Kế toán, kiểm toán - Chapter four: Consolidated financial statements and outside ownership

Chapter FourConsolidated Financial Statements and Outside OwnershipCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objective 4-14-2Understand that completeownership is not a prerequisitefor the formation of a businesscombination.Noncontrolling InterestAlthough 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 doesn’t own 100% of the company, WHO owns the rest of it?Noncontrolling ShareholdersThe ownership interests of the Noncontrolling Shareholders must be reflected in the consolidated financial statements.4-3Learning Objective 4-24-4Describe the valuation principlesunderlying the acquisitionmethod of accounting for thenoncontrolling interest.Noncontrolling Interest4-5The Parent, with controlling interest, must consolidate 100% of the Subsidiary’s financial information. 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 The fair value of the controlling interest. The fair value of the noncontrolling interest at the acquisition date. Noncontrolling Interest Example4-6Assume Parker Corporation wants to acquire 90% of Strong Company. Strong’s stock has been trading for around $60 per share.Parker has to pay a premium for the shares needed to gain control.If Parker pays $70 per share to induce enough stockholders to sell, how will the 10% of Strong that Parker does not own be recorded? Noncontrolling Interest ExampleParker purchased 9,000 shares at $70 per share. The fair value of their consideration transferred is $630,000. The remaining 1,000 shares trade at $60 per share indicating that the fair value of the noncontrolling interest is $60,000. The total acquisition-date fair value of the sub is $690,000. Fair value of controlling interest : ($70 X 9,000 shares) . . . . . . . . . . . . . . . $630,000 Fair value of noncontrolling interest ($60 X 1,000 shares) . . . . . . . . . . . . . . . . . 60,000 Total fair value of sub. . . . . . . . . . . . . . $690,0004-7Learning Objective 4-34-8Allocate goodwill acquired ina business combination acrossthe controlling and noncontrollinginterests.Noncontrolling Interest ExampleThe total acquisition-date fair value (amount paid) of Strong of $690,000 is greater than the fair value of the identifiable net assets acquired of $600,000 (10,000 shares x $60 per share). The difference is allocated to Goodwill.The parent first allocates goodwill to its controlling interest for the excess of the fair value of the parent’s equity interest over its share of the fair value of the net identifiable assets. ($600,000 X 90% = 540, 000). Goodwill allocated to the controlling and noncontrolling interests will not always be proportional to the percentages owned.4-9Noncontrolling Interest Example4-10Total acquisition-date fair value . . . . . . . . . . $690,000Fair value of net identifiable net assets . . . . . (600,000)Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000There is no excess goodwill to assign to the noncontrolling interest. Assign Goodwill: Controlling Noncontrolling Interest InterestFair value at acquisition date . . . . . $630,000 $60,000Relative fair value of identifiable netassets acquired ($600,000 X 90%). . (540,000) ----------and ($600,000 X 10%) . . . . . . . . . . . . . --------- ($60,000)Goodwill . . . . . . . . . . . . . . . . . . . . . . . $90,000 $0Noncontrolling Interest - ExampleIf the shares were not actively traded, the $70 per share consideration transferred by Parker would be considered the best measure of fair value of Strong, and the fair value of the noncontrolling interest would be estimated at $70,000.4-11Fair value of controlling interest ($70 X 9,000 shares) . $630,000Fair value of noncontrolling interest ($70 X 1,000 shares). 70,000Total fair value of Strong Company . . . . . . . . . . . . . . . . $700,000Noncontrolling Interest - Example4-12Assign Goodwill: Controlling Noncontrolling Interest InterestFair value at acquisition date . . . . . $630,000 $70,000Relative fair value of identifiable netassets acquired ($600,000 X 90%). . (540,000) ----------and ($600,000 X 10%) . . . . . . . . . . . . . --------- ($60,000)Goodwill . . . . . . . . . . . . . . . . . . . . . . . $90,000 $10,000Because 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.Learning Objective 4-44-13Understand the computationand allocation of consolidatednet income in the presence of anoncontrolling interest.Allocating Subsidiary’s Net IncomeThe subsidiary’s 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.4-14Assume 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 subsidiary’s income across the ownership groups. Including the excess fair-value amortizations is based on the assumption that the noncontrolling interest represents equity in the subsidiary’s net assets as remeasured on the acquisition date.Strong earns $80,000 in the first year and there is a $30,000 annual excess fair value amortization.Noncontrolling Interest - Example4-15The $5,000 noncontrolling interest in the sub’s net income is subtracted from the combined entity’s consolidated net income to derive parent’s interest in consolidated net income. Learning Objective 4-54-16Identify and calculate the fournoncontrolling interest figuresthat must be included withinthe consolidation process andprepare a consolidation worksheetin the presence of a noncontrollinginterest.Noncontrolling Interests and Consolidations4-17The consolidation process remains substantially unchanged with a noncontrolling interest. The parent company must determine and then enter each of these figures when constructing a worksheet: Noncontrolling interest: In subsidiary at beginning of the current year. In subsidiary’s current year net income. In subsidiary’s current year dividend payments. In subsidiary as of the end of the year.Noncontrolling Interest - Example4-18Assume that King Co. acquires 80% of Pawn Co’s 100,000 outstanding voting shares on January 1, 2014, for $9.75 per share or a total of $780,000 cash. 