ADMS 4520 Chapter Notes - Chapter 5: Equity Method, Extension Method, Fruit Preserves
4 Nov 2018
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ADMS 4551 Ch 5 Consolidation of Non wholly owned subsidiaries
• Why own less than 100%?
o 2 reasons
▪ Acquiring company – may buy majority of shares but less than 100%
▪ Parent may form new subsidiary with involvement of non controlling partner
o Conserves parent’s liquid sources / reduce share dilution
o Maintenance of non controlling interest (NCI) – spread ownership risk/links with other /
maintain market for subsidiary’s shares
▪ May also sell shares in subsidiary – to others
• Conceptual Alternatives
o 3 theoretical approach to accounting
▪ Should NCI’s share of net assets – be included in consolidated statements?
▪ If included – should net assets shown in CV? Or FV?
▪ If use FV, should it include goodwill?
o Proprietary theory – views consolidated group from viewpoint of owners
▪ Goal of consolidation – report total interest owned by parent shareholders
▪ Proportionate consolidation method – application of proprietary theory
o Entity theory
▪ Views consolidated group – as single economic entity / goal of consolidation –
report all of interests controlled by entity
▪ Entity method – application of entity theory
o Parent company method – consolidates parent’s share of FV of subsidiary A/L & NCI’s share
of V of subsidiary’s A/L
o Parent company extension method – 100% of FV of subsidiary’s A/L & parent’s share of
goodwill
o Summary of 4 alternatives
▪ Proportionate consolidation method – include parent’s share of FV of subsidiary’s
A/L
▪ Parent company method – parent’s share of FV of subsidiary’s A/L + CV of NCI’s
shares
▪ Parent company extension/purchased goodwill method – 100% of FV of subsidiary’s
A/L & parent’s share of goodwill → only goodwill on portion paid by parent excess
of FV – included
▪ Entity/full goodwill method – include 100% of FV of subsidiary’s A/L & goodwill
o Required methods for reporting business combinations
▪ IASB – believe that → entity method – correct method to measure NCI
▪ IFRS 3 – allows method 3 & 4 for EACH transaction → can chance consistency
▪ Recently introduced – Purchase Method → FV limited to purchase price paid
o Proprietary Theory & Equity Method of Reporting of Associates & Joint Ventures
▪ IFRS 3 – favors entity theory
▪ IAS 28 & IFRS 11 – require proprietary theory for reporting → associates & Joint
ventures on equity method
• Since sole control lacking – less chance of investor manipulating data
• Includes NI & adjusted ONLY for its share of G/L
• Consolidation at Date of Acquisition
o (P) buys 70% of (T) shares, giving 28000 (P) shares in exchange / MV of (P) =
840000$ acquisition cost
o Exhibit 5.2 – post acquisition – consolidate at time of acquisition → elim & adjustments
under “acquisition related” → apply MEAR
o Exhibit 5.4 – Measure calculation
▪ Calculate 100% of FV of (T) based on purchase price paid by (P)
• Wont calculate accurately if – buyer pays less than proportionate FV
(bargain purchase)
o Entity method – NCI measured share 100% of FV of (T) – including goodwill 360,000$ which
NCI share of goodwill is 30% of 100000 = 30000
o Exhibit 5.5 P. 233 – (P) consolidated SFP after business combination → entity method
▪ Add CV of (P) & (T) & add FVA / eliminate intercompany transaction
▪ Add full FV of (T) A/L in (P) consolidated, (instead of only FVA related to 70%)
o Assigning goodwill to non-controlling shareholders → defended since – 70% of (T) worth
840000$, then 30% must be worth 3/7 소 of that price, = 360000
o Amortization in subsequent years
▪ Even when parent does not own 100% - continue amortize 100% of FV & recognize
impairment
• Consolidation 1 year after acquisition
o Basic info – P. 235
o Direct Method
▪ Exhibit 5.6 P. 236 separate entity FS → assume using cost basis
▪ Difference from exhibit 4.5
• Acquired 70% of shares (not 100%)
o Investment in (T) smaller by 360000$ / (P) common share less
360000
• (T) declared 30000 but (P) received 70% only
▪ Eliminate
• 30000 dividend – 21000 eliminated, 9000 goes into NCI
• Eliminate 55000 upstream sale
• Eliminate 8000 unrealized profit
▪ Amortize
• Recognize amortization
▪ Recognize NCI Share of Earnings
• Show allocation of NI between parent & NCI → appear below NI
• Calculate NCI – P. 238
o Start with unadjusted NI of (T) from separate FS
o Make adjustments – reduction in NI
o Allocate parent’s share & NCI share
▪ Why reduce NCI’s Earnings?
• Non shareholders – look at subsidiary’s FS & receive subsidiary’s dividends
(not parent company’s)
Document Summary
A/l: parent company method pa(cid:396)e(cid:374)t"s sha(cid:396)e of fv of su(cid:271)sidia(cid:396)(cid:455)"s a/l + cv of nci"s shares, parent company extension/purchased goodwill method (cid:1005)(cid:1004)(cid:1004)% of fv of su(cid:271)sidia(cid:396)(cid:455)"s. A/l & pa(cid:396)e(cid:374)t"s sha(cid:396)e of good(cid:449)ill only goodwill on portion paid by parent excess of fv included: entity/full goodwill method include (cid:1005)(cid:1004)(cid:1004)% of fv of su(cid:271)sidia(cid:396)(cid:455)"s a/l & good(cid:449)ill, required methods for reporting business combinations. Iasb believe that entity method correct method to measure nci. Ias 28 & ifrs 11 require proprietary theory for reporting associates & joint ventures on equity method: since sole control lacking less chance of investor manipulating data. Includes ni & adjusted only for its share of g/l: consolidation at date of acquisition (p) buys 70% of (t) shares, giving 28000 (p) shares in exchange / mv of (p) = Investment in (t) smaller by 360000$ / (p) common share less. If control of assets give rise to goodwill may not be appropriate to attribute to.
