the reporting entity and the consolidation of less-than-wholly-owned subsidiaries with no...

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Chapter 3

The Reporting Entity and the Consolidation of

Less-than-Wholly-Owned Subsidiaries with No

Differential

3-2

Learning Objective 3-1

Understand and explain the usefulness and limitations of

consolidatedfinancial statements.

3-3

Consolidation: The Concept

Parent creates or gains control of the subsidiary. The result: a single reporting entity.

P

S

3-4

ParentCompany

Sub CSub BSub A

80% 51% 21%

Review

How do we report the results of subsidiaries?

Consolidation(plus the Equity Method)

Equity Method

3-5

Consolidated Financial Statements

Consolidated financial statements present the financial position and results of operations for

a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single

company or entity.

3-6

Benefits of Consolidated Financial Statements

Presented primarily for those parties having a long-run interest in the parent company: shareholders, long-term creditors, or other resource providers.

Provide a means of obtaining a clear picture of the total resources of the combined entity that are under the parent's control.

3-7

Limitations of Consolidated Financial Statements

Results of individual companies not disclosed (hides poor performance).

Financial ratios are not necessarily representative of any single company in the consolidation.

Similar accounts of different companies may not be entirely comparable.

Information is lost any time data sets are aggregated.

3-8

Subsidiary Financial Statements

Creditors, preferred stockholders, and noncontrolling common stockholders of subsidiaries are most interested in the separate financial statements of the subsidiaries in which they have an interest.

Because subsidiaries are legally separate from their parents, the creditors and stockholders of a subsidiary generally

have no claim on the parent, and the stockholders of the subsidiary do not share in the

profits of the parent.

3-9

Practice Quiz Question #1

A primary benefit of consolidated financial statements is that they

a. provide information directly applicable to the needs of regulators.

b. obscure data of individual companies.c. present data of two or more entities that

clearly reports their individual performance.

d. give a picture of the use of resources under the parent’s control.

e. none of the above.

3-10


Understand and explain how direct and indirect control

influence theconsolidation of a

subsidiary.

3-11

Concepts and Standards

Traditional view of control includes: Direct control that occurs when one company

owns a majority of another company’s common stock.

Indirect control or pyramiding that occurs when a company’s common stock is owned by one or more other companies that are all under common control.

3-12

Indirect Control Example

X

Y

75%

Z

K

51%

20% 40%

Does X control Y? Yes Does X control Z? Yes

Does Y control K? No Does Z control K? No

Does X control K?Yes, indirectly through Y and Z!X must consolidate Y, Z, and K.

3-13


Ability to Exercise Control Sometimes, majority stockholders may

not be able to exercise control even though they hold more than 50 percent of outstanding voting stock. Subsidiary is in legal reorganization or bankruptcy

Foreign country restricts remittance of subsidiary profits to domestic parent company

The unconsolidated subsidiary is reported as an intercorporate investment.

X

Y

90%

3-14


Differences in Fiscal Periods Difference in the fiscal periods of a parent and

subsidiary should not preclude consolidation. Often the fiscal period of the subsidiary is

changed to coincide with that of the parent. Another alternative is to adjust the financial

statement data of the subsidiary each period to place the data on a basis consistent with the fiscal period of the parent.

3-15


Changing Concept of the Reporting Entity Guidance in ASC 810-10-55, requiring consolidation

of all majority-owned subsidiaries, was issued to eliminate the inconsistencies found in practice until a more comprehensive standard could be issued.

Completion of the FASB’s consolidation project has been hampered by, among other things, issues related to control

reporting entity

3-16


The FASB has been attempting to move toward a consolidation requirement for entities under effective control. Ability to direct the policies of another entity

even though majority ownership is lacking.

Even though ASC 805-10-55 indicates that control can be achieved without majority ownership, a comprehensive consolidation policy has yet to be achieved.

3-17


Defining the accounting entity would help resolve the issue of when to prepare consolidated financial statements and what entities should be included.

ASC 810 deals only with selected issues related to consolidated financial statements, leaving a comprehensive consolidation policy until a later time.

3-18


P owns 60% of X and 75% of Y. If X and Y jointly own 100% of Z, under what circumstance would P not be deemed to control Z?

a. Z is a bank.b. Z’s products are largely sold overseas.c. Z is currently in Chapter 11 bankruptcy.d. Z has a CEO known to have a bad temper

and a serious gambling habit.e. none of the above.

