Investments and consolidation
The Consolidation Machine
Control means consolidate: gross goodwill up to 100 percent, eliminate all intercompany activity, and park NCI in equity.
How the exam words it
- -The stem gives a purchase price for a controlling stake and asks for goodwill 'using the full goodwill method'.
- -It asks 'how much net income is attributable to the noncontrolling interest', sometimes with an upstream sale.
- -Intercompany sales occurred and it asks 'what intercompany elimination is required'.
- -An entity holds a small equity stake but 'is the primary beneficiary' of a VIE and it asks how to account for it.
The playbook
- 1Consolidate at over 50 percent voting control, or at any percentage when the investor is the primary beneficiary of a VIE.
- 2Full goodwill: implied 100 percent fair value (price paid divided by percentage acquired) minus the fair value of identifiable net assets.
- 3Eliminate 100 percent of intercompany revenue and COGS regardless of ownership, and defer unrealized profit still in ending inventory.
- 4NCI sits in equity; its income is its share of the sub's income adjusted for upstream unrealized profit and fair value amortization.
The trap
Computing proportional goodwill under the full goodwill method. Gross the price up to an implied 100 percent fair value before subtracting identifiable net assets.
How the exam varies it
The same pattern, re-skinned along these axes:
Whether to consolidate (voting control versus VIE) versus howGoodwill versus NCI versus intercompany eliminationsUpstream versus downstream unrealized profit
Drill this pattern
8 questions of The Consolidation Machine from across the AUD topics. Clear it by getting 5 right with a streak of 3.