Chapter Four

Consolidated
Financial
Statements and
Outside Ownership

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 Learning Objective 4-1

Understand that business combinations can

occur with less than complete ownership.

© McGraw Hill 4-2

 Noncontrolling Interest in a
Subsidiary
• Although most parent companies have 100%
ownership of their subsidiaries, a significant
number establish control with a lesser
amount of stock.
• If the parent doesn’t own 100% of the
company, outside owners are referred to as a
non-controlling interest (NCI).
• How should the ownership interests of the
noncontrolling interest be reflected in the
consolidated financial statements?

© McGraw Hill 4-3

 Learning Objective 4-2

Describe the concepts and valuation

principles underlying the acquisition method
of accounting for the noncontrolling interest.

© McGraw Hill 4-4

 Consolidated Financial Reporting in the
Presence of a Noncontrolling Interest
The parent, with controlling interest, must consolidate
100 percent of its subsidiary’s financial information as
a single economic unit, regardless of the parent’s level
of ownership.
The acquisition method requires that the subsidiary be
valued at the acquisition-date fair value.
The total acquired firm fair value in a partial
acquisition is the sum of two components at the
acquisition date:
• The fair value of the controlling interest.
• The fair value of the noncontrolling interest at the
acquisition date.

© McGraw Hill 4-5

 Noncontrolling Interest (NCI) Example
(Parent Pays No Control Premium)
• Assume Parker Corporation wants to acquire
90% of Strong Company (10,000 stocks).
Strong’s stock has been trading for around $70
per share.
• Assume that Parker continues to trade at $70.

• The fair value of Strong is measured as the sum

of the respective fair values of the controlling
and noncontrolling interest.

© McGraw Hill 4-6

 Noncontrolling Interest (NCI) Example
(Parent Pays No Control Premium)
Parker purchased 9,000 shares at $70 per share.
The fair value of their consideration transferred is
$630,000. (9,000 X 70)
The remaining 1,000 shares trade at $70 per share,
indicating that the fair value of the noncontrolling
interest is $70,000. The total acquisition-date fair
value of the subsidiary is $700,000.
Fair value of controlling interest
($70 × 9,000 shares) . . . . . . . . . . . . . . . $630,000
Fair value of noncontrolling interest
($70 × 1,000 shares) . . . . . . . . . . . . . . . . . 70,000
Total fair value of subsidiary . . . . . . $700,000

© McGraw Hill 4-7

 Allocating Acquired Goodwill to the
Controlling and Noncontrolling Interests
• To report ownership equity in consolidated financial
statements, acquisition-date goodwill is apportioned
across controlling and noncontrolling interests.
• The parent first allocates goodwill to its controlling
interest for the excess of the fair value of its equity
interest over its share of the fair value of the net
assets.
• Total acquisition-date fair value (amount paid) of
Strong, $700,000, is greater than the fair value of the
identifiable net assets acquired of $600,000 (at the
acquisition date, Parker assessed the total fair value
of Strogn’s identifiable net assets at $600,000). The
difference, $100,000, is allocated to Goodwill.
© McGraw Hill 4-8
 Allocating Acquired Goodwill Example
(Parent Pays No Control Premium)
The parent first allocates goodwill to its
controlling interest for the excess of the fair value
of its equity interest, $630,000, over its share of
the fair value of the identifiable net assets
($600,000 × 90% = 540,000). Any remaining
goodwill is then attributed to the noncontrolling
interest.
Controlling Noncontrolling Total
Interest Interest
Fair value at acquisition date $630,000 $70,000 $700,000
Relative fair value of identifiable net
assets acquired (90% and 10% of
$600,000) 540,000 $60,000 600,000
Goodwill $90,000 $10,000 $100,000
© McGraw Hill 4-9
 Allocating Acquired Goodwill Example
(Parent Pays No Control Premium)
Note that in this case, because the price per share
paid by the parent equals the noncontrolling
interest per share fair value ($70), goodwill is
recognized proportionately across the two
ownership groups.

