, 558–566 acquisition of interest by investing assets, 575–579 acquisition of interest by payment to one partner, 572–573 adjustment of income of prior years and, 568 admission of new partner, 571–579 allocation of net income or loss, 561–565 bonuses and, 564–565 bonus method and, 561, 571, 576, 583 capital balances and, 562–563 capital interest and, 557 characteristics of, 554–556 death of partner, 585 definition of, 553 dissolution and, 569 drawing and capital accounts, 558–559 financial statement presentation, 568–569 fixed ratio and, 562 general partnerships, 554–555 goodwill implied by purchase price and, 573–574 goodwill method and, 560, 571, 576–577, 583–584 incorporation of, 616–618 insufficient income to cover allocation, 565–566 interest allowances and, 564 interest on capital investment and, 563–564 joint ventures, 555–556 limited partnerships, 555 ownership changes and, 569–571 partnership agreements, 556–557 partnership equity vs shareholders equity, 558 payment to retiring partner, 583–585 profit interest and, 557 reasons for forming, 553 recording changes in, 571 recording formation of, 559–561 salaries and interest as an expense and, 566–567 salary allowances and, 564 statistics for partnerships in U.S., 552 steps for successful, 553 Uniform Partnership Act (UPA), 603, 604 valuation and changes in ownership, 569–571 withdrawal of partner, 582–585 Payment methods in business combinations, 16–20 Pension trust funds, 687 Permanent funds, 687, 704–707 Personal creditors, partnership liquidation and, 604–606 Phelps Dodge, Pitfalls, avoiding, before deal, 14–16 Placed-in-service approach, 754 Plant funds, 766–771 colleges and universities, 767–768 hospitals, 768–769 nonexhaustible assets, 771 other nongovernment nonbusiness organizations, 769–770 voluntary health and welfare organizations, 769–770 Pledges and grants, 645, 759 Poison pills, Pooling of interests, 27, 40, 60 PPE (property, plant, and equipment), 391 Preaffiliation profit, 301–302 Premiums, takeover, 13 Prepayments, fund accounting and, 666 Presentation methods: in segment reporting, 529 Present value measurements, 442 Price, determining in business combinations, 16–20 Primestar, 10 Private Company Council (PCC), 416 Private-purpose trust funds, 688 Product of service disclosures, 528 Profit, intercompany, 24 Profit interest, partnership agreements and, 557 Pro forma statements, 57–58 Program revenues, governmental, 724 Property: depreciable, 325–332 disposal by purchasing affiliate, 340–342, 350–351 fund accounting and, 645 intercompany sale of, 325–332, 342–344, 352 nondepreciable, 322–325 taxes, 645 Property, plant, and equipment (PPE), 391 Proportional consolidation, 22 Proprietary funds, 640–641, 687 enterprise funds, 687, 708–709 internal service funds, 687, 709–710 governmental fund entities, 707–710 Public colleges and universities, financial reporting for, 755 Public nonprofit organizations, accounting for, 772 Pure endowment funds, 771 Put option, 460 Q Quantitative thresholds, operating segments, 524 R R&D, see Research and development (R&D) Realization through usage, 325–326 Recession of 2008, Reconciliation, segmental data, 532–533 Reform Act, see Bankruptcy Reform Act of 1978 Rent.com, 244 Rent, intercompany, 352–355 Reorganizations, 378–379 Replacement cost new, 239 Reportable segments, 522 Reported book value, 23 Reporting currency, 437 www.ebookslides.com 812Index Required supplementary information (PSI), 662 Research and development (R&D): capitalization of, 42, 192 expensing of, 194 international differences, 391 Resource outflows, fund accounting and, 645–647 Restricted fund entities, 640 Retained earnings, See also Consolidated retained earnings statement, 137, 146 Return on asset (ROA), 18, 20 Return on equity (ROE), 20 Revco D.S Inc., 10 Revenue bonds, 708 Revenues: