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1 16 creatingbusinessentities

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Unformatted text preview: a business combination or controlling situation. In its financial statements, the investor company reports its interest in the investee as an investment. 1-15 Organizational Structure and Financial Reporting D) OTHER BENEFICIAL INTEREST One company may have a beneficial interest in another entity even without a direct ownership interest When the beneficial interest is based on contractual agreements → reporting rules may be reporting rules may be complex and depend on the circumstances. 1-16 Creating Business Entities The company transfers assets, and perhaps liabilities, to an entity that the company has created & controls & in which it holds majority ownership: 1. 2. The company transfers assets and liabilities to the created entity at BOOK VALUE. The transferring company recognizes an ownership interest in the newly created entity equal to the book value of the net assets transferred. 1-17 Creating Business Entities Recognition of fair values of the assets transferred in excess of their carrying values on the books of the transferring company is not appropriate in the absence of an arm’s­ length transaction No gains or losses are recognized on the transfer by the transferring company 1-18 Creating Business Entities If the value of an asset transferred to a newly created entity has been impaired prior to the transfer and its fair value is less than the carrying value on the transferring company’s books → the transferring company should recognize an impairment loss and transfer the asset to the new entity at the lower fair value. 1-19 The Development of Accounting for Business Combinations In the past, there were two methods: Pooling of Interests Method (Investment = BV of Sub) Purchase Method (Investment in Sub = FV given) 2001 ­ the FASB eliminated Pooling of Interests 2007 ­ FASB 141R replaced the Purchase Method with the Acquisition Method. Although all business combinations must now be accounted for using the Acquisition Method, many companies’ financial statements may in...
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