Chapter Four

Consolidated
Financial
Statements and
Outside
Ownership

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4-1

Noncontrolling Interest
Learning Objective 4-1: Understand that complete ownership is
not a prerequisite for the formation of a business combination.

Although most parent companies do possess 100 percent

ownership of their subsidiaries, a significant number
establish control with a lesser amount of stock.
If the parent doesnt own 100% of the company, WHO
owns the rest of it?
Noncontrolling Shareholders
The ownership interests of the Noncontrolling
Shareholders must be reflected in the consolidated
financial statements.
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4-2

Noncontrolling Interest
Learning Objective 4-2:
Describe the valuation principles underlying the
acquisition method of accounting for the noncontrolling interest.
The Parent, with controlling interest, must consolidate 100% of
the Subsidiarys financial information valued at the acquisitiondate fair value.
The total acquired firm fair value in a partial acquisition is the
sum of
The fair value of the controlling interest.
The fair value of the noncontrolling interest at the acquisition
date.
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4-3

Noncontrolling Interest Example

Learning Objective 4-3:
Allocate goodwill acquired in a business combination across the
controlling and noncontrolling interests.
If the total acquisition-date fair value (amount paid) of a
subsidiary is greater than the fair value of the identifiable net
assets acquired, the difference is allocated to Goodwill.
The parent first allocates goodwill to its controlling interest for
the excess of the fair value of the parents equity interest over its
share of the fair value of the net identifiable assets.
Goodwill allocated to the controlling and noncontrolling interests
will not always be proportional to the percentages owned.
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4-4

Allocating Subsidiarys Net Income

Learning Objective 4-4:
Understand the computation and
allocation of consolidated net income in the
presence of a noncontrolling interest.
The subsidiarys net income (including excess
acquisition-date fair-value amortizations) must be
allocated to its owners - the parent and the
noncontrolling interest - to properly measure
their respective equity in the consolidated entity.

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4-5

Allocating Subsidiarys Net Income

Assume that the relative ownership percentages of
the parent and noncontrolling interest represent an
appropriate basis for attributing all elements
(including excess acquisition-date fair-value
amortizations for identifiable assets and liabilities) of
a subsidiarys income across the ownership groups.
Including the excess fair-value amortizations is
based on the assumption that the noncontrolling
interest represents equity in the subsidiarys net
assets as remeasured on the acquisition date.
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4-6

Noncontrolling Interests and Consolidations

Learning Objective 4-5:
Identify and calculate the four noncontrolling interest figures that
must be included in the consolidation process and prepare a
consolidation worksheet in the presence of a noncontrolling
interest.
Noncontrolling interest
In subsidiary at beginning of the current year.
In subsidiarys current year net income.
In subsidiarys current year dividend payments.
In subsidiary as of the end of the year.
The process remains substantially unchanged. The parent must
determine and enter these figures when in the worksheet.
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Consolidated Financial Statement

Learning Objective 4-6:
Identify appropriate placements for the components of the
noncontrolling interest in consolidated financial statements.
1. Consolidated net income is computed at the combined
entity level and allocated to the noncontrolling and
controlling interests.
2. The statement of changes in owners equity provides
details of the ownership changes for the year for both
the controlling and noncontrolling interest
shareholders.
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Consolidated Financial Statement

3. Each component of other comprehensive income is
allocated to the controlling and noncontrolling interest.
4. The statement of changes in owners equity would also
provide an allocation of accumulated other
comprehensive income elements across the controlling
and noncontrolling interests.
5. Note the placement of the noncontrolling interest in the
subsidiarys equity in the consolidated owners equity
section.

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Consolidated Financial Statement

Income Statement, Owners Equity

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4-10

Consolidated Financial Statement

Balance Sheet

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Noncontrolling Interest
Premium Paid
Learning Objective 4-7:
Determine the effect on consolidated financial statements of a
control premium paid by the parent.

If King paid $11.00 for the subsidiarys shares, when they

were trading for $9.75, then the goodwill allocation would
look like this:

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4-12

Mid-Year Acquisitions
Learning Objective 4-8:
Understand the impact on consolidated financial
statements of a midyear acquisition.
When control of a Sub is acquired at a time subsequent
to the beginning of the subs fiscal year:
The income statements are consolidated as usual
The Subs pre-acquisition revenues and expenses are

excluded from the Parents consolidated statements

(adjusted via Entry S)
Only partial years amortization on excess fair value is
taken.
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4-13

Step Acquisitions
Learning Objective 4-9:
Understand the impact on consolidated financial
statements when a step acquisition has taken place.
A step acquisition occurs when control is achieved in a
series of equity acquisitions, as opposed to a single
transaction. As with all business combinations, the
acquisition method measures the acquired firm
(including the noncontrolling interest) at fair value at
the date control is obtained.

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Step Acquisitions
The parent utilizes a single uniform valuation basis for all
subsidiary assets acquired and liabilities assumedfair value
at the date control is obtained.
If the parent held a noncontrolling interest in the acquired
firm, the interest is remeasured to fair value and a gain or
loss is recognized.
If after obtaining control, the parent increases its ownership
interest in the subsidiary, no further remeasurement takes
place. The parent accounts for the additional shares acquired
as an equity transactionconsistent with transactions with
other owners, as opposed to outsiders.
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4-15

Sales of Subsidiary Stock

Learning Objective 4-10:
Record the sale of a subsidiary (or a portion of its shares).

If the parent maintains control, it recognizes no

gains or losses the sale is shown in the equity
section.
If the sale results in the loss of control, the parent
recognizes any resulting gain or loss in consolidated
net income.

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Sales of Subsidiary Stock

If the parent retains any of its former subs shares, the
investment should be remeasured to fair value on the
date control is lost.
Any resulting gain or loss from the remeasurement
should be recognized in the parents net income.
If it sells less than the entire investment, parent must
select a cost-flow assumption if it has made more than
one purchase.
For securities, the use of specific identification based on
serial numbers is acceptable, although averaging or FIFO
assumptions often are applied.
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Noncontrolling Interest
International Accounting Standards
US GAAP
U.S. GAAP requires fair
value measurement.
Thus, acquisition-date fair
value provides a basis for
reporting the
noncontrolling interest
which is adjusted for its
share of subsidiary income
and dividends subsequent
to acquisition.

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vs.

IFRS
IFRS permits fair value
measurement, or the
noncontrolling interest may
be measured at a
proportionate share of the
Subs identifiable net asset
fair value, which excludes
goodwill. This option
assumes that any goodwill
created via acquisition
applies solely to the
controlling interest.

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