CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
Chapter Outline
I. Outside ownership may be present within any business combination.
A. Complete ownership of a subsidiary is not a prerequisite for consolidation—only
enough voting shares need be owned so that the acquiring company has the ability
to control the decision-making process of the acquired company.
B. Any ownership interest in a subsidiary company by a party unrelated to the acquiring
company is termed a noncontrolling interest.
II. Valuation of subsidiary assets and liabilities poses a challenge when a noncontrolling
interest is present.
A. The accounting emphasis is placed on the entire entity that results from the business
combination when control has been obtained. The parent company that controls its
subsidiary must consolidate 100% of subsidiary assets, liabilities, revenues, and
expense are consolidated even when its ownership is less than 100%.
B. The consolidated valuation basis for a newly acquired subsidiary is the acquisition-
date fair value of the company (most frequently determined by the consideration
transferred and the fair value of the noncontrolling interest); specific subsidiary
assets and liabilities are measured at their acquisition-date fair values.
C. The noncontrolling interest balance is reported in the parent’s consolidated financial
statements as a component of stockholders’ equity.
III. Consolidations involving a noncontrolling interest—subsequent to the date of acquisition
A. Four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance sheet amount
2. Net income attributable to noncontrolling interest
3. Dividends declared by subsidiary during the period attributable to the
noncontrolling interest
4. End of year balance sheet amount
B. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is entered on the worksheet as a component of
Entries S and A
2. The net income attributable to the noncontrolling interest is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends declared to these outside owners are reflected by extending the
subsidiary’s Dividends declared balance (after eliminating intra-entity transfers)
into the noncontrolling interest column as a reduction
4. The end of year noncontrolling interest total is the summation of the three items
above and is reported in stockholders’ equity.
IV. Step acquisitions
A. An acquiring company may make several different purchases of a subsidiary’s stock
in order to gain control
B. Upon attaining control, all of the parent’s previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its total
fair value (the sum of the fair values of the controlling and noncontrolling interests)
D. Post-control subsidiary stock acquisitions by the parent are considered transactions
with current owners of the consolidated entity. Thus such post-control stock
acquisitions neither result in gains or losses nor provide a basis for subsidiary asset
remeasurement to fair value. The difference between the sale proceeds and the
carrying value of the shares sold (equity method) is recorded as an adjustment to the
parent’s additional paid in capital.
V. Sales of subsidiary stock
A. The proper book value must be established within the parent’s Investment account
so that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during
the entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment
account is reduced using either a FIFO or a weighted-average cost flow assumption
D. If the parent maintains control, any difference between the proceeds of the sale and
the equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference
between the proceeds of the sale and the equity-adjusted book value of the share
sold is recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the
influence remaining after the sale.
Answer to Discussion Question:
Do you think the FASB made the correct decision in requiring consolidated
financial statements to recognize all subsidiary’s assets and liabilities at fair
value regardless of the percentage ownership acquired by the parent?
As the quotes from the five accounting professionals illustrate, the decision to require the
revaluation of 100% of a newly controlled subsidiary’s assets and liabilities—regardless of
Answer to Discussion Question:
DOES GAAP UNDERVALUE POST–CONTROL STOCK ACQUISITIONS?
From the Berkshire Hathaway 2012 annual 10-K report:
We have owned a controlling interest in Marmon Holdings, Inc. (“Marmon”) since 2008. In the
fourth quarter of 2012, pursuant to the terms of the 2008 Marmon acquisition agreement, we
acquired an additional 10% of the outstanding shares of Marmon held by noncontrolling interests
for aggregate consideration of approximately $1.4 billion. Approximately $800 million of the
On the date control is established, the new subsidiary’s valuation basis is established.
Subsequent acquisitions of any remaining portions of the noncontrolling interests do not
Berkshire’s payments for its post-control equity acquisitions (16% and 10%) were in excess of
Marmon’s proportionate carrying amounts. Because these transactions were with owners (not
Mr.Buffett may be correct that the current market value of Marmon is $4.6 bilion more that its
Answers to Questions
1. “Noncontrolling interest” refers to an equity interest that is held in a member of a
business combination by an unrelated (outside) party.
