ACC 401 Advanced Accounting Week 4 Discussion

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 1/6

Select: AllAll NoneNone

Message Actions Message Actions Expand AllExpand All Collapse AllCollapse All

12 Post(s) in this Thread 10 Unread 0 Unread Replies to Me

Week 4 Discussion C O L L A P S E

posted 9 years ago (last edited 1 year ago)Anonymous

QuoteQuote

Overall Rating:

Per the textbook, some investors (e.g., Warren Buffet) have contended that the U.S. GAAP treatment undervalued the parent’s investment carrying value for post-control step acquisitions. Construct one (1) argument in which you provide at least two (2) reasons for the U.S. GAAP treatment of reporting additional investments in subsidiaries when the parent previously established control. Provide support for your rationale. Determine the main characteristics of a variable interest entity (VIE). Evaluate the usefulness to investors of the inclusion of VIEs in the company’s consolidated financial statements. Provide support for your rationale.

"Consolidated Financial Statements and Variable Interest Entities"

Reply

RE: Week 4 Discussion

3 days agoLaShundra Thomas Overall Rating:

There is a smaller capitalization of an entity..

INFLATION ARGUMENT: It refers to the general increase in the prices of commodities. It can

be brought about by low purchasing power of money hence undervaluation of the

investments to curb the effect of inflation.

REASONS FOR UNDERVALUATION BY USA GAAP

The acquirer preserves original book value of each investment of its control without

considering economic change like inflation.

The acquire marks each incremental investment to fair value as of the acquisition date

immediately after acquisition. Also the date of interest is the date on which the acquirer

obtains control of the subsidiary. Gains and losses obtained in revaluation of holdings are

included in current earnings. The outcome in this case will be greater as a result of all

recorded assets and liabilities stated at fair value.

MAIN CHARACTERISTICS OF A VARIABLE INTEREST ENTITY (VIE)

RefreshRefreshSearchSearchDenise Bryant 111DISCUSSION BOARDH

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 2/6

Residual equity holders have no control over the entity.

Equity holders are protected from economic losses and uncertainty.

There is establishment of an entity with non-substantive voting interest.

USEFULNESS: It addresses entities for which the voting interest model is not appropriate

developed. This situation occurs when a controlling financial interest is achieved through

arrangements that do not involve voting interests.

Reply ▲ Hide 1 reply (1 unread)

RE: Week 4 Discussion

2 days agoDAVID REPP

Overall Rating:

LaShundra, thank you very much for this feedback. What are the ownership types a consolidation can be reported as and why? How is the cash flow statement prepared when consolidation occurs? Do you have any questions about the work? Take care Professor Repp

Reply

RE: Week 4 Discussion

2 days agoAsia Brown Overall Rating:

1. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interest in its subsidiary or if the parent sells some of its ownership interests in its subsidiary.

2. When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any controlling equity investment rather than the carrying amount of that retained investment.

The entity's equity is not sufficient to support its operations Residual equity holders do not control the VIE Residual equity holders are shielded from the gains and losses normally associated with ownership

Hello Professor Repp and classmates,

A noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or indirectly to a parent. The two reasons for the U.S. GAAP treatment of reporting additional investments in subsidiaries when the parent previously established control are as follows:

When a parent company acquires a controlling ownership interest with less than 100 percent of a subsidiary’s voting shares, it must account for the noncontrolling shareholders’ interest in its consolidated financial statements. The noncontrolling interest represents an additional set of owners who have legal claim to the subsidiary’s net assets.

A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. Characteristics include:

Denise Bryant 111DISCUSSION BOARDH

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 3/6

If an investor is the primary beneficiary of such an entity, the investor must consolidate its financial statements with those of the VIE. The primary beneficiary is the one that can direct the most significant economic activities of the VIE. Variable interest entities are used as special purpose vehicles to finance certain investments without putting the parent entity at risk of loss. Sources: 1. Joe B. Hoyle, Thomas F. Schaefer, Timothy S. Doupnik. Advanced Accounting, 13th Edition. Mc-Graw Hill Connect. New York, NY. https://strayer.vitalsource.com/#/books/9781260008722/cfi/6/28!/4/2/20/4/2/10@0:64.0 https://strayer.vitalsource.com/#/books/9781260008722/cfi/6/32!/4/2/18/10/2@0:0 2. https://www.fasb.org/summary/stsum160.shtml 3. https://www.accountingtools.com/articles/2017/5/8/variable-interest-entity Asia

Reply ▲ Hide 1 reply (1 unread)

RE: Week 4 Discussion

1 day agoDAVID REPP

Overall Rating:

