And s ltd have a june 30 year end p ltds consolidated

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P Ltd. and S Ltd. have a June 30 year-end. P Ltd.’s consolidated financial statements for the year ended June 30, Year 1, would consist of a consolidated balance sheet and the net income, retained earnings, and cash flows from P Ltd.’s separate entity state- ments. This is consistent with what would be done if the parent had purchased the net assets directly from the subsidiary. When a company acquires assets, it records these assets on its own books; it does not record the profit earned by the assets when they belonged to the previous owner. The parent’s income and retained earnings do not change on the date of acquisition. The consolidated statements will combine the results of the parent and subsidiary for transactions occurring on and subsequent to the date of acquisition. Push-down Accounting Under push-down accounting, on the date of acquisition the subsidiary revalues its assets and liabilities based on the parent’s acquisition cost. The allocation of the acquisition differential is “pushed down” to the actual accounting records of the subsidiary. This practice became permissible under Canadian GAAP in 1992 with the issuance of Section 1625, “Comprehensive Revaluation of Assets and Liabilities.” Push-down accounting is not presently allowed under IFRSs. Since it may be incorporated in IFRSs in the future, we will briefly describe how it works. Push-down accounting is another example where GAAP allowed a departure from historical cost accounting and allowed the use of current values in financial reporting. Even though the subsidiary was not involved in the transaction with the parent (the transaction involved the parent and the shareholders of the subsidiary), the subsidiary was allowed to revalue its assets and liabilities based on the value paid by the parent to acquire these net assets. Since the parent and subsidiary were not related prior to the acquisition, the amount paid by the parent was probably equal to or fairly close to the fair value of these net assets. So, why not use these values to provide more relevant, yet very reliable, information to the users of the subsidiary’s financial statements? Section 1625 allowed push-down accounting only when a subsidiary was at least 90 percent owned by a parent, and so theoretically a parent could demand a 95-percent-owned subsidiary to use it. Practically, it probably would not, because when a non-controlling interest is present, the consolidation becomes very com- plex and the benefits from its use disappear. We will not provide a detailed illus- tration of push-down accounting in the textbook; however, for those readers that wish to pursue this further, a full discussion and illustration of comprehensive revaluations can be found on Connect at .
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  • Fall '12
  • Smith
  • Balance Sheet, consolidated balance sheet, S Ltd, acquisition differential, hiL01537_ch04_120-169.indd Page

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