3. A control premium is the portion of an acquisition price (above currently traded market
4. Current accounting standards require the noncontrolling interest to appear in the
5. The ending noncontrolling interest is determined on a consolidation worksheet by adding
the four components found in the noncontrolling interest column: (1) the beginning
6. Allsports should remove the pre-acquisition revenues and expenses from the
7. Following the second acquisition, consolidation is appropriate. Once Tree gains control,
8. When a company sells a portion of an investment, it must remove the carrying value of
that portion from its investment account. The carrying value is based upon application of
9. Unless control is surrendered, the acquisition method views the sale of subsidiary’s
10. The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
Answers to Problems
1. C
2. A At the date control is obtained, the parent consolidates subsidiary assets
at fair value ($549,000 in this case) regardless of the parent’s percentage
ownership.
5. C
6. B Combined revenues……..…………………………………………………..…... $1,100,000
Combined expenses………………………………………………..….…..….…. (700,000)
7. C Consideration transferred by Pride……………..………………………….. $540,000
Noncontrolling interest fair value……………………………………………. 60 ,000
Star acquisition-date fair value……………………………………………….. $600,000
Star book value………………………………………………………………………. 420 ,000
Excess fair over book value…………..……………………………………….. $180,000
Amort.
Consolidated net income…………..……………………………..….…..….… $203 ,000
8. A Under the equity method, consolidated RE = parent’s RE.
10. A Amie, Inc. fair value at July 1, 2015:
30% previously owned fair value (30,000 shares × $5) …............. $150,000
11. C
12. B Fair value of 30% noncontrolling interest on April 1………………… $165,000
14. B Combined revenues……….………………………………………………….…... $1,300,000
Combined expenses………………………………………………..….…..….…. (800,000)
15. C Subsidiary net income
($100,000 – $14,000 excess amortizations)…………………………. $86,000
Noncontrolling interest percentage……………..…………….….….….... 40 %
Net income attributable to noncontrolling interest…….….…..….… $34 ,400
16. A West trademark balance………..…………………………………………….…. $260,000
Solar trademark balance……………………………………….…..….….….... 200,000
17. A Acquisition-date fair value ($60,000 ÷ 80%)…………..…..….….…..… $75,000
Strand’s book value ………….……………………………………….….…..….. (50 ,000)
Fair value in excess of book value ……………….………………………… $25,000
Excess assigned to inventory (60%) ……………………………$15,000
Excess assigned to goodwill (40%) …………….….…..….…..$10,000
Park current assets……….…………………………………………………..…... $70,000
18. D Park noncurrent assets………..………………………………………..….…... $90,000
19.B Add the two book values and include 10% (the $6,000 current portion) of
the loan taken out by Park to acquire Strand.
21. C Park stockholders’ equity………….…………………….….….…..….…..…. $80,000
22. (15 minutes) (Compute consolidated net income and noncontrolling
interest)
2014 2015
a. Harrison net income…………..…………………………………… $220,000 $260,000
b. Starr fair value…………………………………………………………….….…..…. $1,200,000
Fair value of consideration transferred………………..……….….…..… 1 ,125,000
Noncontrolling interest fair value……………………………………………. $75,000
Noncontrolling interest fair value January 1, 2014 (above)……….. $75,000
2014 income to NCI ([$70,000 – $8,000] × 10%)..….……………………… 6,200
23. (30 minutes) (Consolidated balances, allocation of consolidated net income to
controlling and noncontrolling interest, calculation of noncontrolling interest).