Asia, thank you for this feedback. What are the steps to value a VIE in consolidation? If a parent increases their percentage in Company B to 90% up from 75% for $300,000 what are the journal entries both for the parent and the non-controlling interest? Is there any help you need with the homework? Best, Professor Repp

Reply

RE: Week 4 Discussion

1 day agoGeoffery Johnson Overall Rating:

Good Evening Class,

Two (2) reasons for the U.S. GAAP treatment of reporting

additional investments in subsidiaries when the parent previously established control. 1. Identifying the acquirer: The pushdown election is available for an acquired company’s separate financial statements but not for an acquirer’s consolidated financial statements since the acquirer must apply business combination accounting. Accordingly, the first step is to identify the acquirer in any change-in- control event. The acquirer is the entity or individual that obtains control of the company in a business combination. The acquirer is not always clear; in some cases, the legal acquirer may not be the same as the accounting acquirer. Example: Identifying the accounting acquirer Parent Co. acquires 100% of Target from Seller. To affect the transaction, NewCo. is formed by Parent Co. through an infusion of cash, which NewCo. Uses to acquire all the shares of Target. Target will continue as a wholly-owned subsidiary of NewCo. and NewCo. will be a reporting entity. 2. Shared control transfers may still result in pushdown: The new standard does not affect frequent control transfers. U.S. GAAP (ASC 805- 50-30-5) indicates that a company that receives net assets in a standard control transfer should record those net assets at the parent’s historical cost rather than at the transferring entity’s carrying amounts, if different. Therefore, even when a subsidiary elects not to apply pushdown accounting in its separate financial statements, its net assets may be subject to “push down” of the parent’s historical cost if those assets are transferred to another subsidiary under the parent’s control. Example: Transfer of net assets or equity interests between entities under common control Parent Co. has two wholly-owned subsidiaries; Sub A and Sub B, which both meet the definition of a business. Sub B is a separate reporting entity. Sub B was acquired in a previous reporting period by Parent Co., and pushdown accounting was not applied. Parent Co.’s historical cost of the assets and liabilities of Sub B differed from the carrying amounts in Sub B’s separate financial statements at the transfer date. In the

Denise Bryant 111DISCUSSION BOARDH

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 4/6

current reporting period, Parent Co. contributes its equity interest in Sub B to Sub A, and Sub B will continue to be a separate reporting entity.

Hoyle, J., Schaefer, T., Doupnik, T (2019). Advanced Accounting 13th Edition. Consolidation of Financial Information.

Reply ▲ Hide 1 reply (1 unread)

RE: Week 4 Discussion

19 hours agoDAVID REPP

Overall Rating:

Geoffery, thank you for this information. How then would this example be treated under IFRS rules? If the acquiring company paid $400,000 for a 90% interest in company B how is the non-controlling interest determined? Is there any help you. need with the homework? Take care Professor REpp

Reply

RE: Week 4 Discussion

1 day agoArtquishia Wainwright Overall Rating:

U.S GAAP treatment of Reporting Additional Investments

It is true that the current market valuation of the companies is always undervalued under GAAP. Firstly, GAAP does not record the unrealized increases in a firm’s market value as the reported asset amounts in increases. The failure to record the unrealized increase in firm’s market value affects the valuation of the companies. For instance, the parent’s payments for its post control equity acquisitions were in excess of the subsidiary’s proportionate carrying amounts (Hsu, Duh & Cheng, 2012). Considering the owners retain such transactions, no gain or losses are usually recorded. Thus, the parent company will reduce its paid in capital for excess of the purchase price over the carrying amount. The GAAP accounting is same to the retirement of stock for the payment in excess of the company certain carrying amount.

A second reason includes the failure to establish new valuation basis for subsidiary. When the date control is created, the GAAP does not require the new subsidiary’s valuation basis to be established. Additional acquisitions of the remaining portions of the non controlling interests do not establish new valuation basis for a subsidiary. In terms of a parent company, a new valuation of basis for subsidiary could be established. When the parent increases the consolidated carrying amount at the subsidiary usually earns income, and not by the subsequent purchases of the parent’s non controlling shares.

Variable Interest Entity (VIE)

The main characteristics of a variable interest entity (VIE) includes that the equity investment at must be adequate to allow the entity to finance their operations without additional financial support from other firms. The VIEs is also characterized with that the equity investors lacks key characteristics of a controlling financial interest. The features includes he direct or indirect ability to make decisions about the company’s operations through voting rights (Hsu et al., 2012). It also discusses the obligation to absorb the expected losses of the entity if they are incurred. The features indicate the implications of the variable interest entity and their impacts on business combinations.

