Chapter 4 Consolidated Financial Statements and Outside Ownership

The issues focus on how the parent, in its consolidated financial statements, should

1. Recognize the subsidiary's assets and liabilities 2. Assign values to the subsidiary's assets and liabilities 3. value and disclose the presence of the other owners as the NCI

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

1. fair value of the controlling interest 2. fair value of the NC interest

Frequently, a parent company will sell a portion or all of the shares it owns of a subsidiary

If the sale of the parent's ownership interest results in the loss of control of a subsidiary, it recognizes any resulting gain or loss in consolidated net income; if the parent sells some shares but retains control, it recognizes no gains or losses on the sale

To properly report ownership equity in consolidated financial statements, acquisition date goodwill should be

apportioned across the controlling and noncontrolling interests

Noncontrolling interest

The portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

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Understand that business combinations can occur with less than complete ownership

Regardless of the reason for owning less than 100 percent, the parent consolidates the financial data of

every subsidiary when control is present

Step Acquisition

occurs when control is achieved in a series of equity transaction, as opposed to a single transaction

Acquirers frequently pay a premium price per share to garner

sufficient shares to ensure a controlling interest

When a parent company acquires a less than 100 percent controlling interest in another firm

the acquisition method requires a determination of the acquisition date fair value of the acquired firm for consolidated financial reporting

Control premium

the incremental amount paid in a business combination above the preacquisition subsidiary value

When a company gains control at a midyear date

the new parent company must compute the subsidiary's book value as of that date to determine excess total fair value over book value allocations; excess amortization expenses as well as 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

Estimating the value of acquisition date fair value of Noncontrolling interest requires

valuation models based on subsidiary discounted cash flows or residual income projections

Economic unit concept

views the parent and subsidiary companies as a single economic unit for financial reporting purposes

For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures the following at the acquisition date

1. all subsidiary identifiable assets and liabilities at their full fair values 2. nci interest at fair value 3. goodwill or a gain from a bargain purchase