Controlling Noncontrolling Total

Interest Interest
Fair value at acquisition date $630,000 $70,000 $700,000
Relative fair value of identifiable net
assets acquired (90% and 10% of
$600,000) 540,000 $60,000 600,000
Goodwill $90,000 $10,000 $100,000
© McGraw Hill 4-10
 Noncontrolling Interest (NCI) Example
(Parent Pays Control Premium)
• Assume Parker Corporation wants to acquire
90% of Strong Company (10,000 stocks).
Strong’s stock has been trading for around $70
per share.
• Parker offered all of Strong’s shareholders a
premium price of $75 per share for up to 90
percent of the outstanding shares.
• The fair value of Strong is measured as the sum
of the respective fair values of the controlling
and noncontrolling interest.

© McGraw Hill 4-11

 Noncontrolling Interest (NCI) Example
(Parent Pays Control Premium)
Parker purchased 9,000 shares at $75 per share.
The fair value of their consideration transferred is
$675,000. (9,000 X 75)
The remaining 1,000 shares trade at $70 per share,
indicating that the fair value of the noncontrolling
interest is $70,000. The total acquisition-date fair
value of the subsidiary is $745,000.
Fair value of controlling interest
($75 × 9,000 shares) . . . . . . . . . . . . . . . $675,000
Fair value of noncontrolling interest
($70 × 1,000 shares) . . . . . . . . . . . . . . . . . 70,000
Total fair value of subsidiary . . . . . . $745,000

© McGraw Hill 4-12

 Noncontrolling Interest (NCI) Example
(Parent Pays Control Premium)
Thus, Parker paid a $45,000 control premium for
its acquisition of 90 percent of Strong as follows:

Amount paid by Parker for 90% of Strong

shares ($75 × 9,000 shares) . . . . . . . . . . . . . . . $675,000
Preacquisition trading value of 90% Strong
shares ($70 × 9,000 shares) . . . . . . . . . . . . . . . 630,000
Control premium . . . . . . $45,000

During the weeks following the acquisition, the 10

percent noncontrolling interest in Strong continues
to trade in a $69-to-$71 range.
© McGraw Hill 4-13
 Allocating Acquired Goodwill Example
(Parent Pays Control Premium)
Next, we allocate the goodwill acquired in the
Strong acquisition across the controlling and
noncontrolling interests as follows:

Controlling Noncontrolling Total

Interest Interest
Fair value at acquisition date $675,000 $70,000 $745,000
Relative fair value of identifiable net
assets acquired (90% and 10% of
$600,000) 540,000 $60,000 600,000
Goodwill $135,000 $10,000 $145,000

© McGraw Hill 4-14

 Noncontrolling Interest Additional
Issues
 If the noncontrolling interest’s proportionate share
of subsidiary’s fair values exceeds its total fair
value, the excess reduces goodwill recognized by
the parent.
 If the total fair value of the acquired firm is less than
the collective sum of its identifiable net assets:
• A bargain purchase occurs.
• Parent recognizes the entire gain in current income.
• No gain is ever allocated to the noncontrolling interest.
• If the price per share paid by the parent equals the
noncontrolling interest per share fair value, goodwill is
recognized proportionately across the two ownership
groups.
© McGraw Hill 4-15
 Learning Objective 4-4

Demonstrate the computation and allocation

of consolidated net income in the presence of
a noncontrolling interest.

© McGraw Hill 4-16

 Consolidated Net Income

• To reflect the economic unit concept,

consolidated net income includes 100 percent of
both the parent’s and the subsidiary’s net
income, adjusted for excess acquisition-date fair
value over book value amortizations.
• Once consolidated net income is determined, it
is allocated to the parent company and the
noncontrolling interests.
• Noncontrolling interests’ ownership pertains
only to the subsidiary; its share of consolidated
net income is limited to a share of the adjusted
subsidiary’s net income.
© McGraw Hill 4-17
 Noncontrolling Interest (NCI) in
Subsidiary Net Income
Parker acquires 90 percent of Strong Company. Current
year consolidated net income equals $108,000 including
$10,000 of annual acquisition-date excess fair-value
amortization. If Strong reports revenues of $280,000 and
expenses of $160,000 (internal book values), the
noncontrolling interest (NCI) share of Strong’s income can
be computed as follows:
Noncontrolling Interest in Subsidiary Strong Company Net Income
Strong revenues $280,000
Strong expenses 160,000
Strong net income $120,000
Excess acquisition-date fair-value amortization 10,000
Strong net income adjusted for excess amortization $110,000
Noncontrolling interest percentage 10%
Noncontrolling interest share of adjusted subsidiary net income $ 11,000
© McGraw Hill 4-18
 Accounting for Noncontrolling Interest
(NCI) in Subsidiary Net Income
• The $11,000 noncontrolling interest share of
adjusted subsidiary net income is equivalent to
the noncontrolling interest share of
consolidated net income, which is then
subtracted from consolidated net income to
determine the parent’s interest in consolidated
net income.

