Brief Contents
About the Authors v
1 The Equity Method of Accounting for Investments 1
2 Consolidation of Financial Information 39
3 Consolidations—Subsequent to the Date of Acquisition 93
4 Consolidated Financial Statements and Outside Ownership 159
5 Consolidated Financial Statements—...
,Brief Contents
About the Authors v 10 Translation of Foreign Currency Financial
Statements 477
1 The Equity Method of Accounting for 11 Worldwide Accounting Diversity and
Investments 1 International Standards 537
2 Consolidation of Financial 12 Financial Reporting and the Securities and
Information 39 Exchange Commission 591
3 Consolidations—Subsequent to the Date of 13 Accounting for Legal Reorganizations and
Acquisition 93 Liquidations 617
4 Consolidated Financial Statements and 14 Partnerships: Formation and Operation 667
Outside Ownership 159 15 Partnerships: Termination and
5 Consolidated Financial Statements—Intra- Liquidation 705
Entity Asset Transactions 215 16 Accounting for State and Local Governments
6 Variable Interest Entities, Intra-Entity (Part 1) 737
Debt, Consolidated Cash Flows, and Other 17 Accounting for State and Local Governments
Issues 265 (Part 2) 797
7 Consolidated Financial Statements— 18 Accounting and Reporting for Private
Ownership Patterns and Income Taxes 321 Not-for-Profit Entities 861
8 Segment and Interim Reporting 365 19 Accounting for Estates and Trusts 919
9 Foreign Currency Transactions and Hedging
Foreign Exchange Risk 407 INDEX 953
xvi
,Contents
About the Authors v Google and Fitbit 42
Uber and Postmates 43
Business Combinations, Control, and Consolidated
Chapter One Financial Reporting 43
The Equity Method of Accounting for Business Combinations—Creating a Single Economic
Investments 1 Entity 43
Control—An Elusive Quality 45
Why Do Business Firms Invest in the Equity Shares of
Consolidation of Financial Information 46
Other Business Firms? 1
The Reporting of Investments in Corporate Equity Financial Reporting for Business Combinations 47
The Acquisition Method 47
Securities 2
Consideration Transferred for the Acquired Business 47
Fair-Value Method 2
Contingent Consideration: An Additional Element
Cost Method (Investments in Equity Securities without
of Consideration Transferred 47
Readily Determinable Fair Values) 3
Assets Acquired and Liabilities Assumed 48
Consolidation of Financial Statements 3
Goodwill, and Gains on Bargain Purchases 49
Equity Method 4
Discussion Question: Did the Cost Method Invite Procedures for Consolidating Financial Information 49
Acquisition Method When Dissolution Takes Place 50
Earnings Manipulation? 5
Related Costs of Business Combinations 55
Application of the Equity Method 5
The Acquisition Method When Separate Incorporation Is
Criterion for Utilizing the Equity Method 5
Maintained 55
Accounting for an Investment—The Equity Method 7
Acquisition-Date Fair-Value
Equity Method Accounting Procedures 9
Excess of Investment Cost over Book
Allocations—Additional Issues 60
Intangibles 60
Value Acquired 9
Preexisting Goodwill on Acquired Firm’s Books 62
Discussion Question: Does the Equity Method Really
Acquired In-Process Research and Development 62
Apply Here? 10
The Amortization Process 12
Convergence between U.S. and International Accounting
Standards 64
International Accounting Standard 28—Investments in
Summary 64
Associates 14
Discussion Question: What if an Acquired Entity is Not a
Equity Method—Additional Issues 14
Business? 65
Reporting a Change to the Equity Method 14
Reporting Investee’s Other Comprehensive Income and
Appendix A 69
Irregular Items 16
Legacy Methods of Accounting for Business
Combinations 69
Reporting Investee Losses 17
Reporting the Sale of an Equity Investment 18
The Purchase Method: An Application of the Cost
Principle 69
Deferral of Intra-Entity Gross Profits in Inventory 19
The Pooling of Interests Method: Continuity of
Downstream Sales of Inventory 19
Upstream Sales of Inventory 21
Previous Ownership 71
Financial Reporting Effects Comparisons across the Pooling of Interests,
Purchase, and Acquisition Methods 72
and Equity Method Criticisms 22
Appendix B 74
Equity Method Reporting Effects 22
Pushdown Accounting 74
Criticisms of the Equity Method 23
Fair-Value Reporting for
Equity Method Investments 23
Chapter Three Consolidations—
Summary 25 Subsequent to the Date of Acquisition 93
Consolidation—The Effects Created
Chapter Two
by the Passage of Time 94
