Reference no: EM132623588

The Walt Disney Company, whose history goes back to 1923, is parent company to some of the most well-known businesses in the world. While best known for Walt Disney Studios, world-famous parks and resorts, media operations such as the Disney Channel, and its consumer products, Disney is a widely diversified company. For example, did you know that Disney owns the ABC Television Network and is the majority owner of ESPN? While the consolidation examples you're working on in class usually involve a parent company and a single subsidiary, Disney employs a dedicated staff at its Burbank, California, headquarters each quarter to complete the consolidation of its five segments, each comprising many subsidiaries, in preparation for its quarterly 10-Q and annual 10-K filings with the SEC. Preparation for the actual consolidation begins before the end of the fiscal period. Soon after the end of the period, each segment closes its books, including performing its own subsidiary consolidations, works with the independent auditors, and prepares for the roll-up to the overall company consolidation. The work continues as the finance and accounting staff of approximately 100 men and women at the corporate offices review and analyze the results from the individual segments and work with segment financial staff to prepare what becomes the publicly disclosed set of consolidated financial statements.

However, the work doesn't all take place at the end of the fiscal period. The accounting system also tracks intercompany transactions throughout the period. The consolidation process requires the elimination of intercompany sales and asset transfers among others cost allocations. Tracking these transactions involves ongoing efforts throughout the period.

One of the reasons Disney has grown and become so diversified over the years is that it frequently acquires other companies. Three of the more notable acquisitions in recent years are Lucasfilm in 2012, Marvel Entertainment in 2009, and Pixar Animation Studios in 2006. In these and other well-known acquisitions, Disney paid more than the book value of each acquired company's net assets. Acquisition accounting rules require Disney to account for the full acquisition price-even though the acquired companies may continue to report their assets and liabilities on their separate books at their historical book values. Thus, acquisition accounting requires Disney to essentially revalue the balance sheets of these companies to their amortized fair values in the consolidation process each period. We provide more details on the Pixar and Lucasfilm acquisitions later in the chapter.

The bottom line is that preparation of Disney's publicly disclosed financial statements is the culmination of a lot of work by the segment and corporate accounting and finance staff. The issues mentioned here illustrate the complexity of a process that requires substantial teamwork and effort to produce audited financial statements that are valuable to an investor or interested accounting student. You'll learn in this chapter about the activities during the consolidation process performed by the accounting staff at any well-known public company. This chapter also introduces differences in the consolidation process when there is a differential (i.e., the acquiring company pays something other than the book value of the acquired company's net assets).

Problem 1: Acquisition accounting rules require the parent company to account for the full acquisition price, but the sub maintains their separate financial statements at book value. How does Disney reconcile this difference?

Problem 2: What other insights into this challenge can be found in examples from accounting for Disney's acquisitions of Lucasfilm and Pixar?