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. . . . . . $780,000Noncontrolling interest fair value . . . . . . . .195,000Pawn’s total fair value on Jan. 1, 2014 . . . $975,000Noncontrolling Interest -Excess Fair Value Allocations4-19Noncontrolling Interest - Example4-20Pawn Company changes in retained earnings since acquisition:Net income - Current year (2015) . . . . . . . . . . . . $90,000Less: Dividends declared. . . . . . . . . . . . . . . . . . . . .(50,000)Increase in retained earnings (2015) . . . . . . . . . . $40,000Prior years (2014) Increase in retained earnings. $70,000To complete the information needed for this combination, assume that Pawn Company reports the following changes in retained earnings since King’s acquisition:Noncontrolling Interest -Worksheet Example4-21King uses the Equity Method to account for Pawn subsequent to acquisition. The consolidation process is substantially the same. At each consolidation, worksheet entries S, A, I, D, and E are prepare ANDA column will be added to the worksheet to record the noncontrolling interest in the subsidiary.Noncontrolling Interest -Worksheet Example4-22Noncontrolling Interest – Worksheet Example4-23Noncontrolling Interest – Worksheet Example4-24Learning Objective 4-64-25Identify appropriate placementsfor the components of the noncontrolling interest in consolidated financial statements.Consolidated Financial Statement4-26Consolidated net income is computed at the combined entity level and allocated to the noncontrolling and controlling interests. The statement of changes in owners’ equity provides details of the ownership changes for the year for both the controlling and noncontrolling interest shareholders. If appropriate, each component of other comprehensive income is allocataed to the controlling and noncontrolling interest. The statement of changes in owners’ equity would also provide an allocation of accumulated other comprehensive income elements across the controlling and noncontrolling interests. Note the placement of the noncontrolling interest in the subsidiary’s equity in the consolidated owners’ equity section.Consolidated Financial StatementIncome Statement, Owners’ Equity4-27Consolidated Financial StatementBalance Sheet 4-28Learning Objective 4-74-29Determine the effect on consolidated financial statements of a control premium paid by the parent.Noncontrolling Interest – Premium Paid4-30If King had paid $11.00 for their shares, at a time when they were trading for $9.75, then the goodwill allocation would look like this: Effects of using the Initial Value Method4-31The initial value method employs cash basis for income recognition. The parent recognizes dividend income rather than an equity income accrual. Parent does not accrue the percentage of the sub’s income earned in excess of dividends (the increase in subsidiary retained earnings). The parent does not record amortization expense, therefore it must include it in the consolidation process if proper totals are to be achieved. Effects of using the Initial Value Method4-32If the Parent used the Initial Value Method to account for the Sub after acquisition, Entry *C is used to convert to the Equity Method. The entry will combine the increase in the Sub’s Retained Earnings since acquisition X the parent’s percentage of ownership, and the parent’s share of amortization expense since acquisition.Entry D is not necessary. Effects of using the Partial Equity MethodEntry *C converts from the Partial Equity Method to the Equity Method, but only the adjustment for the parent’s share of amortization expense is necessary. If the Parent used the Partial Equity Method to account for the Subsidiary after acquisition, Entry *C is used to convert to the Equity Method.4-33Learning Objective 4-84-34Understand the impact onconsolidated financial statementsof a midyear acquisition.Mid-Year AcquisitionsWhen control of a Sub is acquired at a time subsequent to the beginning of the sub’s fiscal year:The income statements are consolidated as usualThe Sub’s pre-acquisition revenues and expenses are excluded from the Parent’s consolidated statements (adjusted via Entry S)Only a partial year’s amortization on excess fair value is taken. 4-35Learning Objective 4-94-36Understand the impact onconsolidated financial statementswhen a step acquisitionhas taken place.Step AcquisitionsA 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.The parent utilizes a single uniform valuation basis for all subsidiary assets acquired and liabilities assumed—fair value at the date control is obtained.4-37Step AcquisitionsIf the parent held a noncontrolling interest in the acquired firm, the parent remeasures that interest to fair value and recognizes a gain or loss. If after obtaining control, the parent increases its ownership interest in the subsidiary, no further remeasurement takes place. The parent simply accounts for the additional subsidiary shares acquired as an equity transaction—consistent with transactions with other owners, as opposed to outsiders. 4-38Learning Objective 4-104-39Record the sale of a subsidiary(or a portion of its shares).Sales of Subsidiary StockIf 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.4-40What is reported on the consolidated statements when a Parent sells some of its ownership in a Subsidiary? Sales of Subsidiary StockIf the parent retains any of its former sub’s 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 parent’s 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.4-41Noncontrolling Interest – International Accounting Standards4-42IFRS permits fair value measurement, or the noncontrolling interest may be measured at a proportionate share of the Sub’s identifiable net asset fair value, which excludes goodwill. This option assumes that any goodwill created via acquisition applies solely to the controlling interest.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.US GAAP vs. IFRS