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CONSOLIDATED
FINANCIAL STATEMENTS
AND OUTSIDE
OWNERSHIP
CHAPTER FOUR

OUTSIDE OWNERSHIP
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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 less
than 100% ownership of a subsidiary:

Parent could not have sufficient resources available to


obtain all of the outstanding stock.
A few stockholders of the subsidiary could have elected to
retain their ownership, perhaps in hope of getting a better
price in future.

OUTSIDE OWNERSHIP
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The 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 native
ownership with the purpose to establish better relations
with a subsidiarys employee, customers and local
government.

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

When a noncontrolling interest (outside ownerships)


remains after a business combination, difficulty arise
concerning :

The appropriate consolidation values to assign to the


subsidiarys assets and liabilities.
The method of valuing and disclosing the presence of the
other owners.

In previous chapters, we were assuming total


ownership exist and the subsidiarys assets and
liabilities are always consolidated based on fair value
at the date of acquisition with any excess assigned to
goodwill.

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

However, when a company acquires less than


100% of a subsidiary, several different method
exist to calculate the consolidated values of the
acquired accounts.
Example 1: Assume Small Company posses net
asset with the following value:
Book value
$110,000
Fair value of identifiable net assets (ex. Goodwill) $130,000

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

Example 1:

Big Company purchase 7,000 (70%) of the 10,000


outstanding voting stock shares of Small for $20 per share.
Therefore, the fair value for Small as a whole is $200,000
(10,000 x $20)

Now, question arise on:

What amounts should the parent report for the acquired


subsidiarys assets and liabilities when acquired less than
100%.
How does the valuation for these acquired net assets affect
the amount reported for the noncontrolling interest?

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

The first method required that Small Companys


entire $200,000 fair value should serve as the
valuation basis for both the parent and the
noncontrolling interest share of the subsidiary net
assets.
Because they views that management has
effectively controls 100% of the net assets
acquired.
This method is referred to as the economic unit
concept.

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

The second method simply values the


noncontrolling interest and its share of the
subsidiary net assets at zero.
This approach reflects the strict interpretation of
the cost principle by incorporating only the
percentage acquired by the parent.
And this method as referred to as the proportionate
consolidation concept.

CONSOLIDATIONS INVOLVE
NONCONTROLLING INTEREST

The third method continue reflect the cost principle (2 nd


method), but also assigns a value to the noncontrolling
interest shares.
Because the parent only purchased 70% of the
subsidiarys shares, only this percentage of the
subsidiarys net assets are valued at the parents cost.
The noncontrolling interest, 30% of the net assets
remains at the subsidiarys former book value and
carry over.
This approach view as the parent company concept.

NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
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The 2005 FASB Exposure Draft were adopting this


concept.
Where a controlled company must always be
consolidated as a whole regardless of the parents level
of ownership.
Because it gives the best view of the assets and
liabilities that have come under the control of the
parent company.
As previous example, Big acquire Small, the $20 price
share paid by Big for its 7,000 shares is assumed to be
equivalent to the value of all 10,00 of Smalls.

NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
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Therefore, all subsidiarys assets and liabilities are


included at their fair values with any excess
assigned to goodwill.
Fair value of Small (purchase price)
Fair value of Smalls net assets
Fair value not assigned Goodwill
Noncontrolling interest (30% of $200,000)

$ 200,000
130,000
70,000
$ 60,000

NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
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Even Smalls outside owners do not possess an


equity interest in the parent company, the $60,000
balance is presented within the consolidated
stockholders equity section.
The outside parties own a component part of the
resulting business combination, thus their interest is
viewed as an ownership balance to be reported
within the consolidated balance sheet.

NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
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For income statement, parent company will


recognizes 100% of the subsidiarys revenue and
expenses balances.
The objective of reporting subsidiary as an
inseparable unit within the consolidated entity.
And, also effectively reports the income generated
by the net assets under the control of the parent
company.

NONCONTROLLING INTEREST:
THE ECONOMIC UNIT CONCEPT
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For Big acquisition of Small, 100% of the


subsidiary revenue and expenses are included in the
consolidated figure.
However, since parent only own 70% of Small, a
30% claim to subsidiarys earnings must be
deducted separately in recognition of the
noncontrolling interest.

NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
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This approach assumes that ultimate objective of


consolidated financial statements is to serve as a
report to stockholders of the parent company.
The value utilized for consolidation reflect the
parents payment attributed to each asset and
liability.
E.g. Small owns land with a book value of $8,000
but fair value of $10,000; the cost incurred by Big
is $7,000 (70% of fair value) with this asset.

NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
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Therefore, under this approach, only $49,000 of


goodwill is recognized.
Purchase price [(10,000 x 70%) x $20]

$ 140,000

Fair value of Smalls net assets ($130,000 x 70%)

91,000

Cost excess of fair value Goodwill

49,000

Noncontrolling interest

NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
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A unique feature of proportionate consolidation is the


reporting of the noncontrolling interest, where
consolidated statements totally ignore these outside
owners.
Because this theory hold that the presence of a
noncontrolling interest is irrelevant to the stockholders
of the parent company.
In other words, an outside owner of a subsidiary has no
capital invested in the parent company and the parent
has no legal obligation to this outside ownership.

NONCONTROLLING INTEREST:
THE PROPORTIONATE CONSOLIDATION CONCEPT
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For income statement reporting, taken Big as


example, Big will only include 70% of each of the
subsidiarys revenue and expenses accounts in the
consolidated balances.

NONCONTROLLING INTEREST:
THE PARENT COMPANY CONCEPT
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This approach is viewed as hybrid (mixture) method


because it incorporates the assumptions of economic
unit concept and proportionate consolidation:

Holding control of a subsidiary provides the parent an


inseparable interest in that company; and
The parent company primarily produces consolidated
financial statements for the benefit of its stockholders.

The subsidiarys book value and the purchase price the


parent paid are viewed as separate elements that can be
accounted for individually within the consolidation
process.

NONCONTROLLING INTEREST:
THE PARENT COMPANY CONCEPT
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For Big Company example:


Purchase price [(10,000 x 70%) x $20]
Book value of Small (100%)
Less: Recognition of noncontrolling interest (30%)
Cost in excess of book value
Allocation on fair value excess book value
[($130,000 - $110,000) x 70%]

$ 140,000
$ 110,000
(33,000)

77,000
63,000
(14,000)

Goodwill

49,000

Noncontrolling interest ($110,000 x 30%)

33,000

NONCONTROLLING INTEREST:
THE PARENT COMPANY CONCEPT
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The subsidiarys book value is consolidated in total


whereas any cost in excess of book value is
assumed to be a parent company expenditure
appropriately allocated based on fair values.
For 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 subsidiarys net income is identified
with the noncontrolling interest.

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THANK YOU

TUTORIAL QUESTIONS
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1. Define the term noncontrolling interest.


2. Airway Corporation acquires 80 percent of the

outstanding stock of Belly Company. On that date,


Belly possess a building with a $160,000 book value
but a $220,000 fair value. What value would this
building be consolidated under each of the following:

a)
b)
c)

Economic unit concept


Proportionate consolidation concept
Parent company concept.

3. How does the parent company concept merge the ideas

put forth under the economic unit concept and


proportionate consolidation?