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© The McGraw-Hill Companies, Inc., 2004
Slide 4-1
McGraw-Hill/Irwin
Chapter Four
Consolidated Consolidated Financial Financial
Statements and Statements and Outside Outside
OwnershipOwnership
© The McGraw-Hill Companies, Inc., 2004
Slide 4-2
McGraw-Hill/Irwin
?
Noncontrolling Interest
Noncontrolling Interest is the amount of the acquired company’s stock that is not acquired by the parent.
The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-3
McGraw-Hill/Irwin
?
Noncontrolling Interest
The existence of noncontrolling investors
requires the establishment of two new accounts:
Noncontrolling Interest Noncontrolling Interest in
Subsidiary Net Income
© The McGraw-Hill Companies, Inc., 2004
Slide 4-4
McGraw-Hill/Irwin
Noncontrolling Interest
3 approaches are defined for defining noncontrolling interest:
Economic Unit Concept
Proportionate Consolidation Concept
Parent Company Concept
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?
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?
© The McGraw-Hill Companies, Inc., 2004
Slide 4-5
McGraw-Hill/Irwin
Recommended by the FASB.Recommended by the FASB.
Noncontrolling Interest is a % of the sub’s implied value.
Noncontrolling Interest is a % of the sub’s implied value.
Noncontrolling Interest in Sub Net Income is a % of the sub’s net income
less amortization of purchase price allocations.
Noncontrolling Interest in Sub Net Income is a % of the sub’s net income
less amortization of purchase price allocations.
The sub is viewed as an indivisible unit within the business combination.
The sub is viewed as an indivisible unit within the business combination.
Economic Unit Concept
© The McGraw-Hill Companies, Inc., 2004
Slide 4-6
McGraw-Hill/Irwin
Little evidence exists to suggest widespread use of this method.
Little evidence exists to suggest widespread use of this method.
Only the portion of the sub’s assets that are acquired by the parent are
consolidated.
Only the portion of the sub’s assets that are acquired by the parent are
consolidated.
Noncontrolling Interest is not reported under this method.
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.
This method has been used where control exists, but less than 50% of the
sub has been acquired.
Proportionate Consolidation Concept
© The McGraw-Hill Companies, Inc., 2004
Slide 4-7
McGraw-Hill/Irwin
Noncontrolling Interest is a % of the sub’s book value at the balance sheet
date.
Noncontrolling Interest is a % of the sub’s book value at the balance sheet
date.
Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.
Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.
Noncontrolling Interest may appear in the equity section or between the equity
section and the liability section.
Noncontrolling Interest may appear in the equity section or between the equity
section and the liability section.
Parent Company Concept
#1 practice in use.
Considered to be the most common method in practice.
Considered to be the most common method in practice.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-8
McGraw-Hill/Irwin
Parent Company Concept
#1 practice in use.
•This concept includes the entire book value of each of the subsidiary’s accounts within the consolidated statements. (Consistent with Economic Unit Concept)
• However, only the parent’s share of the difference between FMV and book value in included in the consolidated statements. (Consistent with Proportionate Consolidation Concept)
•This concept includes the entire book value of each of the subsidiary’s accounts within the consolidated statements. (Consistent with Economic Unit Concept)
• However, only the parent’s share of the difference between FMV and book value in included in the consolidated statements. (Consistent with Proportionate Consolidation Concept)
© The McGraw-Hill Companies, Inc., 2004
Slide 4-9
McGraw-Hill/Irwin
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
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
© The McGraw-Hill Companies, Inc., 2004
Slide 4-10
McGraw-Hill/Irwin
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 sub’s net income.
The account appears on the Income Statement.
On the Income Statement: An account called
Noncontolling Interest in Subsidiary Net Income is set up to recognize the noncontrolling shareholders’ share of the sub’s net income.
The account appears on the Income Statement.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-11
McGraw-Hill/Irwin
Let’s look at an example using
the Parent Company Concept.
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-12
McGraw-Hill/Irwin
On 1/1/05, Jumbo
purchases 80% of Li’l
Bit for $800,000
cash.
On 1/1/05, Jumbo
purchases 80% of Li’l
Bit for $800,000
cash.
Noncontrolling InterestExample
Note, that Li’l Bit owns an internally developed patent valued at $220,000, with an expected useful life of 10 years.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-13
McGraw-Hill/Irwin
Record the initial investment on Jumbo’s books.
Record the initial investment on Jumbo’s books.
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-14
McGraw-Hill/Irwin
Goodwill computation:
This computation will be needed again when the consolidation is
done in years subsequent to the
year of acquisition.
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-16
McGraw-Hill/Irwin
As of the date of acquisition, the balances
for each company are
entered into the worksheet.
As of the date of acquisition, the balances
for each company are
entered into the worksheet.
Next, enter the consolidation entries on the
worksheet.