3-19


Understand and explain differences in the

consolidation process when the subsidiary is not wholly

owned.

3-20

Noncontrolling Interest

Only a controlling interest is needed for the parent to consolidate the subsidiary—not 100% interest.

Shareholders of the subsidiary other than the parent are referred to as “noncontrolling” shareholders.

Noncontrolling interest refers to the claim of these shareholders on the income and net assets of the subsidiary.

Parent

Sub

>50%<50%

NCI

3-21

Noncontrolling Interest (NCI)

What is a noncontrolling interest (NCI)? Voting shares not owned by the parent company NCI was formerly called the “Minority Interest”

Parent

Sub

>50%<50%

NCITwo Issues:(1) Should 100% of the

financial statements be consolidated?

(2) Where to report NCI in the financial statements?

3-22

Issue 1: Should 100% be Consolidated?

ProportionalConsolidation

FullConsolidation

PercentConsolidated?Reports NCIAmounts?Complies withUS GAAP?RelativeComplexity?

3-23

Issue 1: Should 100% be Consolidated?

Full consolidation required by US GAAP (100%)

This means two special accounts appear in consolidated statements: NCI in Net Income of Sub

Like an “expense” in the consolidated income statement

“Reported income that doesn’t belong to us.” NCI in Net Assets of Sub

Equity of unrelated owners “Net assets on our balance sheet not belonging to us.”

3-24

Issue 2: Where to report NCI in Net Assets?

Old rules: Could report it in equity, liabilities, or “no man’s land” between liabilities and equity.

New rules: Must report in equity ASC 810-10-55 makes clear that the

noncontrolling interest’s claim on net assets is an element of equity, not a liability.

3-25

Noncontrolling Interest

Computation of income to the noncontrolling interest In uncomplicated situations, it is a simple

proportionate share of the subsidiary’s net income.

Presentation ASC 810-10-50 requires that

the term “consolidated net income” be applied to the income available to all stockholders,

with the allocation of that income between the controlling and noncontrolling stockholders shown.

3-26


The noncontrolling interest in a corporation can best be describe as

a. a group of disinterested shareholders who rarely vote on company issues.

b. all employees below the manager level.c. all shareholders other than the parent

company.d. a group of investors who plan to sell

their stock within the next twelve months .

e. none of the above.

3-27


Make calculations and prepare basic elimination

entries for the consolidationof a less-than-wholly-owned

subsidiary.

3-28

Summary of differences in consolidation

Wholly Owned Subsidiary

Partially Owned Subsidiary

Investment = Book Value Chapter 2 Chapter 3 No

Differential

Investment > Book Value Chapter 4 Chapter 5 Differential

No NCI Shareholders

NCI Shareholders

3-29

Consolidation of Less-than-wholly-owned Subs

The entity theory requires that the entity’s entire income and value be reported. The subsidiary’s income is divided between the parent

(controlling interest) and the NCI shareholders. The subsidiary’s net assets are divided between the

parent (controlling interest) and the NCI shareholders. Basic elimination entry is modified to split both:

Sub Equity Accounts 100%

Income from Sub XXX

NCI in Net Income of Sub XXX

Dividends Declared by Sub100%

Investment in SubXXX

NCI in Net Assets of SubXXX

3-30


The primary difference in consolidating a less than wholly owned subsidiary relative to a wholly owned subsidiary is:

a. income and net assets of the subsidiary must be divided between the parent and the NCI shareholders.

b. the title of the worksheet must specify “Less than wholly owned.”

c. You only consolidate the parent’s % ownership.

d. There is no difference.

Group Exercise 1: Basic Elimination Entry

Investment AdditionalAccount Common Paid-in Retained

NCI (30%) (70%) Stock Capital Earnings

Beginning Balance+ Net Income- Dividends

Ending Balance

=

The following information is given:1) Photo owns 70% of Snap

2) Snap’s net income for 20X4 is $160,000

3) Photo’s net income for 20X4 from its own separate operations is $500,000.

4) Snap’s declares dividends of $12,000 during 20X4.

5) Snap has 10,000 shares of $4 par stock outstanding that were originally issued at $14 per share.

6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.

