Mastering Consolidated Financials with Less than 100% Ownership

School: University of California, Los Angeles - Course: AC 6356 - Subject: Accounting

Advanced Financial Reporting - ACCT 6333 (5e) Chapter 5 - Class Handouts - Consolidated Financials with Less than 100% Ownership (ExcludeLO4 & LO5, IncludeAppendix 5B -Consol EPS & Appendix 5C - Accounting for Changes in Ownership) [Pages 323-337 "Suggested Integrated Approach for Mastering Complex Consolidations" summarizes how to put the concepts from Chap 1 - Chap 5 together] The Consolidation Process (C-E-A-D-I Entries - "Seedy") C -Eliminate the Changes in the Equity Investment account during period E Eliminate Stockholders' Equity of the subsidiary as of BOY A Eliminate the AAP (Acquisition Accounting Premium) as of BOY D Depreciation for current period AAP I Eliminate intercompany transactions during the periods and remaining balances Intercompany Payables/Receivables [iPAY] Intercompany Inventory Sales [iSALES], [iCOGS] Intercompany Land Sales [iGAIN] Intercompany Sale Depreciable Assets [iGAIN], [iDEP] Why do I care? Even in the presence of a Noncontrolling Interest, we still consolidate 100% of Revenues & Expenses, 100% of Assets & Liabilities (including Goodwill)! 1Where does the profit live?

Consolidated Financial Statements with less than 100% Ownership (there is no % of control - it's all or nothing) Points to remember! The direction of the intraentity transfers (upstream or downstream) is NOT important to the consolidated totals. But it does impact the calculation of Net Income Attributable to NCI! *If there is a Noncontrolling Interest, then the NI attributable to NCI and balance of the NCI in equity is impacted by UPSTREAM sales ONLY, but NOT impacted by downstream sales. *DOWNSTREAM transfers have ZERO/NONE/NADA/NO EFFECT on Noncontrolling interest. *UPSTREAM transfers have an impact on the SUB'S Net Income. All noncontrolling interest balances are based on the sub's net income after RED Zone impact (unrealized intra-entity profit.) 2Stockholders' Equitysection will clearly separate the interests of the two groups of shareholders. Shareholders of the parent companywho have a claim on the net assets of the total consolidated entity by virtue of their ownership of the parent company, and Noncontrolling shareholders of the subsidiarywho only have a claim on the net assets of the subsidiary (called noncontrolling interests, or NCI) Per-share fair values of the parent's interest and the noncontrolling interest in the subsidiary might differ. Must allocate goodwill to the controlling and noncontrolling interests, no longer assume it is based on ownership %. Control Premium - amount that a buyer is usually willing to pay over the current market price of a publically traded company - this is usually justified by the expected synergies from the merger. NCI discount -per-share fair value of the NCI. (page 297, FN7)