Consolidation of Financial Information 39 Consolidated Net Income Determination 94
Expansion through Corporate Takeovers 40 The Parent’s Choice of Investment Accounting 94
Reasons for Firms to Combine 40 Investment Accounting by the Acquiring Company 94
Goodyear Tire & Rubber and Cooper Tire & Rubber 42 xvii
, Contents
Internal Investment Accounting Alternatives—The Revenue and Expense Reporting for
Equity Method, Initial Value Method, and Partial Equity Midyear Acquisitions 179
Method 95 Consolidating Postacquisition Subsidiary Revenue and
Discussion Question: How Does a Company Really Expenses 179
Decide Which Investment Method to Apply? 96 Acquisition Following an Equity Method Investment 181
Subsequent Consolidation—Investment Recorded by the Step Acquisitions 181
Equity Method 97 Control Achieved in Steps—Acquisition Method 182
Acquisition Made during the Current Year 97 Example: Step Acquisition Resulting in Control—Acquisition
Determination of Consolidated Totals 100 Method 182
Consolidation Worksheet 101 Worksheet Consolidation for a Step Acquisition
Consolidation Subsequent to Year of Acquisition—Equity (Acquisition Method) 184
Method 104 Example: Step Acquisition Resulting after Control Is
Subsequent Consolidations—Investment Recorded Using Obtained 184
Initial Value or Partial Equity Method 107 Discussion Question: Does GAAP Undervalue Post-
Acquisition Made during the Current Year 108 Control Stock Acquisitions? 186
Consolidation Subsequent to Year of Acquisition—Initial Parent Company Sales of Subsidiary
Value and Partial Equity Methods 111 Stock—Acquisition Method 187
Discussion Question 115 Sale of Subsidiary Shares with Control Maintained 187
Excess Fair Value Attributable to Subsidiary Long-Term Sale of Subsidiary Shares with Control Lost 188
Debt: Postacquisition Procedures 117 Cost-Flow Assumptions 188
Goodwill Impairment 119 Accounting for Shares That Remain 189
Assigning Goodwill to Reporting Units 120 Comparisons with International Accounting Standards 189
Qualitative Assessment Option 120 Summary 190
Testing Goodwill for Impairment 121 Illustration—
Accounting and Reporting for a Goodwill Impairment Chapter Five
Loss 122 Consolidated Financial Statements—Intra-
Comparisons with International Accounting Standards 123 Entity Asset Transactions 215
Amortization and Impairment of Other Intangibles 124
Intra-Entity Inventory Transfers 216
Contingent Consideration—Postcombination 125
The Sales and Purchases Accounts 216
Accounting for Contingent Consideration in Periods
Intra-Entity Gross Profit—Year of Transfer (Year 1) 217
Subsequent to a Business Combination 126
Discussion Question: Earnings Management 218
Summary 128
Intra-Entity Gross Profit—Year Following Transfer
Appendix: Private Company Accounting for Business
(Year 2) 219
Combinations 132
Intra-Entity Gross Profit—Effect on Noncontrolling
Interest 221
Chapter Four Intra-Entity Inventory Transfers Summarized 222
Intra-Entity Inventory Transfers Illustrated: Parent Uses
Consolidated Financial Statements and Outside
Equity Method 223
Ownership 159
Effects of Alternative Investment Methods on
Consolidated Financial Reporting in the Presence of a Consolidation 231
Noncontrolling Interest 160 Discussion Question: What Price Should We Charge
Subsidiary Acquisition-Date Fair Value in the Presence of a Ourselves? 234
Noncontrolling Interest 161 Intra-Entity Land Transfers 235
Discussion Question: Noncontrolling Interest Accounting for Land Transactions 235
Valuation 162 Eliminating Intra-Entity Gains—Land Transfers 236
Control Premiums, Noncontrolling Interest Valuation, and Recognizing the Effect on Noncontrolling Interest—Land
Goodwill 163 Transfers 237
Allocating Consolidated Net Income to the Parent Intra-Entity Transfer of Depreciable Assets 238
and Noncontrolling Interest 165 Deferral and Subsequent Recognition of Intra-Entity Gains 238
Partial Ownership Consolidations Depreciable Asset Intra-Entity Transfers Illustrated 239
(Acquisition Method) 166 Years Following Downstream Intra-Entity Depreciable Asset
Illustration—Partial Acquisition with No Control Transfers—Parent Uses Equity Method 241
Premium 167 Effect on Noncontrolling Interest—Depreciable Asset
Illustration—Partial Acquisition with Control Premium 176 Transfers 242
Effects Created by Alternative Investment Methods 179 Summary 242
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