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Chapter 16 - Solution Manual

Consequently the purpose of consolidated financial

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Consequently, the purpose of consolidated financial statements is to provide information to all shareholders - parent company stockholders and outside noncontrolling stockholders of the subsidiary companies. Entity theory implies that all stockholders are stockholders in the consolidated group - i.e., that noncontrolling interest is an equity interest. The consolidated entity is considered as one economic unit, and noncontrolling stockholders contribute resources to the unit in the same manner as parent company stockholders. Noncontrolling stockholders have the same characteristics as parent company stockholders. Their interest is enhanced or burdened by changes in net assets from nonowner sources - a prerequisite for equities as defined and described in SFAC No. 6. For noncontrolling interest which owns common stock, they have the four basic rights of common stock inherent in the common stock of the parent company. They have the right to vote, to share in profits, to share in liquidation, and the preemptive right. The FASB defined minority interest (here termed noncontrolling interest) as meeting the definition of equity. Recently the FASB issued an exposure draft in which they reiterated this position. Noncontrolling interest does not meet the definition of a liability. It embodies no obligation for the future transfer of assets unless a dividend is declared (no different from parent company shares). If noncontrolling interest does not meet the definition of a liability and it is not an asset, under the present accounting model, it must be equity. Team 2 Argue in favor of presenting the noncontrolling interest outside of stockholders’ equity Presenting noncontrolling interest as an outside interest is consistent with parent company theory and IAS No. 27. According to parent company theory, only parent company stockholders have a proprietary interest in the net assets of the consolidated group. Under this theory, the purpose of consolidated statements is to provide information primarily for parent company stockholders, a view that is supported by ARB No. 51. As a result, consolidated financial statements reflect the parent company perspective in which the net assets of the subsidiary are substituted for the parent’s equity interest investment in the subsidiary resulting from the application of the equity method of accounting. As a result, consolidated net income equals parent company net income and consolidated equity is equal to parent company equity.
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357 Because only parent company stockholders play a proprietary role, noncontrolling shares are an outside interest and should not be included in consolidated stockholder’s equity. The consolidation process has no impact on the reporting entity and is of no benefit to noncontrolling shareholders. Noncontrolling shareholders have no interest in the parent company or any other subsidiaries of the parent company. Their interest is limited to a segment of the consolidated group, the subsidiary.
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Consequently the purpose of consolidated financial...

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