Chapter Four

Consolidated Consolidated Financial Financial

Statements and Statements and Outside Outside

OwnershipOwnership

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Noncontrolling Interest

If the parent doesn’t own 100% of the company, WHO owns the rest of it?

Noncontrolling (Minority) Shareholder The ownership interests of the

Noncontrolling Shareholders must be reflected in the consolidated financial statements.

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Noncontrolling Interest

Noncontrolling Interest Noncontrolling Interest in

Subsidiary Net Income

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The Parent has control and is responsible for all of the Subsidiary’s assets and liabilities, so we will still consolidate 100% of the Subsidiary’s financial information. However…

The existence of noncontrolling investors requires two new accounts:

Recording Noncontrolling Interest

On the Balance Sheet: A credit balance account called

Noncontrolling Interest represents the noncontrolling stockholders’ investment.

This account usually appears in the equity section of the Consolidated Balance Sheet as required by

SFAS 160. Prior to SFAS 160 an option existed to report it in the liability section, or as a “mezzanine” item between the two sections.

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Recording Noncontrolling Interest

On the Income Statement: An account called Noncontolling

Interest in Subsidiary Net Income represents the noncontrolling shareholders’ share of the sub’s net income.

This account is created in consolidation and reported in the worksheet entries, similar to the balance sheet account for the noncontrolling interest.

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Noncontrolling Interests and Consolidations

The consolidation process remains substantially unchanged with a noncontrolling interest.

Consolidate as though the Parent has 100% ownership, and then determine the

noncontrolling interest in:The subsidiary as of the beginning of the current year.The subsidiary’s current year net income.The subsidiary’s dividend payments.

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Effects of using the Initial Value Method

Add Entry *C to convert from the Initial Value Method to the Equity Method by combining: the increase in the Sub’s Retained

Earnings since acquisition x the parent’s ownership %, and

the parent’s share of amortization expense since acquisition.

Entry D will not be necessary.

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What if the Parent used the Initial Value Method to account for the Subsidiary after acquisition?

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Add Entry *C to convert from the Partial Equity Method to the Equity Method, but only the adjustment for the parent’s share of amortization expense is necessary.

What if the Parent used the Partial Equity Method to account for the Subsidiary after acquisition?

Mid-Year Acquisitions

When control of a Sub is acquired at a time subsequent to the beginning of the sub’s fiscal year: The income statements are

consolidated as usual, and The Sub’s pre-acquisition revenues

and expenses are excluded from the Parent’s consolidated statements (adjusted via Entry S), and

Only a partial year’s amortization on excess fair value is taken.

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Step Acquisitions

When a Parent acquires a Subsidiary over time, or in “steps,” the date control is achieved is significant –

All previous values for the investment, prior to the date control is obtained, are remeasured to fair value as of the date of control.

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Sales of Subsidiary Stock

If the parent maintains control, it recognizes no gains or losses – the sale is shown in the equity section.

If the sale results in the loss of control, the parent recognizes any resulting gain or loss in consolidated net income.

What is reported on the consolidated statements when a Parent sells some of its ownership in a Subsidiary?

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Noncontrolling Interest – Int’l Accounting Standards

IFRS permits fair value measurement, or the noncontrolling interest may be measured at a proportionate share of the Sub’s identifiable net asset fair value, which excludes goodwill. This option assumes that any goodwill created via acquisition applies solely to the controlling interest.

U.S. GAAP requires fair value measurement. Thus, acquisition-date fair value provides a basis for reporting the noncontrolling interest which is adjusted for its share of subsidiary income and dividends subsequent to acquisition.

US GAAP vs IFRS

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Noncontrolling Interest – The Legacy Purchase Method

Under the purchase method, when less than 100% was purchased, only the parent’s percentage was adjusted to fair value. Therefore, the valuation principle for the noncontrolling interest under the purchase method was simply its share of the subsidiary’s book value.

The consolidation worksheet entries must be adjusted accordingly.

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