Chp 4: Consolidated Financial Statements and Outside Ownership Consolidated Financial Reporting in the Presence of a Noncontrolling Interest Noncontrolling Interest Defined The ownership interests in the sub that are held by owners other than the parent is a noncontrolling interest. The noncontrolling interest in a sub is part of the equity of the consolidated group. oWhen a parent company acquires a controlling ownership interest with less than 100% of a sub's voting shares, it must account for noncontrolling shareholders' interest in its consolidated financial statements. The noncontrolling interest represents an additional set of owners who have legal claim to the sub's net assets. o Recognize the sub's assets and liabilities Assign values to the sub's assets and liabilities Value and disclose the presence of the other owners as the noncontrolling interest. The economic unit concept views the parent and sub companies as a single economic unit for financial reporting purposes. Thus, a controlled company must always be consolidated as a whole regardless of the parent's level of ownership. oWhen a parent controls a sub through a 70% ownership, the parent must consolidate 100% of the sub's (and the parent's) assets and liabilities in order to reflect the single economic unit. The consolidated balance sheet then provides an owners' equity amount for the noncontrolling owners' interest - a recognition that the parent does NOT own 100 percent of the sub's assets and liabilities. oThe acquisition method also captures the sub's acquisition-date fv as the relevant measurement attribute for reporting the financial effects of the business combination- including the noncontrolling interest. Control and Accountability In acquiring a controlling interest, a parent company becomes responsible for managing all the sub's assets and liabilities even though it may only own a partial interest. If a
parent can control the business activities of its sub, it directly follows that the parent is accountable to its investors and creditors for all of the sub's assets, liabilities, and profits. oThus, for business combinations involving less than 100% ownership, the acquirer recognizes and measures the following at the acquisition date: All sub identifiable assets and liabilities at their full fv Noncontrolling interest at fv Goodwill or a gain from a bargain purchase. Subsidiary Acquisition-Date Fair Value in the Presence of a Noncontrolling Interest The total acquired firm fair value in the presence of a partial acquisition is the sum of the following two components at the acquisition date: oThe fv of the controlling interest oThe fv of the noncontrolling interest The sum of these two components serves at the starting point for the parent in valuing and reporting the sub acquisition. If the sum exceeds the collective fv of the identifiable net assets acquired and liabilities assumed, then goodwill is recognized. Conversely, if the collective fv of the identifiable net assets acquired and liabilities assumed exceed the total fv, the acquirer recognizes a gain on bargain purchase. oMeasurement of the acquisition-date controlling interest fv remains straightforward in the vast majority of cases - the consideration transferred by the parent typically provides the best evidence of fv of the acquirer's interest.
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