RSM321 Lecture 3.docx - RSM321 Lecture 3(Chapter 4 – Consolidation of Non-Wholly Owned Subsidiaries(<100 ownership*Note when performing consolidated

RSM321 Lecture 3.docx - RSM321 Lecture 3(Chapter 4 –...

This preview shows page 1 - 3 out of 6 pages.

RSM321 Lecture 3 (Chapter 4) – Consolidation of Non-Wholly Owned Subsidiaries (<100% ownership) **Note : when performing consolidated statements of subsidiaries, if there is an accumulated depreciation account, it must be deducted from PPE to find the NBV of the PPE. (sometimes it is already shown as a Net value on the sub’s BS). The consolidated statements should only include the AD of the parent company. IFRS 3 – specifies the accounting principles involved in preparing consolidated financial statements IFRS 10 – specifies when control exists, requiring consolidation Consolidated statements consists of BS, IS, comprehensive income, cash flows The Consolidated Balance Sheet on Acquisition Date Consolidation of non-wholly owned sub (Midterm) o Shares not owned by parent are owned by “non-controlling shareholders” The parent would own 80% of the sub, and the other “non-controlling party” would own 20% o Value of shares held by non-controlling shareholders appears on the b/s as “noncontrolling interest” (NCI) o 4 theories How should the portion of the subsidiary’s net assets not owned by the parents be measured on the consolidated f/s? It will just be the percentage of ownership Conceptual alternatives Assume that, on June 30, year 1, S Ltd has 10,000 shares outstanding & P Ltd buys 8,000 shares (80%) for a total cost of $72,000 2 theories: Entity and PCE Theory o Entity theory (Most used) Views the consolidated entity as having 2 distinct groups of s/h – the controlling & noncontrolling s/h The idea is that the consolidated f/s are prepared for the entity’s s/h The consolidated b/s reflects full fair values of subsidiary’s net assets & goodwill as if the parent had acquired 100% instead of the lesser amount actually acquired. The as if number is called Entity FV (can be obtained through linear extrapolation) For the b/s to reflect full fair value of the subsidiary, the price per share paid by the parent is effectively extrapolated to the shares not acquired , to establish an implied fair value for the entire company Purchase Price – Book value of company – Allocated Differential = GW To find the purchase price (FV Method), take the 80% of the purchase price company bought for the shares, and calculate the remaining 20% using the market price of the shares to find the implied value of the 100% value of the shares Entity FV = Acquisition cost / % Ownership = $72,000/0.8 = $90,000 (linear extrapolation) NCI = NCI% * Entity FV = 0.2 * $90,000 = $18,000 Use the linear extrapolation method if the exam question doesn’t state the FV of the other 20% As parent’s holding moves further away from 100%, or a parent acquires control through a series of small purchases, straight-line extrapolation loses validity The allocation of Entity FV Entity FV = 100% of NAV at FV + 100% of Entity GW The theory results in the following:
Image of page 1

Subscribe to view the full document.

Assets acquired & liabilities assumed are valued at their total fair value at the date of acquisition
Image of page 2
Image of page 3
  • Spring '12
  • LisaHarvey

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes