Ch 5: consolidation with less than 100% ownership

whether the intracompany transfer is upstream or downstream

- The intracompany deferred profits is always 100% eliminated from the consolidated FS at the date of intracompany transfer - As the asset is depreciated during the periods after the intracompany sale, 100% of the deferred profit is ratably amortized and recognized in the consolidated FS as an adjustment of deprecation expense

stockholder's equity with non controlling interests

- consolidated A and L remain unchanged int he presence of non controlling shareholders - Stockholder's equity section will clearly separate the interest of the two groups of shareholders - Shareholders of the parent company who have a claim on the net assets the total consolidated entity by virtue of their ownership fo the parent company, and - Non-controlling shareholders of the subsidiary who only have a claim of the net assets of the subsidiary (called non controlling interests, or NCI)

Income statement with non controlling interests

- consolidated Rev and Expense remain unchanged in the presence of non controlling shareholders - Net income is allocated to the two groups of shareholders - consolidated NI attributable to the non controlling shareholders - consolidated NI that is available to the parent's shareholders

suggested integrated approach for mastering complex consolidations

1) Disaggregate and document the activity for the 100% acquisition accounting premium (AAP), the controlling interest AAP and the NCI AAP 2) calculate and organize the profits and losses on intracompany transactions and balances 3) compute the pre-consilidaed equity investment account beginning and ending balances starting with the stockholder's equity of the subsidiary

GW allocation example: Assumptions 1) Acquisition of 80% of a subsidiary for $1,570,000 2) NCI has a FV of $380,000 3) FV of the identifiable net assets is $1,800,000

100% of subsidiary $1,570,000 + $380,000 = $1,950,000 $1,950,000 - $1,800,000 = $150,000 GW Allocation of GW to controlling interest 1,570,000 - (80% x 1,800,000) = $130,000 Allocation of GW to the NCI 1,570,000 - (20% x 1,800,000) = $20,000

Cost method (ADJ) amount equation

80% change in Sub RE from Acquisition date through BOY - cumulative 80% AAP amortization from acquisitions date through BOY - 100% of the BOY downstream unconfirmed intracompany inventory profits - 80% of the BOY upset unconfirmed intracompany inventory profits - 100% of the BOY downstream unconfirmed intracompany depreciable asset profits - 80% of the BOY upstream unconfirmed intracompany depreciable asset profits _______________________ =ADJ amount

ending RE

Beg RE + Consolidated NI attributable to parent - Div = ending RE

NCI equity account formula

Beg balance (FV at acquisition date) + NI attributable to NCI - Div declared and paid to non controlling shareholders = ending balance

Which consolidation entries include NCI?

C, E, A

when the inventory is downstream

NCI is unaffected by deferred profit

Cost method: income attributable to NCI formula

NCI share of the sub's reported NI for 2018 - 20% AAP amortization for 2016 + 20% of the BOY upstream intracompany inventory profits confirmed during 2016 - 20% of the EOY upstream intracompany inventory profits deferred from 2016 + 20% of the upstream confirmed depreciable asset profits = consolidated income attributable to NCI

when the asset sale transaction is downstream

NI is unaffected by deferred profit

Profit elimination for downstream inventory sales formula

Sub NI - AAP dep/amort = adjusted sub NI Allocation: Parent (80%): $136,000 Subsidiary (20%): $34,000 This is because the non controlling shareholders are not affected by the inventory sale

Apportionment of BVSE and Identifiable Assets

The book value fo the sub and the Acquisition Accounting Premium (AAP) assets and liabilities other than goodwill are apportioned between the parent's shareholders and the NCI in proportion to their ownership in the company - so, if the NCI own 20% of the company, they are apportioned 20% of the sub's BV and 20% of the AAP other than GW in our (E) and (A) consolidation elimination entries

the NCI equity account is reported on the

consolidated BS separately from the the parent's equity, and should be clearly identified and labeled

the consolidated NI attributable to parent is the same as the

consolidated NI attributable to parent in the RE calculation for ending RE

If the parent still controls the subsidiary

it must still consolidate the financial statements of the subsidiary with its own

Consolidated income statement

sales - COGS = Gross profit Gross Profit - operating expenses = consolidated NI Consolidated NI - Consolidated NI attributable to non controlling interests = Consolidated NI attributable to parent

profit elimination for upstream inventory sales formula

subsidiary NI + Recognition of prior year gain - Deferral of current period gain - AAP dep/amort = Adjusted sub NI Allocation parent (80%): $127,600 Subsidiary (20%): $31,900 adjusted sub NI: 159,500 $31,900 goes to consolidated NI attributable to NCI(IS) and NCI(BS) Icogs consolidated entry for the deferred profit must attributed to NCI as well

When the inventory is upstream

the deferred inventory profit adjustment also affect the NCI balances by the NCI percentage

When the depreciable asset sale is upstream

the deferred profit adjustments also affect the NCI balances by the NCI %

Intracompany transfers of Inventory parent owns less than 100%

whether the intracompany transfer is upstream or downstream - 100% of the intracompany deferred profit is always eliminated form the consolidated FS at the date of the intracompany inventory transfer - the reduction of ending inventory for the deferred profit will increase COGS BI + Purchases - EI = COGS - When the inventory is transferred to an unaffiliated party, the deferred profit is recognized as decrease of COGS