Understanding Initial Consolidations

This chapter provides an overview to initial consolidations. It discusses how to:

• Record the fair market value ledger entries of an acquired subsidiary.

• Record goodwill.

• Record adjusting entries when using the full year consolidation reporting method.

• Modify non-controlling interest (NCI) rules to incorporate the balances within the offset accounts.

• Record 100% implied value of goodwill to the subsidiary (Push Down Accounting).

Initial Consolidations Overview

The following diagram summarizes the process flows for initial consolidations based on a variety of accounting treatments:

Initial Consolidations Flow Diagram

Record Fair Market Value (FMV) Ledger Entries

When organizations acquire or increase the ownership in a subsidiary, they record adjusting entries to the subsidiary to mark the subsidiary’s assets and liabilities to the fair market value. You can record these entries either using the source general ledger or by using PeopleSoft Global Consolidations. To record separate journal entries for fair market value adjustments, you simply record the journal entries with the predetermined amounts.

To illustrate the recording of such an entry, refer to the following example of a parent acquiring an 80% stake in a subsidiary where the book value is $56,500.

Comparison of Book Value and Fair Market Value (FMV) of Subsidiary:

Recording Fair Market Value Adjustments table.

Knowing the Fair Market Value adjustments that you need to make for the portion of the acquired subsidiary, the following journal entry for the subsidiary describes how you might set up these adjustments in Global Consolidations.

The journal entry lists the acquired subsidiary (ACQ1) as the Ledger Unit. The accounts are specific for your installation. List the base currency for the subsidiary ledger and make sure you list the difference column values or the adjustment journal entry you need to make for your subsidiary ledger. You can use a separate dimension to segregate these entries if you wish. There is an attachment link that you can use to attach supporting documentation for your journal entry. The adjustments to the book value of the subsidiary's assets and liabilities should be amortized and this may be accomplished by using allocations or recurring journal functionality. Since you are recording these balances in Global Consolidations, you should rollforward the balances using the rollforward close process.

See Also

Understanding Manual Journals

Creating Recurring Journals

Understanding Allocations

Record Goodwill

Initial consolidation also requires the calculation and recording of goodwill. You record Goodwill either on the parent or on the subsidiary’s ledger. Additionally, you should decide if you are using the partial year or full year accounting method. The partial year accounting method captures a subsidiary's income statement information from the date of acquisition. The full year accounting method captures the subsidiary’s year-to-date income statement information. If you are using this method, you must record adjusting entries such as pre-acquisition income, and pre-acquisition dividends on the parent ledger to account for the change in ownership.

Here is an example illustrating how to record Goodwill on the parent ledger for the full year accounting method. The previous example illustrated the handling of adjusting entries for the subsidiary acquisition. The difference in the book value and the purchase price of the subsidiary acquisition creates goodwill in the amount of $8,000.

You would record the following entries on the parent’s books with the Global Consolidation Journal Entries page.

The use of the affiliate dimension allows you to track by subsidiary the goodwill amounts for each separate subsidiary you are booking to the parent.

Record Adjusting Entries When Using the Full Year Consolidation Reporting Method

When consolidating the financial statements of an acquired subsidiary, you need to make sure the initial consolidation takes into account any net income and declared dividends realized by the subsidiary before the parent acquisition of the subsidiary. Following our example above, with the increase of the FMV adjustments to Net Assets, the following illustrates the equity portion of the subsidiary.

If your organization acquires a subsidiary at some point during the reporting year at some ownership level you would need to calculate the pre-acquisition income expense to reduce the total net income owned by the parent using the following formula: (Change in Ownership) * (Year-to-Date Sub Net Income before Acquisition)

For example, say your organization acquired an 80% stake in a subsidiary on 02/01/04. The year-to-date net income for the subsidiary as of 02/01/04 is $20,000. The pre-acquisition income expense to realize on this transaction would be calculated as follows: (80%) * ($20,000) = $16,000.

Similar to the handling of pre-acquisition income for the subsidiary, you need to account for pre-acquisition declared dividends. Using the same ownership stake and acquisition date, say that the declared dividends paid out prior to the acquisition was $2,000. At an ownership stake of 80%, the pre-acquisition declared dividends is calculated as follows:

(80%) * ($2,000) = $1,600

You would record the following entries on the parent’s books with the Global Consolidation Journal Entries page to handle the pre-acquisition income expense and pre-acquisition declared dividends in the period in which the subsidiary was acquired.

Note. There is no impact on the parent's ledger when recording an offset account. It is only through the consolidation that these entries have an impact. The next section describes this process.

Modify Non-Controlling Interest (NCI) Rules to Incorporate the Balances Within the Offset Accounts

After recording your journal adjustment entries, you need to specify the offset accounts as input for the parent investment ChartField Value Set (accounts) for the Non-Controlling Interest (NCI) rules as follows:

The offset accounts that were used previously to record your journal entries enable the NCI engine to properly eliminate the parent investment in the subsidiary and subsidiary equity.

The offset accounts must be included as part of the Parent Investment Chartfield valueset. You can set up your ChartField Value Sets as part of your installation. In the example above, all offset accounts should be included in the GC_INVST_SUB_TB chartfield valueset.

See Understanding ChartField Value Sets.

The following table highlights the NCI rule chartfield valueset inputs and amounts for the NCI Rule page:

The following table highlights the outputs after the NCI engine has been run:

Record 100% Implied Value of Goodwill to the Subsidiary (Push Down Accounting)

Another way to handle subsidiary acquisition accounting is the Push Down Accounting method which essentially adjusts not only the net assets of a subsidiary, but also records the 100% implied value of goodwill on the subsidiary.

In the previous example where a parent acquired 80% of a subsidiary, the resulting goodwill was $8,000. Using the Push Down accounting method, the 100% implied value of the subsidiary is $8,000 divided by 0.8, or $10,000 resulting in goodwill recorded on the subsidiary at $10,000.

To illustrate this concept further, see the following:

The traditional goodwill calculation for the parent is zero because goodwill is already factored into the fair market value increase to the subsidiary’s book. The resulting journal entries for the sub are as follows:

Following our example from above, the subsidiary's equity would be the following.

Since there is no goodwill offset account for the parent, there is no need to modify the inputs to the parent investment for the NCI rule. However, if you use the full year reporting method, you need to record adjusting entries for pre-acquisition income and dividends to the parent using the resulting offset accounts as inputs into the parent investment chartfield valueset.

Following our example with pre acquisition income and dividends, we have the following as inputs into the NCI rule.

The following table highlights the outputs after the NCI engine has been run:

The journal entries and Non Controlling Interest (NCI) results for Push Down Accounting are similar to the previous example except that now the Goodwill amount of $10,000 is recorded on the subsidiary rather than the $8,000 Goodwill entry on the parent ledger. This results in an increase to the NCI liability for the parent by $2,000 (or $10,000) since the overall goodwill amount increased from $8,000 to $10,000.