definition of, 28 fund accounting, 643–644, 652–656 interim financial reporting and, 534–536 matching expenses to, 30 nongovernment nonbusiness organizations and, 757 recognition, 87, 322 Right to dispose, in general partnerships, 554 Rite Aid Corp., 10 RSI (required supplementary information), 662 S Safe payment approach, partnership liquidation and, 608–610 St Jude Medical, 42 Salaries, partnerships and, 564 Sales taxes, fund accounting and, 645 Schedule of partnership realization and liquidation, 607–608 SEC, see Securities and Exchange Commission (SEC) Securities Act of 1934, 416 Securities and Exchange Commission (SEC), 382–386, 502 Security issuance costs, 45 Segment reporting: aggregation criteria and, 523–524 bases for measurement information and, 526–527 basic disclosure requirements, 523 determining operating segments, 523–524 enterprisewide disclosures, 528–529 and future prospects, 523 general information and, 526 geographic area disclosures, 529 geographic area reporting, 529 interim disclosures, 528 major customer disclosures, 529 operating profit or loss, 523 presentation methods, 529 product/service disclosures, 528 quantitative thresholds and, 524 reconciliation of segmental data, 528, 532–533 reportable information to be presented, 524–529 revenue, 523 segment assets information and, 526 segment profit or loss information, 526, 528 seventy-five percent combined revenue test, 524–529 standards of financial accounting for, 521–533 terminology regarding, 522 Selling affiliate, in intercompany sales, 279 Serial bonds, 696–697, 715 Service fee intercompany, 352–355 revenue, 776 Settlement rate spot date, 444 Seventy-five percent combined revenue test, 524–529 Shareholders equity, 558–559 Sherwin-WIlliams Company, 483 Significance tests, 525 Significant transactions/events, 397 Skype Technologies S.A., 62–64 Small-and medium-sized entities (SMEs), 416 SolarCity, 61–62 Sound value, 239 Sound value/depreciated replacement cost approach, 391 Special revenue funds, 686–687, 689 Speculation, forward contracts and, 446 Spin-offs, Split accounting, intrinsic and time value elements, 463 Spot rates, 434, 445 State and local government See also Fund accounting capital assets and, 712–714 external reporting requirements, 716–717 fiduciary funds, 687–688, 711 fund entities, 686–688 generally accepted governmental accounting standards, 750–752 governmental fund, 686–707 government fund balances and governmentwide net assets and, 718–720 government fund-based reporting, 717–720 government-wide reporting, 721–725 long-term debt and, 715–716 proprietary funds, 687, 707–710 structure of governmental accounting, 686–688 Statement of activities, 724–725 Statement of changes in equity (SOCE), 387 Statement of comprehensive income, 30 Statement of recognized income or expense (SORIE), 387 Statement of Shareholders’ Equity, 496 Statements of Financial Accounting Concepts (SFAC), 27 No 2, 751 No 4, 27, 635, 751, 752 No 5, 29, 30 No 6, 29, 751 No 7, 27 Statements of Financial Accounting Standards (SFAS): No 14, 521 No 21, 521 No 52, 483 No 131, 521, 536 No 133, 442 No 141, 38 No 160, 24 No 168, 385, 386 No 141R, 3, 21, 24, 38 Statutory consolidation, 11 Statutory mergers, 11, 12 Stock acquisitions, 11 advantages of, 83 asset acquisitions vs., 10 consolidated financial statements and, 83–84 firm valuation and, 16 interim acquisitions, 156–162 investments at date of acquisition, 84–85 purchasing additional shares, 163 reasons for, 83 recording investments in, 144–155 requirements regarding consolidation of, 82–83 stock exchange ratios, 17 subsidiaries and control, 79–82 terminology regarding, 78 treasury stock holdings, 100–101 use of workpapers and, 86–102 www.ebookslides.com 813 Index Strategic acquisitions, Subsidiary company(-ies), 21 See also Consolidated financial