CFAI EOC Reading 19 Question 27

Its asking for consolidated Depreciation and amortization

“The projected depreciation and amortization expense will include NinMount’s reported depreciation and amortization (£102), Boswell’s reported depreciation and amortization (£92), and amortization of Boswell’s licenses (£10 million). The licenses have a fair value of £60 million. £320 purchase price indicates a fair value of £640 for the net assets of Boswell. The net book (fair) value of the recorded assets is £580. The previously unrecorded licenses have a fair value of £60 million. The licenses have a remaining life of six years; the amortization adjustment for 2008 will be £10 million. Therefore, Projected depreciation and amortization = £102 + £92 + £10 = £204 million.”

The answer is 102 + (92 + 10

I thought the answer would be 102 + 46 + 5

Full consolidation, or partial consolidation?

This question is the based on the Acquisition method (if full consolidation were to apply) that is why one has consolidate the whole of the D&A expense.

The only time one would take 50% or any other % of the excess purchase price attributable to fair value of PPE/license or other such assets is under the equity method (Example 4 of the curriculum), but then you do not include the D&A of the investee.

So the problem says,

“On 31 December 2008, NinMount paid £320 million to purchase a 50 percent stake in Boswell Company”

but the question asks:

"Based on Byron’s forecast, if NinMount deems it has acquired control of Boswell, NinMount’s consolidated 2009 depreciation and amortization expense (in £ millions) will be closest to: A 102.

B 148.

C 204."

Where do I have to assume that this is full consolidation?

“it has acquired control” - consolidation

" significant influence over" - equity method

I don’t think there is any such term “full consolidation” in the 2014 curriculum - question asks you to assume control implying use the ‘Acquisition method’ . In Acquisition method, you fully consolidate the Investee’s BS in the Investor’s BS , that is why i used that term…

There is another concept Full Goodwill and Partial Goodwill method that doesn’t apply here.

well, control doesn’t mean 100% of the share… right? there is non-controlling interst as well.

there is a term called proportionate consolidation. what is that?

That correct- but the accounting requires you to first consolidate 100% of the Investee’s Income Stmt (Revenue, Expense etc.), then arrive at the Net Income (as if you owned it 100%) and then back out the portion that is NOT owned by the Investor/Parent Co or is attributable to the Non-controlling interest.

Work through the curriculum example (under Business Combination) and you will see how it works.

Proportionate Consolidation is when you take your proportionate share of your ownership and accordingly recognise that portion on your incomes stmt, so if you own 50%, you recognise 50% of the revenue/expenses etc… This is sometimes used when there is Joint Venture (JV) entity, but as far as i remember its use is not common under IFRS…

Also read the Errata for Level 2 for more insights

Proportionate consoidation was allowed before under IFRS, but not anymore.

now it’s only the acquisition method (100% consolidation) or equity method.

ok let me check those out…

thanks for pointing out… also your explanation makes sense…