Chapter Four

Consolidated
Financial
Statements and
Outside
Ownership

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Noncontrolling Interest

 Noncontrolling interest is
the portion of the
subsidiary that is not held

?
by the parent.
 The interests of the
noncontrolling (non-
parent) stockholders
must be reflected in the
consolidated financial
statements.
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Noncontrolling Interest

The existence of
noncontrolling investors
requires the establishment

?
of two new accounts:
 Noncontrolling interest
presented in the owners’ equity
section of the consolidated
balance sheet.
 Noncontrolling interest share of
subsidiary net income on the
consolidated income statement.
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SFAS 160: NONCONTROLLING
INTERESTS IN CONSOLIDATED
FINANCIAL STATEMENTS

Noncontrolling Interest is initially recognized at

its fair value—usually indicated by the market
price of the noncontrolling interest’s shares.

Subsequent to acquisition, the NCI (reported on

the consolidated balance sheet) is adjusted for its
share of subsidiary income and dividends.

Noncontrolling Interest in Sub Net Income is a %

of the sub’s net income less amortization of
excess acquisition date fair value allocations.
Control and Accountability with
less than 100% ownership
 Once control is achieved, the parent
company is accountable for 100% of
the subsidiary’s assets and liabilities.

 A complete picture of the acquired

subsidiary requires 100% fair value
measurement for the subsidiary’s
assets and liabilities.

 Therefore, even with < 100%

acquisitions, the parent includes 100%
of the sub’s assets and liabilities at
their acquisition-date fair values in
consolidated statements.
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Accounting for
Noncontrolling Interest
On the Consolidated Balance Sheet:
 A credit balance account called
Noncontrolling Interest is set up to
recognize the noncontrolling
stockholders’ investment in the
subsidiary.
 Beginning in 2009, the NCI account
appears in the owners’ equity
section.
 In previous years, the NCI was
sometimes reported in the liability
section, as owners’ equity, or as a
“mezzanine” item between the two
sections.
7
Accounting for
Noncontrolling Interest
On the Income Statement:
 An account called
Noncontolling Interest in
Subsidiary Net Income is
reported to recognize the
noncontrolling
shareholders’ share of the
sub’s net income.
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Noncontrolling Interest
Example

Let’s look at an
example using the
Fair Value
concept for
reporting
noncontrolling
interests.
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Noncontrolling Interest -Example

10
Noncontrolling Interest Example
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Noncontrolling Interest -Example

12

Noncontrolling Interest -Example

13

Noncontrolling Interest -Example

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Noncontrolling Interest -Example

15
Noncontrolling Interest
Example
 Effects Created by Using the
16

Initial Value Method

Prepare Entry *C to convert

from the Initial Value Method
to the Equity Method
Combine:
1. The increase in the sub’s BV
since acquisition to the
beginning of the period × the
parent’s ownership %
2. Total amortization for the same
period.
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Effects Created by Using the
Initial Value Method

 Change Entry I to
eliminate the Dividend
Income

 DO NOT use Entry D

18
Effects Created by Using the
Partial Equity Method

Perform Entry *C.

Only the
adjustment for
the amortization
expense is
necessary.
Noncontrolling interest in the
presence of a control premium
 Often a parent will pay an extra per share
amount to obtain a controlling interest in a
subsidiary—this extra amount is called a
“control premium.”
 When the parent pays a control premium,
 the NCI per share fair value will be less than the
parent’s per share fair value
 goodwill will not be allocated proportionately
across the two ownership groups.
Example of goodwill allocation when
the parent pays a control premium
 A parent acquires 8,000 of the 10,000 outstanding
shares of a subsidiary for $55 per share.
 The 20% noncontrolling interest shares continue to
trade at $40 before and after the combination.
 The acquisition-date fair value of the subsidiary’s
identifiable net assets is $400,000.

Parent’s consideration (8,000 × $55 per share) $440,000

Fair value of the NCI (2,000 shares × $40 per share) 80,000
Business fair value of Sub Co. $520,000
Fair value of Sub’s net identifiable assets 400,000
Goodwill acquired in the combination $120,000
Example of goodwill allocation when
the parent pays a control premium
Because of the control premium paid by the parent, the
goodwill is allocated disproportionately across the
ownership interests as follows:
Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $440,000 $80,000
Relative fair values of identifiable
net assets (80% and 20%) 320,000 80,000
Goodwill $ 120,000 –0–

In this case, worksheet adjustment A allocates all

acquired goodwill the parent and none to the NCI.
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Step Acquisitions

 Companies often acquire

controlling interest in other
companies a piece at a
time; i.e. “in steps”.
 Under the acquisition
method, at the time a
parent gains control, the
valuation basis for the
acquired firm is
established.
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Post-acquisition accounting
issues
 After control is established, any
further acquisitions of the NCI by
the parent are accounted for as
equity transactions.
 In the period the parent gains
control, only post-acquisition
subsidiary revenues and expenses
are included in the consolidated
income statement.
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SFAS 141 reporting (through 2008)

Legacy Method of Noncontrolling Interest

Reporting in Consolidated Balance Sheets

Noncontrolling Interest as 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 would appear in

the equity section or between the equity
section and the liability section.
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Summary
 Control does not require total ownership. Ownership
of subsidiary stock retained by outside, unrelated
parties is called noncontrolling interest.
 Regardless of the parent’s percentage acquired, all
subsidiary assets and liabilities are initially
consolidated at their acquisition-date fair values.
 The acquisition-date valuation basis for reporting the
NCI is fair value.
 Subsequent to acquisition, the NCI is adjusted for its
share of subsidiary income and dividends.
 A control premium paid by the parent requires a
special allocation of goodwill across the controlling
and noncontrolling interests.
 If control is achieved in a series of steps, the
valuation basis for the sub is established once the
control threshold is met.