a. Stayer’s technology processes:
Acquisition-date fair value (20 year remaining life) $1,000,000
2015 amortization (50 ,000)
-or-
$175,500 + $150,000 – $15,000 = $310,500
c. Controlling interest in consolidated net income:
Net income–Johnsonville $650,000
Net income–Stayer adjusted for excess fair value
-OR-
Johnsonville’s separate net income $650,000
Stayer’s reported net income 350,000
Excess fair value amortization:
Technology processes (50,000)
Stayer’s reported net income 350,000
Excess fair value amortization:
Technology processes (50,000)
Building ($345,000 – $195,000) ÷ 10 years (15 ,000)
Stayer’s adjusted net income 285,000
Net income attributable to noncontrolling interest $57 ,000
23. (continued)
e. Noncontrolling interest:
Acquisition-date balance 1/1/15
Total Stayer fair value ($3,000,000 ÷ 80%) $3,750,000
Noncontrolling interest percentage 20 %
Noncontrolling interest acquisition-date fair value $750,000
24. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)
a. Business combinations are recorded generally at the fair value of the
b. Each identifiable asset acquired and liability assumed in a business
combination is initially reported at its acquisition-date fair value.
c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are
reported at their book values adjusted for acquisition-date fair value
d. Soriano’s total fair value January 1…………………………………………..…. $3,100,000
Soriano’s net assets book value……………….……………………………..….. 1 ,290,000
Excess acquisition-date fair value over book value……………..…..….. $1,810,000
Adjustments from book to fair values…………………………………………..
Unpatented technology……………………………….…..… 600 ,000 1 ,610,000
Goodwill …………..…………………………………………………..…..….…..….. $ 200 ,000
e. Combined revenues………..………………………………………..…..….….…..… $4,400,000
Combined expenses……………………………………………………………………. (2,350,000)
Building and equipment excess depreciation……….………………..….... 50,000
Consolidated net income…………..………………………………………………… $1 ,615,000
24. (continued)
To noncontrolling interest:
Soriano’s revenues……………..……………………………………..….…..….. $1,400,000
Soriano’s expenses…………….………………………………………………….. (600,000)
To controlling interest:
Consolidated net income…………..……………………………..….…..….… $1,615,000
Net income attributable to noncontrolling interest…….….…..….… (73 ,000)
Net income attributable to Patterson……………….………………..….… $1 ,542,000
-OR-
Patterson’s revenues……………..……………………………………..…..…... $3,000,000
Patterson’s expenses……………..…………………………….…..….….….... 1 ,750,000
f. Fair value of noncontrolling interest January 1……………………….…... $ 600,000
Net income attributable to noncontrolling interest……………………….. 73,000
Noncontrolling interest December 31……………..……..…..….…..….….… $ 667 ,000
g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain
purchase has occurred.
Collective fair values of Soriano’s net assets……………….…..….….….. $2,900,000
The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values
25. (30 minutes) Step acquisition.
a. Investment in Sellinger 445,000
Cash 415,000
Additional paid-in capital 30,000
Acquisition-date adjusted subsidiary value 12/31/14 1,780,000
Percent acquired 1/1/15 0.25
Acquisition-date based value of newly acquired shares $ 445,000
Acquisition price for 25% interest 415 ,000
Adjusted fair value of newly acquired shares 445,000
95% of adjusted subsidiary 2015 net income
($440,000 – $40,000) 380,000
26. (20 Minutes) (Determine consolidated income balances, includes a mid-year
acquisition)
a. Acquisition-date total fair value …….….….…..…... $594,000
Book value of net assets………………………………... (400 ,000)
Fair value in excess of book value .…................. $194,000
Excess fair value assigned to specific Remaining Annual excess
accounts based on fair value life amortizations
Goodwill………………………………….…..….…..….. 14 ,000
Total ………..…………………………………………. -0- $31 ,000
Consolidated figures following January 1 acquisition date:
Combined revenues …………..……………………………………….….…..….….. $1,500,000
Combined expenses……………………………………………………………………. (1 ,031,000)
b. Consolidated figures following April 1 acquisition date:
Combined revenues (1)……………………………………………….….…..….…... $1,350,000
Combined expenses (2)……………………………………………………………….. (923 ,250)
(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues