© the mcgraw-hill companies, inc., 2004 slide 4-1 mcgraw-hill/irwin chapter four consolidated...

© The McGraw-Hill Companies, Inc., 2004

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McGraw-Hill/Irwin

Chapter Four

Consolidated Consolidated Financial Financial

Statements and Statements and Outside Outside

OwnershipOwnership


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Noncontrolling Interest

Noncontrolling Interest is the amount of the acquired company’s stock that is not acquired by the parent.

The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements.


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The existence of noncontrolling investors

requires the establishment of two new accounts:

Noncontrolling Interest Noncontrolling Interest in

Subsidiary Net Income


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3 approaches are defined for defining noncontrolling interest:

Economic Unit Concept

Proportionate Consolidation Concept

Parent Company Concept

Assume that Expo,Inc. acquires 70% of Nent Co. for $10 million cash.

How do we account for the 30% of Nent Co. that Expo does not own?

Assume that Expo,Inc. acquires 70% of Nent Co. for $10 million cash.

How do we account for the 30% of Nent Co. that Expo does not own?


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Recommended by the FASB.Recommended by the FASB.

Noncontrolling Interest is a % of the sub’s implied value.

Noncontrolling Interest is a % of the sub’s implied value.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income

less amortization of purchase price allocations.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income

less amortization of purchase price allocations.

The sub is viewed as an indivisible unit within the business combination.

The sub is viewed as an indivisible unit within the business combination.

Economic Unit Concept


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Little evidence exists to suggest widespread use of this method.

Little evidence exists to suggest widespread use of this method.

Only the portion of the sub’s assets that are acquired by the parent are

consolidated.

Only the portion of the sub’s assets that are acquired by the parent are

consolidated.

Noncontrolling Interest is not reported under this method.

Noncontrolling Interest is not reported under this method.

This method has been used where control exists, but less than 50% of the

sub has been acquired.

This method has been used where control exists, but less than 50% of the

sub has been acquired.

Proportionate Consolidation Concept


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Noncontrolling Interest is a % of the sub’s book value at the balance sheet

date.

Noncontrolling Interest is a % of the sub’s book value at the balance sheet

date.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.

Noncontrolling Interest may appear in the equity section or between the equity

section and the liability section.

Noncontrolling Interest may appear in the equity section or between the equity

section and the liability section.


#1 practice in use.

Considered to be the most common method in practice.

Considered to be the most common method in practice.


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#1 practice in use.

•This concept includes the entire book value of each of the subsidiary’s accounts within the consolidated statements. (Consistent with Economic Unit Concept)

• However, only the parent’s share of the difference between FMV and book value in included in the consolidated statements. (Consistent with Proportionate Consolidation Concept)

•This concept includes the entire book value of each of the subsidiary’s accounts within the consolidated statements. (Consistent with Economic Unit Concept)

• However, only the parent’s share of the difference between FMV and book value in included in the consolidated statements. (Consistent with Proportionate Consolidation Concept)


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Accounting for Noncontrolling Interest

On the Balance Sheet: A credit balance account

called Noncontrolling Interest is set up to recognize the noncontrolling stockholders’ investment in the subsidiary.

The account usually appears in the equity section of the Consolidated Balance Sheet. Or it may be placed in a separate section between equity and non-current liabilities

On the Balance Sheet: A credit balance account

called Noncontrolling Interest is set up to recognize the noncontrolling stockholders’ investment in the subsidiary.

The account usually appears in the equity section of the Consolidated Balance Sheet. Or it may be placed in a separate section between equity and non-current liabilities


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Accounting for Noncontrolling Interest

On the Income Statement: An account called

Noncontolling Interest in Subsidiary Net Income is set up to recognize the noncontrolling shareholders’ share of the sub’s net income.

The account appears on the Income Statement.

On the Income Statement: An account called

Noncontolling Interest in Subsidiary Net Income is set up to recognize the noncontrolling shareholders’ share of the sub’s net income.

The account appears on the Income Statement.


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Let’s look at an example using

the Parent Company Concept.

Noncontrolling InterestExample


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On 1/1/05, Jumbo

purchases 80% of Li’l

Bit for $800,000

cash.

On 1/1/05, Jumbo

purchases 80% of Li’l

Bit for $800,000

cash.


Note, that Li’l Bit owns an internally developed patent valued at $220,000, with an expected useful life of 10 years.


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Record the initial investment on Jumbo’s books.

Record the initial investment on Jumbo’s books.



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Goodwill computation:

This computation will be needed again when the consolidation is

done in years subsequent to the

year of acquisition.



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As of the date of acquisition, the balances

for each company are

entered into the worksheet.

As of the date of acquisition, the balances

for each company are

entered into the worksheet.

Next, enter the consolidation entries on the

worksheet.

Next, enter the consolidation entries on the

worksheet.


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This is 20% of Li’l Bit’s BV at

date of acquisition.




