Chapter Four

Consolidated Financial
Statements and
Outside Ownership

Noncontrolling Interest
2

If the parent doesnt own

100% of the company, WHO
owns the rest of it?

Noncontrolling (Minority) Shareholder

The ownership interests of the

Noncontrolling Shareholders must be
reflected in the consolidated financial
statements.

Noncontrolling Interest
3

The Parent has control and is

responsible for all of the Subsidiarys
assets and liabilities, so we will still
consolidate 100% of the Subsidiarys
financial information. However

The existence of noncontrolling

investors requires two new
accounts:
1. Noncontrolling Interest
2.

Noncontrolling Interest in
Subsidiary Net Income

Noncontrolling Interest Example

Parker Corporation wants to
acquire 90% of Strong
Company.
Strongs stock has been trading
for $60 per share.
If Parker has to pay $70 per
share to induce enough
stockholders to sell, how do we
account for the 10% of Strong

Noncontrolling Interest Example

In this case, the Controlling
Investor had to pay a
premium for the shares they
need to gain control.
How do we value this
premium, and how do we
value the noncontrolling
interest?

Noncontrolling Interest Example

If Parker purchased 9,000 shares

at this price, then the fair value of
their consideration transferred is
$630,000. The remaining 1,000
shares of Strong have a fair value
of $60,000.
This gives a total acquisition-date
fair value of Strong Company of
$690,000.

Noncontrolling Interest Example

The total acquisition-date fair

value 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.

Noncontrolling Interest Example

If the shares were not actively

traded, then the consideration
transferred by Parker would be
considered the best measure of
fair value of Strong.
And we would estimate the fair
value of the noncontrolling
interest at $70,000.

Recording
Noncontrolling Interest

On the Balance Sheet:

A credit balance account called
Noncontrolling Interest represents the
noncontrolling stockholders investment.
This account appears in the equity section
of the Consolidated Balance Sheet as
required by SFAS 160.

Prior to SFAS 160 an option existed to

report it in the liability section, or as a
mezzanine item between the two
sections.

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Recording
Noncontrolling Interest

On the Income Statement:

An account called Noncontolling
Interest in Subsidiary Net Income
represents the noncontrolling
shareholders share of the subs net
income.
This account is created in
consolidation and reported in the
worksheet entries, similar to the
balance sheet account for the

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Noncontrolling Interest Example

Lets take our original example one
step further.
Parker owns 90% of Strong.
Strong earns $80,000 in the first year
Parker has control.
$30,000 of annual excess fair value
amortization results from increasing
Strongs acquisition-date book values
to fair value.

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Noncontrolling Interest Example

Noncontrolling Interest in Strong Company Net Income
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Subsidiary Strong net income . . . . . . . . . . . . . . . . 80,000
Excess acquisition-date fair-value amortization. . . 30,000
Net income adjusted for excess amortizations. . . $ 50,000
Noncontrolling interest percentage . . . . . . . . . . . . . . 10%
Noncontrolling interest in Strong net income. . . . . $ 5,000

Note: The noncontrolling shareholders have

a 10% interest in the subsidiary company,
but no interest in the parent firm.

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Noncontrolling Interests and

Consolidations

13

The consolidation process remains

substantially unchanged with a
noncontrolling interest.
Consolidate as though the Parent has
100% ownership, and then determine the
noncontrolling interest in:
The subsidiary as of the beginning of
the current year.
The subsidiarys current year net

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Noncontrolling Interest Worksheet Example

14

Assume that King Co. acquires 80% of Pawn

Cos 100,000 outstanding voting shares on
January 1, 2011, for $9.75 per share or a total of
$780,000 cash.
Further assume that the 20% noncontrolling
interest shares trade before and after the
acquisition at an average of $9.75 per share.
The total fair value of Pawn to be used initially in
consolidation is thus as follows:
Consideration transferred by King. . . . . . . . . . .
$780,000
Noncontrolling interest fair value . . . . . . . . . . . .

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Noncontrolling Interest Worksheet Example

Exhibit 4.2: Subsidiary Accounts Date of Acquisition

15

Note: Comparing the total fair value based on

the stock value of $975,000 to the fair value of
identifiable net assets shown above, it appears
Pawn has goodwill valued at $25,000.