The inclusion of VIEs in the company’s consolidated financial statements would be useful to the investors as it assists in improving the financial reporting by enterprises involved with the variable interest entities. Most of the accounting boards have argued that businesses, which have a financial

Denise Bryant 111DISCUSSION BOARDH

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 5/6

controlling interest in a variable interest entity, are able to impose effective enterprise controls (Reinstein, Churyk & Berde, 2012). The interpretation of the inclusion of the VIEs helps the investors to decide on whether to consolidate their entities. VIEs also enhance the effective distribution of risks to allow for the combination of interests. Therefore, the investors will have an opportunity to assess the enterprise risks and thus, providing information useful in making informed business and economic decisions.

Reply

RE: Week 4 Discussion

20 hours agoBrenda Frigo Santos

Overall Rating:

Hey guys,

Step Acquisition refers to acquisition of organization by applying step by step acquisition of entire or maximum shares of Acquiree Company to prove the ownership in the Acquiree Company. When a company have some shares of any entity and thereafter when that company bought for all shares or maximum shares of Acquiree Company then it is termed as “Step Acquisition”. This is possible only if the Acquirer has an option to buy the remaining shares of Acquiree Company and all the control is achieved in different stages & point of time. When Acquirer obtains the control over Acquiree then it will be treated as the part of Acquirer Company.

If the control is acquired in 4 stages then the assets and liability will be valued 4 times for consolidation purposed after obtaining the control over Acquiree Company. However, the subsequent acquisition by Parents Company will not affect the recognized fair values at the time of obtaining control over Acquiree Entity and it will remain same until the control is maintained subject to any valuation changes as per requirement of standards.

ASC – 805 under US GAAP deals with accounting and financial reporting for business combination and non-controlling interest. All the valuation of identifiable net assets and liability is measured at fair value in accordance with requirement of standards subject to certain exception where other provisions of GAAPs are applicable.

Therefore, we can conclude that step valuation is taken place as per rules and guidelines provided by standards and GAAPs for reporting purpose. Interest already obtained by Acquirer Company will not affect the valuation of further investment by Parent Company.

Miller, Paul. "A New Day for Business Combinations", Journal of Accountancy. June 1, 2008. https://www.journalofaccountancy.com/issues/2008/jun/anewdayforbusinesscombinations.html

Reply ▲ Hide 2 replies (2 unread)

RE: Week 4 Discussion

19 hours agoDAVID REPP

Overall Rating:

Brenda, thank you very much for this feedback. What are the different types of eliminating entries that are recorded in a consolidation? What is an example of an intra-entity debt transaction between a parent sand subsidiary? Is there any help you need with the homework? Best, Professor Rep

Reply

RE: Week 4 Discussion

14 hours agoRona Radcliffe

Overall Rating:

Denise Bryant 111DISCUSSION BOARDH

7/30/2020 Thread: Week 4 Discussion – ACC401012VA016-1206-001

https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_275976_1&nav=discussion_board&conf_id=… 6/6

Select: AllAll NoneNone

Message Actions Message Actions Expand AllExpand All Collapse AllCollapse All

HI Brenda,

You have presented a different perspective that I find interesting. You stated that based on the step valuation that is how the acquiring company maintains value and not the parent company. I did not consider that as an option, great observation!

Rona

Reply

RE: Week 4 Discussion

16 hours agoRona Radcliffe

Overall Rating:

1. Assign Value to the Subsidiary’s assets and liabilities 2. Value and Disclose the presence of other parent owners

1. Insufficient to support its operations 2. As a residual equity holder you do not have any control of the VIE 3. You are shielded from gains and losses if a Residual equity holder

Hi Prof.  & Fellow Classmates,

Welcome to Week 4!

“Consolidation financial Statements and variable interest entities”

My Argument

Based on research I tend to agree with the notion that the US GAAP does undervalue the parent’s investment. When there is an acquisition, it captures the subsidiary’s acquisition fair value as the relevant attribute for the non-controlling interest. Since a consolidated balance sheet provides an owners’ equity amount for the non-controller’s interest, it is not recognized that the parent owns 100% of the subsidiary’s assets and liabilities. After attaining control all previous investments should be fair value.

Therefore the following two (2) should be considered

Variable Interest Entities

By definition a Variable interest entity (VIE) is a legal entity in which an investor holds controlling interest despite not having a majority of the shared ownership.

Main characteristics:

With variable interest entities, it is basically used for investment purposes without any risk to the parent entity (investor).

 

Reply

←← OKOK

Denise Bryant 111DISCUSSION BOARDH