© McGraw Hill 4-19

 Accounting for Noncontrolling Interest
(NCI) in Subsidiary Net Income

• The noncontrolling shareholders’ portion of

consolidated net income is limited to their 10
percent share of adjusted subsidiary income.
They own a 10 percent interest in the subsidiary
company but no ownership in the parent firm.

© McGraw Hill 4-20

 Learning Objective 4-5

Identify and calculate the four noncontrolling

interest figures that must be included within
the consolidation process and prepare a
consolidation worksheet in the presence of a
noncontrolling interest.

© McGraw Hill 4-21

 Partial Ownership Consolidations—
Acquisition Method
• The acquisition method incorporates 100
percent of the subsidiary’s assets and liabilities
at their acquisition-date fair values in the
consolidated financial statements.
• Subsequent to acquisition, changes in current
fair values for assets and liabilities are not
recognized.
• Subsidiary assets acquired and liabilities
assumed are reflected in future consolidated
financial statements using acquisition-date fair
values net of subsequent amortizations (or
reduced for impairment).
© McGraw Hill 4-22
 Noncontrolling Interest (NCI) and
Consolidations
The consolidation is substantially unchanged with the
presence of a noncontrolling interest.
The parent company must determine and enter each of
these figures when constructing a worksheet:
• NCI in subsidiary at beginning of current year.
• Net income attributable to noncontrolling interest.
• Subsidiary dividends attributable to noncontrolling
interest.
• NCI as of the end of the year (three balances above
combined).

© McGraw Hill 4-23

 Partial Acquisition with No Control
Premium Example
Assume that King Co. acquires 80 percent of Pawn Co.’s 100,000
outstanding voting shares on January 1, 2020, for $9.75 per share or a
total of $780,000 cash consideration.
• The shares are trading at an average of $9.75 per share before and
after the acquisition.

• The total fair value of Pawn to be used initially in consolidation is:

Consideration transferred by King

($9.75 × 80,000 shares) $780,000
Noncontrolling interest fair value
($9.75 × 20,000 shares) 195,000
Pawn’s total fair value on Jan. 1, 2020 $975,000

© McGraw Hill 4-24

 Partial Acquisition with No Control
Premium Example

Book value of Pawn’s Identifiable net assets (80% and 20%) = $740,000
Fair value of Pawn’s Identifiable net assets (80% and 20%) = $950,000
© McGraw Hill 4-25
 Noncontrolling Interest—Excess
Fair-Value Allocations Example 1

EXHIBIT 4.3 Excess Fair-Value Allocations

KING COMPANY AND 80% OWNED SUBSIDIARY PAWN COMPANY
Fair-Value Allocation and Amortization
January 1, 2020

Remaining Life Annual Excess

Allocation (years) Amortizations
Pawn’s acquisition-date fair value (100%) $975,000
Pawn’s acquisition-date book value (100%) (740,000)
Fair value in excess of book value $235,000
Adjustments (100%) to $ 60,000 Indefinite $ -0-
Trademarks
Patented technology 120,000 20 6,000
Equipment (10,000) 10 (1,000)
Long-term liabilities (8 years to maturity) 40,000 8 5,000
Goodwill $ 25,000 indefinite $ -0-
Annual amortizations of excess fair value over book value (initial years) $ 10,000

Noncontrolling Interest annual amortization excess= 10,000 @ 20%= 2,000

© McGraw Hill 4-26
 Noncontrolling Interest—Excess
Fair-Value Allocations Example 2

Goodwill Allocation to the Controlling and Noncontrolling Interests

Controlling Noncontrolling
Interest Interest Total
80% 20% 100%
Fair value at acquisition date $780,000 $195,000 $975,000
Relative fair value of Pawn’s Identifiable net
assets (80% and 20%) 760,000 190,000 950,000
Goodwill $ 20,000 $ 5,000 $ 25,000