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Exhibit 4.3: Excess Fair Value Allocations

Exhibit 4.4: Equity Method Investment Balance

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Exhibit 4.5: Separate Financial Records

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Noncontrolling Interest Worksheet Example

19

King uses the Equity Method to account

for Pawn subsequent to acquisition.
The consolidation process is
substantially the same.
At each consolidation, we will prepare
the worksheet with the entries we
referenced as S, A, I, D, and E, AND
We will add a column to our worksheet
where we will record the noncontrolling

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Noncontrolling Interest Worksheet Example

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Noncontrolling Interest Worksheet Example

21

Continued

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Consolidated Financial Statement

Balance Sheet

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Noncontrolling Interest
Premium Paid

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If 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:
$9.75 x 20,000
$11.00 x 80,000
shares

shares

Acquisition-date

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Effects of using the Initial Value Method

27

What if the Parent used the Initial

Value Method to account for the
Subsidiary after acquisition?
Add Entry *C to convert from the
Initial Value Method to the Equity
Method by combining:
the increase in the Subs Retained
Earnings since acquisition x the parents
ownership %, and
the parents share of amortization
expense since acquisition.

Entry D will not be necessary.

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Effects of using the Partial

Equity Method

28

What if the Parent used the Partial

Equity Method to account for the
Subsidiary after acquisition?
Add Entry *C to convert from the
Partial Equity Method to the Equity
Method, but only the adjustment for
the parents share of amortization
expense is necessary.

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Mid-Year Acquisitions
29

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, and

The Subs pre-acquisition revenues and

expenses are excluded from the Parents
consolidated statements (adjusted via
Entry S), and

Problem 33:

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Problem 33:

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Step Acquisitions
34

When a Parent acquires a

Subsidiary over time, or in steps,
the date control is achieved is
significant

All previous values for the

investment, prior to the date
control is obtained, are remeasured
to fair value as of the date of
control.

Problem 10:

35

Amie, Inc., has 100,000 shares of $ 2 par value

stock outstanding.
Prairie Corporation acquired 30,000 of Amies
shares on January 1, 2009, for $ 120,000 when
Amies net assets had a total fair value of $
350,000.
On July 1, 2013, Prairie agreed to buy an
additional 60,000 shares of Amie from a single
stockholder for $ 6 per share.
Although Amies shares were selling in the $ 5
range around July 1, 2013, Prairie forecasted
that obtaining control of Amie would produce
significant revenue synergies to justify the
premium price paid.
If Amies net identifiable assets had a fair

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Sales of Subsidiary
Stock
What is reported on the consolidated
statements when a Parent sells some of
its ownership in a Subsidiary?
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 net income.

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Noncontrolling Interest
International Accounting Standards

38

US GAAP
IFRSrequires
U.S. GAAP
fair value
measurement.
Thus, acquisitiondate fair value
provides a basis for
reporting the
noncontrolling
interest;
which is adjusted for
its share of
subsidiary income

vs
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

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Noncontrolling Interest
The Legacy Purchase Method

39

Under the purchase method, when less

than 100% was purchased, only the
parents percentage was adjusted to
fair value.
Therefore, the valuation principle for
the noncontrolling interest under the
purchase method was simply its share
of the subsidiarys book value.
The consolidation worksheet entries
must be adjusted
accordingly.

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Summary
40

Control does not require 100%

ownership. The minority ownership
by outside, unrelated parties is called
noncontrolling interest.

Noncontrolling interest is recognized

as a credit balance on the balance
sheet, and as a separate line on the
income statement.

If a mid-year acquisition occurs, preacquisition revenues and expenses of

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Possible Criticisms
41

FASB advocates that a noncontrolling

interest be accounted for as equity,
even though the outside parties do not
hold a direct interest in the parent
company.

Others believe that mezzanine

recognition of a credit balance, that is
neither liability nor equity, is the
appropriate accounting for a
noncontrolling interest.

Finally, there are those who think

liability section reporting is best.

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