Accounting question

[Frosty3799]

I ran into an issue with accounting for goodwill that doesn't quite make sense to me, and I was wondering if someone would be able to explain it a bit further.

The topic at hand has to do with goodwill impairment when one company either wholl-owns or partially-owns a subsidiary. What I don't understand is, why does the goodwill belong to the subsidiary when the subsidiary is wholly-owned, but when only partially-owned the goodwill belongs to the parent company.

To me it seems like this should be the other way around?

Thank you for your input, and hopefully I can understand this issue.

 

[Frosty3799]

Anybody?

 

[JMWarren]

Is goodwill listed in the same place in both cases?

 

[Frosty3799]

the impairment entries are done as follows:

parent wholly-owns subsidiary:
Intercompany investment income ---------------- Debit
---Investment in subsidiary's common stock -------------- Credit
------(goodwill belongs to the subsidiary)

parent partially-owns subsidiary:
Impairment Expense ------------------------------- Debit
---Investment ------------------------------------------------- Credit
------(goodwill belongs to the parent)

EDIT: wow - formatting is bad, used dashes as spacers

 

[Doggiedog]

Are you sure? I've seen circumstances where goodwill of a wholly owned subsidiary belongs to the parent or holding company.

 

[Frosty3799]

Originally posted by: Doggiedog
Are you sure? I've seen circumstances where goodwill of a wholly owned subsidiary belongs to the parent or holding company.

yes, I am sure that is the rule. but i have to figure out why...

I have searched my school's professional journals, and the web and havent found anything too useful

 

[JMWarren]

It could just be convention.

Try thinking about it if the Parent were to sell the subsidiary.

 

[Kenazo]

Are you sure you're not reading the problem wrong? Can you re-write it exactly as written? (I presume this is a problem for a course)

In Canada the CICA sets our rules and section 3051.12 of the Handbook reads...

Accounting for an investment under the equity method generally results in the net income of the investor being the same as what the consolidated net income would have been had the financial statements of the investee been consolidated with those of the investor. Depreciation and amortization of investee assets are based on the assigned costs of such assets at the date(s) of acquisition. The portion of the difference between the investor's cost and the amount of its underlying equity in the net assets of the investee that is similar to goodwill (equity method goodwill) is not amortized. No part of an impairment write-down of an investment accounted for by the equity method is presented in the income statement as a goodwill impairment loss (see GOODWILL AND OTHER INTANGIBLE ASSETS, Section 3062). Unrealized intercompany gain or loss, and any gain or loss that would arise in accounting for intercompany bond holdings, are eliminated.


Oh, and I think a hint might be that if the company is wholly owned it's probably going to show up on a consolidated F/S, so it won't really be in the books of the holdco at all.

 

[JS80]

Originally posted by: Frosty3799
the impairment entries are done as follows:

parent wholly-owns subsidiary:
Intercompany investment income ---------------- Debit
---Investment in subsidiary's common stock -------------- Credit
------(goodwill belongs to the subsidiary)

parent partially-owns subsidiary:
Impairment Expense ------------------------------- Debit
---Investment ------------------------------------------------- Credit
------(goodwill belongs to the parent)

EDIT: wow - formatting is bad, used dashes as spacers

Because for a wholly owned company the goodwill impairment is rolled up on the consolidated financials. The only way to show impairment expense in a partially owned sub is to expense the partial ownership of it just like it would for revenue/earnings.

 

[Doggiedog]

Originally posted by: Frosty3799

Originally posted by: Doggiedog
Are you sure? I've seen circumstances where goodwill of a wholly owned subsidiary belongs to the parent or holding company.

yes, I am sure that is the rule. but i have to figure out why...

I have searched my school's professional journals, and the web and havent found anything too useful

Strange. I have seen parent companies or holding companies assign goodwill to their subsidiaries.

The parent company is still responsible for the aggregate goodwill and calculates the goodwill impairment or increase at their level.

 

[thegimp03]

http://www.fasb.org/pdf/fas142.pdf

I didn't read it too closely but you might want to look at pages 15-18.

 

[Frosty3799]

I think JS80 hit it, it is consolidated statements, so that makes some sense So basically, the Do you have a source that could support this by chance, just so i can put something in the biblio?

And Kenazo, I am not reading a problem, it is in my notes handed out to the class. I have to know why because I have to write a essay on it. Canadian stantards could be different than those in the US though.

 

[JS80]

Originally posted by: Frosty3799
I think JS80 hit it, it is consolidated statements, so that makes some sense So basically, the Do you have a source that could support this by chance, just so i can put something in the biblio?

And Kenazo, I am not reading a problem, it is in my notes handed out to the class. I have to know why because I have to write a essay on it. Canadian stantards could be different than those in the US though.

FAS142 + APB Opinion No. 18

 

[Frosty3799]

Originally posted by: thegimp03
http://www.fasb.org/pdf/fas142.pdf

I didn't read it too closely but you might want to look at pages 15-18.

Damn good find reading now

EDIT: ThanksJS80, I will check out APB 18 too

 

[Kenazo]

Originally posted by: Frosty3799
I think JS80 hit it, it is consolidated statements, so that makes some sense So basically, the Do you have a source that could support this by chance, just so i can put something in the biblio?

And Kenazo, I am not reading a problem, it is in my notes handed out to the class. I have to know why because I have to write a essay on it. Canadian stantards could be different than those in the US though.

I know, figured it'd give you an idea though. I'm sure given enough time your FASB will see the light and align with us... Then again it probably will happen the other way.

 

[Frosty3799]

Originally posted by: Kenazo

Originally posted by: Frosty3799
I think JS80 hit it, it is consolidated statements, so that makes some sense So basically, the Do you have a source that could support this by chance, just so i can put something in the biblio?

And Kenazo, I am not reading a problem, it is in my notes handed out to the class. I have to know why because I have to write a essay on it. Canadian stantards could be different than those in the US though.

I know, figured it'd give you an idea though. I'm sure given enough time your FASB will see the light and align with us... Then again it probably will happen the other way.

Ha, quite possibly. I have to make this paper 5 pages long though, so i will probably talk a bit about how Canada, and other international does not do the same thing, so thank you for your input as well. where abouts can I find the canadian accounting standards you speak of online?

 

[Kenazo]

CICA Handbook

I hope that link works anyway. I logged into my computer at work to get you that little segment, I've never used the online one.

Make sure you check out the IASB's decision on the topic.

Hmm... seems you have to be a CA member to get at that website.

PM me your email and I'll email you a pdf with the sections you'll need.

 

[Kenazo]

So, how'd your paper go?

 

[Frosty3799]

Originally posted by: Kenazo
So, how'd your paper go?

Heh, not too bad. I think I got it all right.

See, we had to do 2 research papers this semester, and i asked my teacher that question in class one day, and he was like, "that's a good question, I think you should do it for your second paper."

I hope my grade comes back ok, and I answered the question to his liking