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to accompanyAdvanced Accounting, 11th edition

by Beams, Anthony, Bettinghaus, and Smith

Chapter 11

Consolidation Theories,

Push-Down

Accounting,and Corporate oint

!entures

Copyright ©2012 Pearson Education,Inc. Publishing as Prentice Hall

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Theories, Push-Down Accounting, and

oint !entures" #b$ectives

1. Compare and contrast the elements ofconsolidation approaches under traditional,

parent-company, and contemporary/entity

theory.

2. Adjust subsidiary assets and liabilities tofair values using push-down accounting.

. Account for corporate and unincorporated

joint ventures.

!. "dentify variable interest entities.

#. Consolidate a variable interest entity.


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1" C#%S#&'DAT'#%

T()#*')S

Consolidation Theories, Push-Down Accounting,

and Corporate oint !entures


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Three Theories

$arent-company theory !iewpoint o+ parent company shareholders

Contemporary/entity theory

Taes the viewpoint o+ the total consolidated entity

%raditional theory

!iewpoint o+ the parents shareholders andcreditors

Statements are +rom the viewpoint o+ the total

consolidated entityCopyright ©2012 Pearson Education,

Inc. Publishing as Prentice Hall11-

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'ncome *eporting

Consolidated net income&

$arent-company theory and traditional theory 'ncome to the parent company shareholders

Contemporary/entity theory 'ncome to be shared between the controlling and

noncontrolling interests


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Asset !aluation

$arent-company theory and traditional theory Subsidiary assets and liabilities are ad$usted to +air

value only to the e.tent o+ the parent/s share0 &and with a boo value o+ 23 and +air value o+ 43

would be consolidated at 43 i+ the parent owned1335, but at 61 723 8 635943-23:; i+ the parent

owned 635

Contemporary/entity theory

Subsidiary assets and liabilities are consolidated at +airvalue &and would be consolidated at 43 regardless o+

ownership percentage0


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Constructive >ains and &osses

$arent-company theory *ecogni=e constructive gains and losses

attributable to the subsidiary based on parent/s

ownership

Contemporary/entity theory and traditionaltheory *ecogni=e constructive gains and losses 'nclude 1335 o+ constructive gains and losses

regardless o+ parents share

All theories recogni'e 1(() of constructive

gains and losses attributable to the parent


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Consolidated Stocholders/ )?uity

Contemporary theory %oncontrolling interest is a single amount and a

part o+ stocholders/ e?uity

*ntity theory

%oncontrolling interest is also part o+stocholders/ e?uity

't would be decomposed into paid in capital,

retained earnings, etc0


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#ther 'deas on Consolidation

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S)C *e?uires Push-Down

+*C reuires push-down accounting for +*Cfilings when the subsidiary& 's substantially wholly owned 9usually 35:, and (as substantially no publicly-held debt or

pre+erred stoc*stablishes a new basis for the assets and

liabilities Based on ac?uisition price

Arguments against Subsidiary is not party to the ac?uisition Subsidiary receives no new +unds, sells no assets


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Push-Down Procedure

Assets and liabilities are revaluedoodwill, if any, is recorded

etained earnings prior to acuisition0 are

eliminated

$ush-down capital 's an additional paid-in capital account 'ncludes old retained earnings Any ad$ustments to assets and liabilities, including

goodwill

A new retained earnings account is used

subseuent to the business combination


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Push-Down ).ample

$ed buys () of +ad. +ads boo3 and fair valuesare&

"f +ad applies push-down accounting, it would

revalue its accounts receivable, inventory, and

plant assets, and record goodwill.

B! ! B! !

Cash $5 $5 Liabilities $25 $25

Accounts rec. 30 35Inventory 40 50 Capital stock 100

Other current 10 10 etaine! earnin"s 20

#lant assets 0 %0

&oo!'ill 0 5

(otal $145 $245 (otal $145


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Sad

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Sad

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Push-Down Di++erences

%he e4ample used () ownership by theparent.

+*C reuires push-down accounting when the

firm is substantially owned Eay be applied in other instances

6everaged 7uyouts with a change in

controlling interest

Changing accounting basis may be appropriate


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F" #'%T !)%T

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oint !entures 9de+0:

"t is a business entity that is owned, operatedand jointly controlled by a small group of

investors for a specific business underta3ing

that provides mutual benefit for each of the

venturers.

8orms 'ncorporated >eneral or limited partnerships Domestic or +oreign Temporary or relatively permanent


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Corporate oint !entures

"nvestors who participate in the overallmanagement of the joint venture

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H" 'D)%T'I !A*'AB&)

'%T)*)ST )%T'T')S




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!ariable 'nterest 9de+0:

9:ariable interests are contractual, ownership,or other pecuniary interests in a legal entity

that change with changes in the fair value of

the legal entitys net assets e4clusive of

variable interests.; &'()* ()C $10-10-1!-1+

%he primary beneficiary of the variable interest

entity :"*0 must consolidate the :"*.


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Primary Bene+iciary

%he primary beneficiary (as power to direct the !') activities that most

directly impact its economic per+ormance (as an obligation to absorb losses andor a right to

receive signi+icant bene+its +rom the !')

%he primary beneficiary may be an euity

holder and/or creditor of the :"*


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!') ).ample

et ich #) of the losses andwill ta3e 2?) of the profits. %he other nine

investors will share eually.

Corinne is the primary bene+iciary and consolidates

the !')0 All 13 e?uity investors will have to mae detailed

disclosures about their interests in this !')0


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2" C#%S#&'DAT) !A*'AB&)

'%T)*)ST )%T'T')S




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Special Consolidation Considerations

:"*s are consolidated li3e other subsidiaries '+ the primary bene+iciary trans+erred assets to the

!'), these assets are carried at boo value #therwise, the initial valuation is consistent with

the ac?uisition method The primary bene+iciary uses voting interests to

allocate controlling and noncontrolling interests All intercompany transactions and accounts are

eliminated


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