© McGraw Hill 4-27

 Noncontrolling Interest—Changes in
Retained Earnings Example
To complete the information needed for this
combination, assume that Pawn Company reports
the following changes in retained earnings since
King’s acquisition:

Current year (2021):

Net income $90,000
Less: Dividends declared (50,000)
Increase in retained earnings $40,000
Prior years (only 2020 in this illustration):
Increase in retained earnings $70,000
Noncontrolling Interest in Pawn’s Company 2020 = 70,000 @ 20%= 14,000

© McGraw Hill 4-28

 Investment in Pawn Company
Equity Method

© McGraw Hill 4-29

 Noncontrolling Interest—Worksheet
Process Example
• King uses the equity method to account for
Pawn subsequent to acquisition.
• The consolidation process is substantially
the same as consolidation without a
noncontrolling interest.
• Consolidation, worksheet Entries S
(expanded), A, I, D, and E are prepared.
• A column will be added to the worksheet to
record the noncontrolling interest in the
subsidiary.

© McGraw Hill 4-30

 Noncontrolling Interest—Separate
Financial Records Example
EXHIBIT 4.5 Separate Financial Records

Note: Parentheses indicate a credit balance

© McGraw Hill 4-31

Access the text alternative for slide images.
 Noncontrolling Interest—Example
Consolidation Entries S and A
Consolidation Entry S
Common Stock (Pawn) 230,000
Retained Earnings, 1/1/21 (Pawn) 580,000
Investment in Pawn Company (80%) 648,000
Noncontrolling Interest in Pawn’s Company, 1/1/21 (20%) 162,000
To eliminate beginning stockholder’s equity accounts of subsidiary along with book value
portion of investment (equal to 80 percent ownership). Noncontrolling interest of 20 percent is
also recognized.

Consolidation Entry A
Trademarks 60,000
Parented Technology 114,000
Liabilities 35,000
Goodwill 25,000
Equipment 9,000
Investment in Pawn Company (80%) 180,000
Noncontrolling Interest in Pawn Company, 1/1/21 (20%) 45,000
To recognize unamortized excess fair value as of January 1, 2021, to Pawn’s assets acquired
and liabilities assumed in the combination. Also to allocate the unamortized fair value to the
noncontrolling interest. Goodwill is attributable proportionately to controlling and
noncontrolling interests.
© McGraw Hill 4-32
 Noncontrolling Interest—Example
Consolidation Entries I, D, and E
Consolidation Entry I
Equity in Prawn’s Earnings 64,000
Investment in Pawn Company 64,000
To eliminate intra-entity income accrual comprising subsidiary income less excess
acquisition-date fair-value amortizations.

Consolidation Entry D
Investment in Pawn Company 40,000
Dividends Declared 40,000
To eliminate intra-entity income dividends.

Consolidation Entry E
Amortization Expense 6,000
Interest Expense 5,000
Equipment (net) 1,000
Depreciation Expense 1,000
Patented Technology 6,000
Long-Term Liabilities 5,000
To recognize current year excess fair-value amortizations.

© McGraw Hill 4-33

 Noncontrolling Interest

To calculate the noncontrolling interest in net assets or equity

at year-end 2021, compute the following:

© McGraw Hill 4-34

 Noncontrolling Interest

An alternative way to calculate the noncontrolling interest in

net assets or equity at year-end 2021, compute the following:
NCI at 1/1/2020 ($9.75 × 20,000 shares) $ 195,000
+ NCI share of Retained earnings 2020 (70,000@20%) 14,000
- Annual amortization express -2,000
Noncontrolling Interest in Equity 31/12/2020 $ 207,000

NCI at 1/1/2021 $ 207,000

+ NCI share of income 2021 (see next slide) 16,000*
- NCI share of dividends 2021 ($50,000 x 20%) -10,000
Noncontrolling Interest in Equity 31/12/2021 $ 213,000
© McGraw Hill 4-35
 Noncontrolling Interest

5. Noncontrolling interest in consolidated net income 2021:

income of Pawn Company in 2021 $90,000

Noncontrolling percentage owned 20%
Noncontrolling interest in income $ 18,000
Less Annual amortizations of excess ($2000)
fair value over book value (initial years).
Net Income attributed to NCI $16,000

© McGraw Hill 4-36

 Noncontrolling Interest

© McGraw Hill 4-37

 EXHIBIT 4.6 Noncontrolling Interest (No Control Premium) Illustrated

© McGraw Hill 4-38

 Learning Objective 4-6

Identify appropriate placements for the

components of the noncontrolling interest in
consolidated financial statements.