Book Value Calculations

Photo

Snap

70%

3-31

3-32

Common StockAdd PIC – CSRetained Earnings, BBIncome from SnapNCI in Net Income

Dividends DeclaredInvestment in SnapNCI in Net Assets

Group Exercise 1: Basic Elimination Entry

Investment AdditionalAccount Common Paid-in Retained

NCI (30%) (70%) Stock Capital Earnings

Beginning Balance+ Net IncomeDividends

Ending Balance

=


Investment in Snap

Basic Elimination Entry

3-33


Prepare a consolidation worksheet for a less-than-

wholly-ownedconsolidation.

3-34

Consolidation of < Wholly Owned Subs

The worksheet is modified when the parent owns less than 100% of the subsidiary. The total “Net Income” is divided between:

the noncontrolling interest (NCI shareholders) and the controlling interest (the parent company)

DR CR ConsolidatedIncome StatementSales 840,000$ 300,000$ Less: COGS (516,000) (156,000)Less: Depreciation Expense (12,000) (10,000)Less: Other Expenses (192,000) (98,000)Income from Smith, Inc. 32,400 32,400Net Income 152,400$ 36,000$ 32,400NCI in Net Income 3,600CI In Net Income 152,400$ 36,000$ 36,000

Pinkett, Inc. Smith, Inc.Elimination Entries

3-35


The primary difference in the worksheet when consolidating a less than wholly owned subsidiary is

a. only the parent’s % is consolidated.b. extra columns are added to split the

subsidiary into two or more pieces.c. extra rows are added to divide the net

income and net assets of the sub between the parent and NCI shareholders.

d. There is no difference.

3-36

DR CR ConsolidatedIncome StatementSales 840,000$ 300,000$ Less: COGS (516,000) (156,000)Less: Depreciation expense (12,000) (10,000)Less: Other Expenses (192,000) (98,000)Income from Smith, Inc. 32,400Net Income 152,400$ 36,000$ NCI in Net IncomeCI in Net Income 152,400$ 36,000$

Statement of Retained EarningsBalances, 1/1/X8 124,800$ 72,000$ Add: Net Income 152,400 36,000Less: Dividends (108,000) (12,000)Balances, 12/31/X8 169,200$ 96,000$

Balance SheetCash 58,800$ 48,000$ Accounts Receivable 114,000 66,000 Inventory 204,000 90,000 Investment in Sub 140,400Property & Equipment 336,000 210,000Accumulated Depreciation (144,000) (30,000)Total Assets 709,200$ 384,000$

Payables & Accruals 168,000$ 84,000Long-term Debt 360,000 144,000Common Stock 12,000 60,000Retained Earnings 169,200 96,000NCI in Net AssetsTotal Liabilities & Equity 709,200$ 384,000


Group Exercise 2: Consolidation < 100%

Assume Pinkett only purchases 90% of Smith.

REQUIRED

• Prepare an analysis of the investment for 20X8.

• Prepare all consolidation entries as of 12/31/X8.

• Prepare a consolidation worksheet at 12/31/X8.

3-37

Common StockRetained Earnings, BBIncome from SmithNCI in Net Income

Dividends DeclaredInvestment in SmithNCI in Net Assets

Group Exercise 2: Solution

Parent’s Subsidiary’s Equity AccountsNCI Investment Common Retained(10%) Account (90%) Stock EarningsNCI (10%) (90%) Stock EarningsBalances, 1/1/X8

+ Net Income- Dividends

Balances, 12/31/X8

=


Basic Elimination Entry

3-38


Don’t forget the accumulated depreciation elimination entry:

Accumulated DepreciationBuildings and Equipment

Property, Plant & Equipment Accumulated Depreciation

3-39

DR CR ConsolidatedIncome StatementSales 840,000$ 300,000$ Less: COGS (516,000) (156,000)Less: Depreciation expense (12,000) (10,000)Less: Other Expenses (192,000) (98,000)Income from Smith, Inc. 32,400Net Income 152,400$ 36,000$ NCI in Net IncomeCI in Net Income 152,400$ 36,000$

Statement of Retained EarningsBalances, 1/1/X8 124,800$ 72,000$ Add: Net Income 152,400 36,000Less: Dividends (108,000) (12,000)Balances, 12/31/X8 169,200$ 96,000$

Balance SheetCash 58,800$ 48,000$ Accounts Receivable 114,000 66,000 Inventory 204,000 90,000 Investment in Sub 140,400Property & Equipment 336,000 210,000Accumulated Depreciation (144,000) (30,000)Total Assets 709,200$ 384,000$

Payables & Accruals 168,000$ 84,000Long-term Debt 360,000 144,000Common Stock 12,000 60,000Retained Earnings 169,200 96,000NCI in Net AssetsTotal Liabilities & Equity 709,200$ 384,000



3-40


Understand and explain the purpose of combined

financial statements and how they differ from

consolidated financial statements.

