Chapter Four: Consolidated Financial Statements and Outside Ownership

Partial Ownership Consolidations—Acquisition Method

-The acquisition method incorporates 100 percent of the subsidiary's assets and liabilities at their acquisition-date fair values in the consolidated financial statements. -Subsequent to acquisition, changes in current fair values for assets and liabilities are not recognized. -Subsidiary assets acquired and liabilities assumed are reflected in future consolidated financial statements using acquisition-date fair values net of subsequent amortizations (or reduced for impairment).

Noncontrolling Interest and Consolidations

-The consolidation is substantially unchanged with the presence of a noncontrolling interest. -The parent company must determine and enter each of these figures when constructing a worksheet:

The total acquired firm fair value in a partial acquisition is the sum of two components at the acquisition date:

-The fair value of the controlling interest. -The fair value of the noncontrolling interest at the acquisition date.

Entry *C is used to convert to the equity method. Combine:

-The increase (since acquisition) in the subsidiary's retained earnings during past years (net income less dividends) times the parent's ownership percentage. -The parent's percentage of total amortization expense for these same past years.

Effects of Using the Initial Value Method

-The initial value method ignores two accrual-based adjustments: -Entry *C is added to the worksheet to convert the previously recorded balances to the equity method.

The initial value method ignores two accrual-based adjustments:

-The parent does not accrue the percentage of subsidiary net income earned in past years in excess of dividends. -The parent does not record amortization expense under the initial value method.

Consolidated Financial Reporting in the Presence of a Noncontrolling Interest

-The parent, with controlling interest, must consolidate 100 percent of its subsidiary's financial information as a single economic unit. -The acquisition method requires that the subsidiary be valued at the acquisition-date fair value. -The total acquired firm fair value in a partial acquisition is the sum of two components at the acquisition date:

Consolidated Financial Statements—Statement of Changes in Owners' Equity

-The statement of changes in owners' equity provides details of the ownership changes for the year for both the controlling and noncontrolling interest shareholders. -Note the placement of the noncontrolling interest in the subsidiary's equity in the consolidated owners' equity section. -If appropriate, each component of other comprehensive income is allocated to the controlling and noncontrolling interests. -The statement of changes in owners' equity provides an allocation of accumulated other comprehensive income elements across the controlling and noncontrolling interests.

Consolidated Net Income

-To reflect the economic unit concept, consolidated net income includes 100 percent of both the parent's and the subsidiary's net income, adjusted for excess acquisition-date fair value over book value amortizations. -Once consolidated net income is determined, it is allocated to the parent company and the noncontrolling interests. -Noncontrolling interests' ownership pertains only to the subsidiary; its share of consolidated net income is limited to a share of the adjusted subsidiary's net income.

Allocating Acquired Goodwill to the Controlling and Noncontrolling Interests

-To report ownership equity in consolidated financial statements, acquisition-date goodwill is apportioned across controlling and noncontrolling interests. -The parent first allocates goodwill to its controlling interest for the excess of the fair value of its equity interest over its share of the fair value of the net assets.

Parent Company Sales of Subsidiary Stock—Acquisition Method

The accounting effect from selling subsidiary shares depends on whether the parent continues to maintain control after the sale.

If the total fair value of the acquired firm is less than the collective sum of its identifiable net assets:

-A bargain purchase occurs. -Parent recognizes the entire gain in current income. -*No gain is ever allocated to the noncontrolling interest.* -If the price per share paid by the parent equals the noncontrolling interest per share fair value, goodwill is recognized proportionately across the two ownership groups.

Control Achieved in Steps—Acquisition Method

-A step acquisition occurs when control is achieved in a series of equity acquisitions. -The acquisition method measures the acquired firm (including the noncontrolling interest) at fair value at the date control is obtained. -The parent utilizes a single uniform valuation basis for all subsidiary assets acquired and liabilities assumed—fair value at the date control is obtained.

Noncontrolling Interest in a Subsidiary

-Although most parent companies have 100 percent ownership of their subsidiaries, a significant number establish control with a lesser amount of stock. -If the parent doesn't own 100 percent of the company, outside owners are referred to as a *noncontrolling interest*. -How should the ownership interests of the noncontrolling interest be reflected in the consolidated financial statements?

Consolidated Financial Statements—Income Statement and Balance Sheet

-Consolidated net income is computed at the combined entity level and allocated to the noncontrolling and controlling interests. -Identifiable assets acquired and liabilities assumed are adjusted to their full individual fair values at the acquisition date.

Conversion to Equity Method from Initial Value Method (Entry *C)

-Entry *C is used to convert to the equity method. Combine: -Entry (I) removes both intra-entity dividend income and subsidiary dividends to the parent. (Entry D is unnecessary.)

Parent Company Sales of Subsidiary Stock—Less Than Entire Investment

-If the former parent retains any of its former subsidiary's shares, the investment should be remeasured to fair value on the date control is lost. -Any resulting gain or loss from the remeasurement should be recognized in the parent's net income. -If it sells less than the entire investment, parent must select a cost-flow assumption if it has made more than one purchase. -For securities, the use of specific identification based on serial numbers is acceptable, although averaging or FIFO assumptions often are applied.

Noncontrolling Interest Additional Issues

-If the noncontrolling interest's proportionate share of subsidiary's fair values exceeds its total fair value, the excess reduces goodwill recognized by the parent. -If the total fair value of the acquired firm is less than the collective sum of its identifiable net assets:

Postacquisition Control Achieved in Steps

-If the parent previously held a noncontrolling interest in the acquired firm, the parent remeasures its interest to fair value and recognizes a gain or loss. -If after obtaining control, the parent increases its ownership interest in the subsidiary, no further remeasurement takes place. -The parent accounts for additional subsidiary shares acquired as an equity transaction—consistent with transactions with other owners, as opposed to outsiders.

Partial Equity Method

-If the parent used the partial equity method to account for the subsidiary after acquisition, Entry *C is used to convert to the equity method. -In this case, only the amortization expense for the prior years must be included. -Under the partial equity method, the parent accrues its share of reported subsidiary income, but it does not recognize any acquisition-date excess fair value amortization expenses.

The accounting effect from selling subsidiary shares depends on whether the parent continues to maintain control after the sale.

-If the sale results in the loss of control, parent recognizes any resulting gain or loss in consolidated net income. -If the parent maintains control, it recognizes no gains or losses - the sale is shown in the equity section. -The parent records any difference between proceeds of the sale and carrying amount as additional paid-in capital.

Midyear Acquisitions When control of a subsidiary is acquired at a midyear date:

-New parent must compute the subsidiary's book value as of acquisition date to determine excess total fair value over book value allocations. -Excess amortization expenses, any equity accrual, and dividend distributions are recognized for a period of less than a year. -Because only net income earned by the subsidiary after the acquisition date accrues to the new owners, it is appropriate to include only postacquisition revenues and expenses in consolidated totals.

The parent company must determine and enter each of these figures when constructing a worksheet:

-Noncontrolling interest in subsidiary at beginning of current year. -Net income attributable to noncontrolling interest. -Subsidiary dividends attributable to noncontrolling interest. -Noncontrolling interest as of the end of the year (three balances above combined).