Chapter Four

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Chapter Four
Consolidated Financial Statements and Outside
Ownership
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Noncontrolling Interest

• Noncontrolling Interest is the amount of the
  acquired companys stock that is not acquired by
  the parent.
• The interests of the noncontrolling (non-parent)
  stockholders must be reflected in the
  consolidated financial statements.

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Noncontrolling Interest

• The existence of noncontrolling investors
  requires the establishment of two new accounts
• Noncontrolling Interest
• Noncontrolling Interest in Subsidiary Net Income

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Noncontrolling Interest
Assume that Expo,Inc. acquires 70 of Nent Co.
for 10 million cash. How do we account for the
30 of Nent Co. that Expo does not own?

• 3 approaches are defined for defining
  noncontrolling interest
• Economic Unit Concept
• Proportionate Consolidation Concept
• Parent Company Concept

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Economic Unit Concept
Recommended by the FASB.
Noncontrolling Interest is a of the subs
implied value.
Noncontrolling Interest in Sub Net Income is a
of the subs net income less amortization of
purchase price allocations.
The sub is viewed as an indivisible unit within
the business combination.
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Proportionate Consolidation Concept
Little evidence exists to suggest widespread use
of this method.
Only the portion of the subs assets that are
acquired by the parent are consolidated.
Noncontrolling Interest is not reported under
this method.
This method has been used where control exists,
but less than 50 of the sub has been acquired.
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Parent Company Concept
Considered to be the most common method in
practice.
Noncontrolling Interest is a of the subs book
value at the balance sheet date.
Noncontrolling Interest in Sub Net Income is a
of the subs net income.
Noncontrolling Interest may appear in the equity
section or between the equity section and the
liability section.
1 practice in use.
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Parent Company Concept

• This concept includes the entire book value of
  each of the subsidiarys accounts within the
  consolidated statements. (Consistent with
  Economic Unit Concept)
• However, only the parents share of the
  difference between FMV and book value in included
  in the consolidated statements. (Consistent with
  Proportionate Consolidation Concept)

1 practice in use.
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Accounting for Noncontrolling Interest

• On the Balance Sheet
• A credit balance account called Noncontrolling
  Interest is set up to recognize the
  noncontrolling stockholders investment in the
  subsidiary.
• The account usually appears in the equity section
  of the Consolidated Balance Sheet. Or it may be
  placed in a separate section between equity and
  non-current liabilities

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Accounting for Noncontrolling Interest

• On the Income Statement
• An account called Noncontolling Interest in
  Subsidiary Net Income is set up to recognize the
  noncontrolling shareholders share of the subs
  net income.
• The account appears on the Income Statement.

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Noncontrolling InterestExample
Lets look at an example using the Parent Company
Concept.
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Noncontrolling InterestExample
On 1/1/05, Jumbo purchases 80 of Lil Bit for
800,000 cash.
Note, that Lil Bit owns an internally developed
patent valued at 220,000, with an expected
useful life of 10 years.
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Noncontrolling InterestExample
Record the initial investment on Jumbos books.
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Noncontrolling InterestExample
Goodwill computation
This computation will be needed again when the
consolidation is done in years subsequent to the
year of acquisition.
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As of the date of acquisition, the balances for
each company are entered into the worksheet.
Next, enter the consolidation entries on the
worksheet.
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This is 20 of Lil Bits BV at date of
acquisition.
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This will be the sum of all the amounts in the
Noncontrolling Interest column.
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Noncontrolling InterestExample
Lets do the consolidation at the end of 2005.
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First, update Jumbos numbers for the equity
method entries.
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Noncontrolling InterestExample
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Noncontrolling InterestExample
60,000 dividends were paid to Jumbo by Lil Bit
during the year.
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Noncontrolling InterestExample
FMV adjustment and intangible amortization is
computed as follows
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Noncontrolling InterestExample
Amortization computation
Assume that the building has a remaining useful
life of 10 years, the equipment has a remaining
useful life of 4 years, and the patent has a
remaining useful life of 10 years.
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Noncontrolling InterestExample
Amortization computation
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Note Jumbos updated numbers.
This is based on 80 of Lil Bits income less
20.8 in Amortization Expense
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This is 20 of Lil Bits BV at date of
acquisition.
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This is the 80 of Lil Bits dividends that went
to Jumbo.
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These numbers are computed and entered into the
Noncontrolling Interest column.
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Effects Created by Using the Cost Method

• Prepare Entry C to convert from the Cost Method
  to the Equity Method
• Combine
• The increase in the subs BV since acquisition x
  the parents ownership
• Total amortization for the same period.

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Effects Created by Using the Cost Method

• Change Entry I to eliminate the Dividend Income
• DO NOT use Entry D

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Effects Created by Using the Partial Equity Method
Perform Entry C. Only the adjustment for the
amortization expense is necessary.
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Step Acquisitions

• Companies often acquire controlling interest in
  other companies a piece at a time i.e. in
  steps.
• Under the Parent Company Concept, each investment
  is viewed as a separate purchase, with its own
  cost allocations and amortization.

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Preacquisition Income

1. When control of a sub is acquired at a time
   subsequent to the beginning of the subs fiscal
   year, the income statement accounts are
   consolidated as if the acquisition was made at
   the beginning of the period.
2. A line-item is included (as a deduction) in the
   income statement for the parents share of the
   subs current year income prior to the date of
   acquisition. (which effectively belongs to the
   former shareholders)
3. The dividends paid to these former shareholders
   are then eliminated.

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Preacquisition Income

• Steps 2 3 are done via the following S in
  SAIDE entry
• Dr. Pre Acquisition Income
• Cr. Dividends paid (of subsidiary)
• Cr. Investment in Subsidiary

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Preacquisition Income (Contd)

• The determination of goodwill and the computation
  of excess FMV over BV is based on the
  subsidiarys BV at the time of acquisition.
• The current years amortization is based only on
  the period for which the parent had its ownership
  in the subsidiary. E.g. the last 3 months of the
  year.

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End of Chapter 4
Ten cups of this stuff and I still dont get it!