3-41

Combined Financial Statements

Combined financial statements are sometimes prepared for a group of companies when no one company in the group owns a majority of the common stock of any other company in the group, such as when an individual, not a corporation, owns or controls

multiple companies. a parent company prepares financial statement

that only include its subsidiaries, and not itself. a parent company prepares financial statements

for its subsidiaries by operating group.

3-42

Combined Financial Statements

The procedures used to prepare combined financial statements are essentially the same as those used in preparing consolidated financial statements: Eliminate all intercompany receivables, payables,

transactions, unrealized profits and losses, ownership, and the associated portion of stockholders’ equity.

The remaining stockholders’ equity is divided into the portions accruing to the controlling and non-controlling interests.

3-43


Which of the following statements is true regarding combined financial statements:

a. The parent company is always included in combined financial statements.

b. Companies included in combined financial statements simultaneously own a majority of each others stock.

c. Combined financial statements combine the financial statements of a group of companies that have the same owner.

d. All intercompany transactions remain in the accounts of combined financial statements.

3-44


Understand and explain the rules related to the

consolidation of variable interest entities.

The Rise and FALL of Enron

Press Release Tuesday, October 16, 2001

ENRON REPORTS NON-RECURRING CHARGES OF $1.01 BILLION AFTER-TAX.

3-45

3-46

Special Purpose Entities

Corporations, trusts, or partnerships created for a single specified purpose.

Usually have no substantive operations and are used only for financing purposes.

Used for several decades for asset securitization, risk sharing, and taking advantage of tax statutes.

3-47

Variable Interest Entities

A legal structure used for business purposes, usually a corporation, trust, or partnership, that either does not have equity investors that have voting

rights and share in all profits and losses of the entity, or

has equity investors that do not provide sufficient financial resources to support the entity’s activities.

3-48

Enron’s Accounting “Sleight of Hand”

Special Purpose Entities (SPEs) What is normally the business purpose?

Bundle peripheral activities and have them done by an independent, but close, friend.

Examples: Acquire financing for a project

Package receivables and sell them to third parties

What was Enron’s purpose? Move liabilities off the balance sheet

Provide favorable terms for some transactions

3-49

“Raptors”

Established by Enron CFO to provide a quick buyer for Enron assets. Option 1: Find a bona fide third party.

Can’t find anyone?

Option 2: Establish a SPE to take the other side of the transaction.

Where does the financing come from? 97% sponsoring institution

3% third party

3-50

Example: The Chewco Raptor

A diagram of the Chewco transaction is set forth below:

3-51

Raptor’s Impact on Earnings

Quarter Earnings Raptors Raptor’s Impact

3Q 2000 $364 $295 $69

4Q 2000 286 (176) 462

1Q 2001 536 281 255

2Q 2001 530 490 40

3Q 2001 (210) (461) 251

Total $1,506 $429 $1,077

3-52

Variable Interest Entities (VIEs)

As a result of the Enron collapse and other notable scandals related to SPEs, the FASB issued guidance on VIEs in 2003 (ASC 810-10-25) and updated this guidance later the same year (ASC 810-10-38C).

What is a VIE? An entity that either

does not have equity investors with voting rights and a percentage of profits and losses, OR

has equity investors that do not provide sufficient financial resources to support the entity’s activities.

What is a variable interest? An interest that changes with changes in the VIE’s net assets.

3-53

Variable Interest Entities

ASC 810-10-25 uses the term “variable interest entities” to encompass SPEs and other entities falling within its conditions.

ASC 810-10-38C defines a variable interest in a VIE as a contractual, ownership (with or without voting rights), or other money-related interest in an entity that changes with changes in the fair value of the entity’s net assets exclusive of variable interests.

3-54

Purpose of ASC 810

The main effect of ASC 810-10-38C is to capture those investment relationships in which a controlling financial interest is not indicated by voting rights, but is indicated by residual interests in risks and benefits, which is the conceptual definition of ownership in CON6.

3-55

Example: Variable Interest Entities

How would ABC Corp. typically determine whether to consolidate Leasing Corp.?

What if ABC Corp. were a related party to Investor?

What if ABC Corp. guaranteed the value of the building at the end of the lease?

What if ABC Corp. received any residual value above $100k when building sold?

