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7/25/2019 Chapter 4 - Consolidated Financial Statements and Outside Ownership
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CONSOLIDATED
FINANCIAL STATEMENTS
AND OUTSIDEOWNERSHIP
CHAPTER FOUR
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OUTSIDE OWNERSHIP
When a parent doest not hold 100% of the ownership,
the remaining outside owners are collectively referred
to as a non-controlling interest or minority interest.
A number of reasons exist for one company to hold lessthan 100% ownership of a subsidiary !arent could not have sufficient resources available to
obtain all of the outstanding stoc".
A few stoc"holders of the subsidiary could have elected toretain their ownership, perhaps in hope of getting a better
price in future.
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OUTSIDE OWNERSHIP
#he laws of some countries prohibit outsiders from
maintaining complete control of domestic business
enterprise, this is for the case of foreign subsidiaries.
A parent maintain some percentage of nativeownership with the purpose to establish better relations
with a subsidiary$s employee, customers and local
government.
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
When a noncontrolling interest outside ownerships&remains after a business combination, difficulty ariseconcerning #he appropriate consolidation values to assign to the
subsidiary$s assets and liabilities. #he method of valuing and disclosing the presence of the
other owners. 'n previous chapters, we were assuming total
ownership exist and the subsidiary$s assets andliabilities are always consolidated based on fair valueat the date of ac(uisition with any excess assigned togoodwill.
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
)owever, when a company ac(uires less than
100% of a subsidiary, several different method
exist to calculate the consolidated values of the
ac(uired accounts. *xample 1 Assume +mall ompany posses net
asset with the following value
oo" value 110,000
/air value of identifiable net assets ex. oodwill& 10,000
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
*xample 1 ig ompany purchase 2,000 20%& of the 10,000
outstanding voting stoc" shares of +mall for 30 per share. #herefore, the fair value for +mall as a whole is 300,000
10,000 x 30&
4ow, (uestion arise on What amounts should the parent report for the ac(uired
subsidiary$s assets and liabilities when ac(uired less than
100%. )ow does the valuation for these ac(uired net assets affect
the amount reported for the noncontrolling interest5
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
#he first method re(uired that +mall ompany$sentire 300,000 fair value should serve as thevaluation basis for both the parent and the
noncontrolling interest share of the subsidiary netassets. ecause they views that management has
effectively controls100% of the net assets
ac(uired. #his method is referred to as the economic unit
concept.
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
#he second method simply values the
noncontrolling interest and its share of the
subsidiary net assets at 6ero.
#his approach reflects the strict interpretation ofthe cost principle by incorporating only the
percentage ac(uired by the parent.
And this method as referred to as the proportionateconsolidation concept.
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CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST
#he third method continue reflect the cost principle 3nd
method&, but also assigns a value to the noncontrolling
interest shares.
ecause the parent only purchased 20% of thesubsidiary$s shares, only this percentage of the
subsidiary$s net assets are valued at the parent$s cost.
#he noncontrolling interest, 0% of the net assets
remains at the subsidiary$s former boo" value andcarry over.
#his approach view as the parent company concept.
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NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
#he 3007 /A+ *xposure 8raft were adopting this
concept.
Where a controlled company must always be
consolidated as a whole regardless of the parent$s levelof ownership.
ecause it gives the best view of the assets and
liabilities that have come under the control of the
parent company.
As previous example, ig ac(uire +mall, the 30 price
share paid by ig for its 2,000 shares is assumed to be
e(uivalent to the value of all 10,00 of +mall$s.
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NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
#herefore, all subsidiary$s assets and liabilities are
included at their fair values with any excess
assigned to goodwill.
/air value of +mall purchase price& 300,000/air value of +mall$s net assets 10,000
/air value not assigned 9 oodwill 20,000
4oncontrolling interest 0% of 300,000& :0,000
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NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
*ven +mall$s outside owners do not possess an
e(uity interest in the parent company, the :0,000
balance is presented within the consolidated
stoc"holder$s e(uity section. #he outside parties own a component part of the
resulting business combination, thus their interest is
viewed as an ownership balance to be reportedwithin the consolidated balance sheet.
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NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
/or income statement, parent company will
recogni6es 100% of the subsidiary$s revenue and
expenses balances.
#he ob;ective of reporting subsidiary as aninseparable unit within the consolidated entity.
And, also effectively reports the income generated
by the net assets under the control of the parentcompany.
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NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
/or ig ac(uisition of +mall, 100% of the
subsidiary revenue and expenses are included in the
consolidated figure.
)owever, since parent only own 20% of +mall, a0% claim to subsidiary$s earnings must be
deducted separately in recognition of the
noncontrolling interest.
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NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
#his approach assumes that ultimate ob;ective of
consolidated financial statements is to serve as a
report to stoc"holders of the parent company.
#he value utili6ed for consolidation reflect theparent$s payment attributed to each asset and
liability.
*.g. +mall owns land with a boo" value of
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NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
#herefore, under this approach, only >?,000 of
goodwill is recogni6ed.
!urchase price @10,000 x 20%& x 30 1>0,000
/air value of +mall$s net assets 10,000 x 20%& ?1,000
ost excess of fair value 9 oodwill >?,000
4oncontrolling interest 0
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NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
A uni(ue feature of proportionate consolidation is the
reporting of the noncontrolling interest, where
consolidated statements totally ignore these outside
owners. ecause this theory hold that the presence of a
noncontrolling interest is irrelevant to the stoc"holders
of the parent company.
'n other words, an outside owner of a subsidiary has nocapital invested in the parent company and the parent
has no legal obligation to this outside ownership.
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NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
/or income statement reporting, ta"en ig as
example, ig will only include 20% of each of the
subsidiary$s revenue and expenses accounts in the
consolidated balances.
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NONCONTROLLING INTEREST:
THE PARENT COMPAN CONCEPT
#his approach is viewed as hybrid mixture& methodbecause it incorporates the assumptions of economicunit concept and proportionate consolidation )olding control of a subsidiary provides the parent an
inseparable interest in that company= and #he parent company primarily produces consolidated
financial statements for the benefit of its stoc"holders.
#he subsidiary$s boo" value and the purchase price the
parent paid are viewed as separate elements that can beaccounted for individually within the consolidationprocess.
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NONCONTROLLING INTEREST:
THE PARENT COMPAN CONCEPT
/or ig ompany example
!urchase price @10,000 x 20%& x 30 1>0,000
oo" value of +mall 100%& 110,000
Bess Cecognition of noncontrolling interest 0%& ,000& 22,000ost in excess of boo" value :,000
Allocation on fair value excess boo" value@10,000 - 110,000& x 20% 1>,000&
oodwill >?,000
4oncontrolling interest 110,000 x 0%& ,000
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NONCONTROLLING INTEREST:
THE PARENT COMPAN CONCEPT
#he subsidiary$s boo" value is consolidated in total
whereas any cost in excess of boo" value is
assumed to be a parent company expenditure
appropriately allocated based on fair values. /or the income statement, the entire amount of
each subsidiary revenue and expenses account is
included in the total and the outside ownership
share of the subsidiary$s net income is identified
with the noncontrolling interest.
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THANK YOU
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TUTORIAL !UESTIONS
1. 8efine the term noncontrolling interest.
3. Airway orporation ac(uires