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This will be the sum of all the

amounts in the Noncontrolling

Interest column.

This will be the sum of all the

amounts in the Noncontrolling

Interest column.


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Let’s do the consolidation at the end of

2005.



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First, update Jumbo’s numbers for the

equity method entries.

First, update Jumbo’s numbers for the

equity method entries.


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Li'l Bit's Net Income for 2000 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$

Li'l Bit's Net Income for 2000 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$



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$60,000 dividends were paid to Jumbo by Li’l Bit during

the year.

$60,000 dividends were paid to Jumbo by Li’l Bit during

the year.



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FMV adjustment and intangible amortization is computed as follows:

FMV adjustment and intangible amortization is computed as follows:



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Assume that the building has a

remaining useful life of 10 years, the equipment

has a remaining useful life of 4 years, and the patent has a

remaining useful life of 10 years.

Amortization computation:



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Amortization computation:



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Note Jumbo’s updated

numbers.

Note Jumbo’s updated

numbers.

This is based on 80% of Li’l Bit’s

income less $20.8 in Amortization

Expense

This is based on 80% of Li’l Bit’s

income less $20.8 in Amortization

Expense


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This is the 80% of Li’l

Bit’s dividends that went to

Jumbo.

This is the 80% of Li’l

Bit’s dividends that went to

Jumbo.


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These numbers are computed and

entered into the Noncontrolling

Interest column.

These numbers are computed and

entered into the Noncontrolling

Interest column.


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Effects Created by Using the Cost Method

Prepare Entry *C to convert Prepare Entry *C to convert from the Cost Method to from the Cost Method to

the Equity Methodthe Equity Method

Combine:Combine:1.1. The increase in the sub’s BV The increase in the sub’s BV

since acquisition x the since acquisition x the parent’s ownership %parent’s ownership %

2.2. Total amortization for the Total amortization for the same period.same period.

Prepare Entry *C to convert Prepare Entry *C to convert from the Cost Method to from the Cost Method to

the Equity Methodthe Equity Method

Combine:Combine:1.1. The increase in the sub’s BV The increase in the sub’s BV

since acquisition x the since acquisition x the parent’s ownership %parent’s ownership %

2.2. Total amortization for the Total amortization for the same period.same period.


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Effects Created by Using the Cost Method

Change Entry I to Change Entry I to eliminate the Dividend eliminate the Dividend

IncomeIncome

DO NOT use Entry DDO NOT use Entry D

Change Entry I to Change Entry I to eliminate the Dividend eliminate the Dividend

IncomeIncome

DO NOT use Entry DDO NOT use Entry D


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Effects Created by Using the Partial Equity Method

Perform Entry *C.

Only the adjustment for

the amortization expense is necessary.

Perform Entry *C.

Only the adjustment for

the amortization expense is necessary.


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Step Acquisitions

Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”.

Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization.

Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”.

Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization.


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Preacquisition Income

1. When control of a sub is acquired at a time subsequent to the beginning of the sub’s fiscal year, the income statement accounts are consolidated as if the acquisition was made at the beginning of the period.

2. A line-item is included (as a deduction) in the income statement for the parent’s share of the sub’s current year income prior to the date of acquisition. (which effectively belongs to the former shareholders)

3. The dividends paid to these former shareholders are then eliminated.

1. When control of a sub is acquired at a time subsequent to the beginning of the sub’s fiscal year, the income statement accounts are consolidated as if the acquisition was made at the beginning of the period.

2. A line-item is included (as a deduction) in the income statement for the parent’s share of the sub’s current year income prior to the date of acquisition. (which effectively belongs to the former shareholders)

3. The dividends paid to these former shareholders are then eliminated.


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Preacquisition Income

Steps 2 & 3 are done via the following “S” in SAIDE entry:

Dr. Pre Acquisition Income

Cr. Dividends paid (of subsidiary)

Cr. Investment in Subsidiary

Steps 2 & 3 are done via the following “S” in SAIDE entry:

Dr. Pre Acquisition Income

Cr. Dividends paid (of subsidiary)

Cr. Investment in Subsidiary


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Preacquisition Income (Cont’d)

4. The determination of goodwill and the computation of excess FMV over BV is based on the subsidiary’s BV at the time of acquisition.

5. The current year’s amortization is based only on the period for which the parent had its ownership in the subsidiary. E.g. the last 3 months of the year.

4. The determination of goodwill and the computation of excess FMV over BV is based on the subsidiary’s BV at the time of acquisition.

5. The current year’s amortization is based only on the period for which the parent had its ownership in the subsidiary. E.g. the last 3 months of the year.


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Ten cups of Ten cups of this stuff this stuff and I still and I still

don’t get it!don’t get it!

End of Chapter 4

© the mcgraw-hill companies, inc., 2004 slide 4-1 mcgraw-hill/irwin chapter four consolidated...

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