A controlling financial interest through voting rights.

ABC Corp. Leasing Corp.

Senior Debt ($85k)

Junior Debt ($12k)

Investor ($3k)

Building Owner$100k

Building

Lease Pmts.

Use of Building

3-56

Variable Interest Entities (VIEs)

Variable Interest Relationships Situations in which an entity receives benefits

and/or is exposed to risks similar to those received from having a majority ownership interest.

Results from contractual arrangements.

3-57

VIEs: “Contractual Arrangements”

Contractual Arrangement Types: Options Leases Guarantees of asset recovery values Guarantees of debt repayment

Contractual arrangements may exist simultaneously with a less than majority ownership in a VIE.

3-58

VIEs: Potential Variable Interests

Potential Variable Interests Subordinated loans to a VIE. Equity interests in a VIE (50% or less). Guarantees to a VIE’s lenders or equity

holders (that reduce the true risk of these parties).

Written put options on a VIE’s assets held by a VIE or its lenders or equity holders.

Forward contracts on purchases and sales.

3-59

VIEs: Most are “SPEs”

Special Purpose Entities Legally structured entities to serve a specific,

predetermined, limited purpose. May be a corporation, partnership, trust, or some

other legal entity. Creator is called the “sponsor.” Usually thinly capitalized. Most commonly used for securitizations (of

receivables).

3-60

VIEs: The Primary Beneficiary

The primary beneficiary of a VIE must consolidate the VIE.

The primary beneficiary is the entity that has the power to direct the activities of a VIE that most

significantly impact the VIE’s economic performance. will absorb losses of the VIE that could potentially be

significant to the VIE or will receive the benefits from the VIE that could potentially be significant to the VIE.

Only one primary beneficiary can exist for a VIE (by definition).

3-61

Group Exercise 3: To Consolidate (or not)?

REQUIRED

1. Is consolidation appropriate?2. What would Parch accomplish with this arrangement?3. If consolidation were not appropriate, what serious

reporting issue exists regarding Parch’s separate financial statements?

Parch Inc. and Rees Urch, Parch’s former head of R&D, formed Sede Inc., which will perform research and development. Sede issued 10,000 shares of common stock to Urch, who is now Sede’s president. Parch lent $800,000 to Sede for initial working capital in return for a note receivable that can be converted at will into 100,000 shares of Sede’s common stock. Parch also granted Sede a line of credit of $1,000,000.

3-62


On 1/1/X2, Pocahontas, Inc. invested $480,000 in Smith (80% owned). For 20X2, Smith: (1) earned $70,000,

(2) declared dividends of $60,000, and(3) paid dividends of $50,000.

What amounts does Pocahontas report? Cost Equity

Investment income for 20X2Investment in Smith at year-endRetained earnings increase

3-63


On 1/1/X2, Pocahontas, Inc. invested $480,000 in Smith (80% owned) and NCI shareholders invested $120,000. For 20X2, Smith: (1) earned $70,000,

(2) declared dividends of $60,000, and(3) paid dividends of $50,000.

What amounts does Pocahontas report for the following items?

NCI in net income for 20X2NCI in net assets at 12/31/X2Parent’s retained earnings increase

3-64


Understand and explain differences in consolidation

rules under U.S. GAAPand IFRS.

3-65

IFRS Differences Related to VIEs and SPEs

U.S. GAAP and International Financial Reporting Standards (IFRS) are rapidly converging. The FASB and the IASB are working together to

remove differences in existing standards. They are also working jointly on all new

standards so that agreed-upon standards can be adopted.

Despite convergence efforts, there are still some differences related to VIEs and SPEs.

See Figure 3-1 on p. 124 of the text.

3-66

Key Differences between U.S. GAAP and IFRSTopic U.S. GAAP IFRS

Determination of Control

Normally, control is determined by majority ownership of voting shares.

However, majority ownership may not indicate control of a VIE.

Thus, VIE rules must be evaluated first in all situations.

The primary beneficiary must consolidate a VIE.

The majority shareholder consolidates most non-VIEs.

Control is based on direct or indirect voting interests.

An entity with less than 50 percent ownership may have “effective control” through other contractual arrangements.

Normally, control is determined by majority ownership of voting shares.

In addition to voting shares, convertible instruments and other contractual rights that could affect control are considered.

A parent with less than 50 percent of the voting shares could have control through contractual arrangements allowing control of votes of the board of directors.