Next, enter the consolidation entries on the
worksheet.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-18
McGraw-Hill/Irwin
This is 20% of Li’l Bit’s BV at
date of acquisition.
This is 20% of Li’l Bit’s BV at
date of acquisition.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-21
McGraw-Hill/Irwin
This will be the sum of all the
amounts in the Noncontrolling
Interest column.
This will be the sum of all the
amounts in the Noncontrolling
Interest column.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-22
McGraw-Hill/Irwin
Let’s do the consolidation at the end of
2005.
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-24
McGraw-Hill/Irwin
First, update Jumbo’s numbers for the
equity method entries.
First, update Jumbo’s numbers for the
equity method entries.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-25
McGraw-Hill/Irwin
Li'l Bit's Net Income for 2000 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$
Li'l Bit's Net Income for 2000 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-26
McGraw-Hill/Irwin
$60,000 dividends were paid to Jumbo by Li’l Bit during
the year.
$60,000 dividends were paid to Jumbo by Li’l Bit during
the year.
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-27
McGraw-Hill/Irwin
FMV adjustment and intangible amortization is computed as follows:
FMV adjustment and intangible amortization is computed as follows:
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-28
McGraw-Hill/Irwin
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.
Amortization computation:
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-29
McGraw-Hill/Irwin
Amortization computation:
Noncontrolling InterestExample
© The McGraw-Hill Companies, Inc., 2004
Slide 4-30
McGraw-Hill/Irwin
Note Jumbo’s updated
numbers.
Note Jumbo’s updated
numbers.
This is based on 80% of Li’l Bit’s
income less $20.8 in Amortization
Expense
This is based on 80% of Li’l Bit’s
income less $20.8 in Amortization
Expense
© The McGraw-Hill Companies, Inc., 2004
Slide 4-32
McGraw-Hill/Irwin
This is 20% of Li’l Bit’s BV at
date of acquisition.
This is 20% of Li’l Bit’s BV at
date of acquisition.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-38
McGraw-Hill/Irwin
This is the 80% of Li’l
Bit’s dividends that went to
Jumbo.
This is the 80% of Li’l
Bit’s dividends that went to
Jumbo.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-41
McGraw-Hill/Irwin
These numbers are computed and
entered into the Noncontrolling
Interest column.
These numbers are computed and
entered into the Noncontrolling
Interest column.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-43
McGraw-Hill/Irwin
Effects Created by Using the Cost Method
Prepare Entry *C to convert Prepare Entry *C to convert from the Cost Method to from the Cost Method to
the Equity Methodthe Equity Method
Combine:Combine:1.1. The increase in the sub’s BV The increase in the sub’s BV
since acquisition x the since acquisition x the parent’s ownership %parent’s ownership %
2.2. Total amortization for the Total amortization for the same period.same period.
Prepare Entry *C to convert Prepare Entry *C to convert from the Cost Method to from the Cost Method to
the Equity Methodthe Equity Method
Combine:Combine:1.1. The increase in the sub’s BV The increase in the sub’s BV
since acquisition x the since acquisition x the parent’s ownership %parent’s ownership %
2.2. Total amortization for the Total amortization for the same period.same period.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-44
McGraw-Hill/Irwin
Effects Created by Using the Cost Method
Change Entry I to Change Entry I to eliminate the Dividend eliminate the Dividend
IncomeIncome
DO NOT use Entry DDO NOT use Entry D
Change Entry I to Change Entry I to eliminate the Dividend eliminate the Dividend
IncomeIncome
DO NOT use Entry DDO NOT use Entry D
© The McGraw-Hill Companies, Inc., 2004
Slide 4-45
McGraw-Hill/Irwin
Effects Created by Using the Partial Equity Method
Perform Entry *C.
Only the adjustment for
the amortization expense is necessary.
Perform Entry *C.
Only the adjustment for
the amortization expense is necessary.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-46
McGraw-Hill/Irwin
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.
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.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-47
McGraw-Hill/Irwin
Preacquisition Income
1. When control of a sub is acquired at a time subsequent to the beginning of the sub’s 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 parent’s share of the sub’s 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.
1. When control of a sub is acquired at a time subsequent to the beginning of the sub’s 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 parent’s share of the sub’s 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.
© The McGraw-Hill Companies, Inc., 2004
Slide 4-48
McGraw-Hill/Irwin
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
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
© The McGraw-Hill Companies, Inc., 2004
Slide 4-49
McGraw-Hill/Irwin
Preacquisition Income (Cont’d)
4. The determination of goodwill and the computation of excess FMV over BV is based on the subsidiary’s BV at the time of acquisition.
5. The current year’s 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.
4. The determination of goodwill and the computation of excess FMV over BV is based on the subsidiary’s BV at the time of acquisition.
5. The current year’s 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.