statements; Ownership interest; Stock acquisitions asset valuation and classification, 84 book value of, 88, 89 definition of, 78 disposal of depreciable assets, 240–242 implied value of, 88, 89 initial investment in, 83–84 as intercompany seller, 279, 330–332 more then one subsidiary company and, 103–106 Subsidiary dividends paid, 163 Sun, 10 Supplemental materials, 374, 377, 379 Symantec, 322 Synergies, financial, Uniform CPA Exam, 385 Uniform Partnership Act (UPA), 603, 604 Unlimited liability, in general partnerships, 554 Unrealized intercompany profit, 271 Unrecognized foreign currency commitment, 450–453 Unrestricted fund entities, 640 UPA(Uniform Partnership Act), 603, 604 Upstream sales, 271 See also Intercompany sales cost method and, 281–286 noncontrolling interest and, 279–280, 330–332 subsidiary as intercompany seller, 345–351 U.S dollar, 436, 497–500 U.S GAAP: and FASB codification project, 30 IFRS vs., 385–387 T Valuation, changes in partnership ownership and, 569–571 Value of the forward contracts, 444 Vertical integration, Viva Group, Inc., 244 Vivendi Universal, Voluntary health and welfare organizations (VHWOs), 750 See also Nongovernment nonbusiness organizations (NNO) expenditure and expense classifications, 758 plant funds and, 769–770 Takeover premiums, 13 Tax Reform Act of 1986, Tax returns, see Income tax Temporal conversion method, 486, 489–491, 497–500 Tender offers, Term bonds, 697–699, 715 Term endowment funds, 771 Tesla, 61–62 Texas Department of Public Safety, 683 Thomson Reuters, Thrifty PayLess Holdings Inc., 10 Time elements, in forward contracts, 444 Time Warner Cable (TWC) Inc., 191 T-Mobile, 10 Total elimination, 24 Transfer pricing, 523 Translation, exchange rate, 433–436 Translation of foreign financial statements: adjustment, 484 analysis of gain or loss, 500 current rate method, 486 economies not highly inflationary, 490–492 of financial statements, 483–484 functional currency concept, 484–485 functional currency is local currency, 492–49 functional currency is U.S dollar, 497–500 gain or loss, 484 high inflationary economies, 489 methods of, 486 objectives of, 484–485 process of, 487–492 temporal method, 486 Troubled debt restructurings, see Insolvency Trust funds, 704–707, 711 TRW Inc., Two-transaction approach, 441 U Underlying value, in hedge accounting, 442–443 Unfriendly (hostile) combinations, V W White knight, White squire, Workpapers: basic eliminating entries, 154–155 cost method and, 136–144 disposal of property and equipment by purchasing affiliate, 350–351 downstream sales, 272–275 entry adjustment prior to eliminating, 102 equity method and, 144–155 functional currency is local currency, 492–496 functional currency is U.S dollar, 493 implied value and, 90–92 intercompany balance sheet eliminations, 101–102 intercompany sales, 289–294, 322–325 interim acquisitions of subsidiary stock, 156–162 investment costs and, 110–120, 202–222, 224–232 more than one subsidiary company, 103–106 preparing consolidated statements using, 86–102 subsidiary as intercompany seller, 332–342 upstream sales, 281–286, 345–351 workpaper-only entries, 89 X XTO Energy, 10 Y Yahoo, 10 www.ebookslides.com WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 19.5 Accounting for Current Funds 763 19.6 Accounting for Plant Funds 766 19.7 Accounting for Endowment Funds 771 19.8 Accounting for Investments 772 19.9 Accounting for Loan Funds 774 19.10 Accounting. .. addition, online materials include an expanded discussion of the accounting for investments (See www.wiley.com/go /jeter/ AdvancedAccounting7e.) 11 Learning objectives are included in the margins of... articles in The Accounting Review, the Journal of Accounting Research, the Journal of Public Economics, the Journal of Business, Contemporary Accounting Research, the Journal of Accounting and