Control over SPEs is determined based on judgment and relevant facts.

Substance over form considered in determining whether an SPE should be consolidated.

3-67

Key Differences between U.S. GAAP and IFRS

Topic U.S. GAAP IFRSRelated Parties Interests held by related

parties and “de facto” agents may be considered in determining control of a VIE.

There is no specific provision for related parties or de facto agents.

Definitions of VIEs versus SPEs

SPEs can be VIEs. Consolidation rules focus on

whether an entity is a VIE (regardless of whether or not it is an SPE).

This guidance applies only to legal entities.

Considers specific indicators of whether an entity has control of an SPE: (1) whether the SPE conducts activities for the entity, (2) whether the entity has decision-making power to obtain majority of benefits from the SPE, (3) whether the entity has the right to majority of benefits from the SPE, and (4) whether the entity has majority of the SPE’s residual or risks.

This guidance applies whether or not conducted by a legal entity.

3-68

Key Differences between U.S. GAAP and IFRS

Topic U.S. GAAP IFRSDisclosure Disclosures required for

determining control of a VIE. Entities must disclose

whether or not they are the primary beneficiary of related VIEs.

No SPE-specific disclosure requirements.

There are specific disclosure requirements related to consolidation in general.

Accounting for Joint Ventures

Owners typically share control (often with 50-50 ownership).

If the joint venture is a VIE, contracts must be considered to determine whether consolidation is required.

If the joint venture is not a VIE, venturers use the equity method.

Proportional consolidation generally not permitted.

Joint ventures can be accounted for using either proportionate consolidation or the equity method.

Proportionate consolidation reports the venturer’s share of the assets, liabilities, income, and expenses on a line-by-line basis based on the venturer’s financial statement line items.

3-69


Which of the following differs between U.S. GAAP and IFRS in the determination of control?

a. In U.S. GAAP, control is solely based on ownership but IFRS considers other factors.

b. U.S. GAAP ignores direct stock ownership, while IFRS considers it.

c. In U.S. GAAP, rules related to VIEs must be followed, but IFRS has not specifically addressed VIEs (only SPEs).

e. The determination of control is identical under U.S. GAAP and IFRS.

3-70

Appendix 3B

Understand and explain the differences in theories of

consolidation.

3-71

Different Approaches to Consolidation

Theories that might serve as a basis for preparing consolidated financial statements: Proprietary theory

Parent company theory

Entity theory

With the issuance of ASC 805, the FASB’s approach to consolidation now focuses on the entity theory.

3-72

Proprietary Theory

Views the firm as an extension of its owners.

Assets and liabilities of the firm are considered to be those of the owners.

Results in a pro rata consolidation where the parent consolidates only its proportionate share of a less-than-wholly owned subsidiary’s assets, liabilities, revenues, and expenses.

3-73

Parent Company Theory

Recognizes that although the parent does not have direct ownership or responsibility, it has the ability to exercise effective control over all of the subsidiary’s assets and liabilities, not simply a proportionate share.

Separate recognition is given, in the consolidated financial statements, to the noncontrolling interest’s claim on the net assets and earnings of the subsidiary.

3-74

Entity Theory

Focuses on the firm as a separate economic entity rather than on the ownership rights of the shareholders.

Emphasis is on the consolidated entity itself, with the controlling and noncontrolling shareholders viewed as two separate groups, each having an equity in the consolidated entity.

3-75

Recognition of Subsidiary Income

3-76

Entity Theory

All of the assets, liabilities, revenues, and expenses of a less-than-wholly owned subsidiary are included in the consolidated financial statements, with no special treatment accorded either the controlling or noncontrolling interest.

3-77

Reporting Net Assets of the Subsidiary

3-78

Current Practice

ASC 805-50-30 has significantly changed the preparation of consolidated financial statements subsequent to the acquisition of less-than-wholly owned subsidiaries. Under ASC 805-50-30, consolidation follows

largely an entity-theory approach. Accordingly, the full entity fair value increment

and the full amount of goodwill are recognized.

3-79

Current Practice

Current approach clearly follows the entity theory with minor modifications aimed at the practical reality that consolidated financial statements are used primarily by those having a long-run interest in the parent company.

3-80


Current consolidation practice in the U.S. adopts the:

a. proprietary theory.b. parent company theory.c. equity theory.d. entity theory.e. None of the above.

3-81

Conclusion

The End

the reporting entity and the consolidation of less-than-wholly-owned subsidiaries with no...

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