© McGraw Hill 4-39

 Consolidated Financial Statements—
Income Statement
• Consolidated net income is computed at the
combined entity level ($416,000) and
allocated to the noncontrolling and
controlling interests.

© McGraw Hill 4-40

 Consolidated Financial Statements—
Balance Sheet

© McGraw Hill 4-41

 Consolidated Financial Statements—
Statement of Changes in Owners’ Equity
• The statement of changes in owners’ equity provides
details of the ownership changes for the year for both the
controlling and noncontrolling interest shareholders.
• Note the placement of the noncontrolling interest in the
subsidiary’s eqauity in the consolidated owners’ equity
section.

© McGraw Hill 4-42

 Learning Objective 4-7

Determine the effect on consolidated financial

statements of a control premium paid by the
parent.

© McGraw Hill 4-43

 Partial Acquisition with Control
Premium
Assume that to acquire sufficient shares to gain control of Pawn, King
pays a control premium of $1.25 ($11 − $9.75) for a total of $880,000 cash
consideration for its 80 percent interest.
Book value of Pawn’s Identifiable net assets (80% and 20%) = $740,000
Fair value of Pawn’s Identifiable net assets (80% and 20%) = $950,000

© McGraw Hill 4-44

 Partial Acquisition with Control
Premium
Assume that to acquire sufficient shares to gain
control of Pawn, King pays a control premium of
$1.25 ($11 − $9.75) for a total of $880,000 cash
consideration for its 80 percent interest.

Controlling Noncontrolling Total

Interest Interest
80% 20% 100%
Fair value at acquisition date $880,000 $195,000 $1,075,000
Relative fair value of identifiable net
assets acquired (80% and 20%) 760,000 190,000 950,000
Goodwill $120,000 $ 5,000 $ 125,000

© McGraw Hill 4-45

 Noncontrolling Interest—Example
Consolidation Entries S and A
Consolidation Entry S
Common Stock (Pawn) 230,000
Retained Earnings, 1/1/21 (Pawn) 580,000
Investment in Pawn Company (80%) 648,000
Noncontrolling Interest in Pawn’s Company, 1/1/21 (20%) 162,000
To eliminate beginning stockholder’s equity accounts of subsidiary along with book value
portion of investment (equal to 80 percent ownership). Noncontrolling interest of 20 percent is
also recognized.

Consolidation Entry A1

© McGraw Hill 4-46

 Noncontrolling Interest—Example
Consolidation Entries I, D, and E
Consolidation Entry I
Equity in Prawn’s Earnings 64,000
Investment in Pawn Company 64,000
To eliminate intra-entity income accrual comprising subsidiary income less excess
acquisition-date fair-value amortizations.

Consolidation Entry D
Investment in Pawn Company 40,000
Dividends Declared 40,000
To eliminate intra-entity income dividends.

Consolidation Entry E
Amortization Expense 6,000
Interest Expense 5,000
Equipment (net) 1,000
Depreciation Expense 1,000
Patented Technology 6,000
Long-Term Liabilities 5,000
To recognize current year excess fair-value amortizations.

© McGraw Hill 4-47

 Partial Acquisition with Control
Premium
Assume that to acquire sufficient shares to gain
control of Pawn, King pays a control premium of
$1.25 ($11 − $9.75) for a total of $880,000 cash
consideration for its 80 percent interest.

© McGraw Hill 4-48

 Partial Acquisition with Control
Premium

© McGraw Hill 4-49

 Learning Objective 4-8

Understand the impact on consolidated

financial statements of a midyear acquisition.

© McGraw Hill 4-50

 Midyear Acquisitions
When control of a subsidiary is acquired at a midyear
date:
• New parent must compute the subsidiary’s book value as
of acquisition date to determine excess total fair value
over book value allocations.
• Excess amortization expenses, any equity accrual, and
dividend distributions are recognized for a period of less
than a year.
• Because only net income earned by the subsidiary after
the acquisition date accrues to the new owners, it is
appropriate to include only postacquisition revenues and
expenses in consolidated totals.

© McGraw Hill 4-51