Chapter 16 - Solution Manual

Team 2 argue in favor of presenting the

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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. They cannot exercise control over the consolidated entity, hence, they do not act as owners in the usual sense. Hence, they are not equity to the consolidated group. They represent an outside interest. Debate 16-2 Measurement Team 1 According to the guidance contained at FASB ASC 805, a company should measure the plant assets of an acquired company that it plans to use in its operations using replacement cost. This makes sense because, replacement cost measures the amount that a company would have to pay to acquire the assets that it will use. In other words, we believe that an entry value is appropriate to measure the current value of assets in use. If the plant assets of an acquired company were measured in accordance with SFAS No. 157, the parent company would have to value assets acquired based on exit values. These exit values would be the values that the parent company could get from selling the assets in an orderly sale. If the parent company plans to use these assets, the value they could get from selling them is not relevant. Instead, the only relevant cost is the cost that it would take to acquire them in their current condition. Team 2 Fair value under the guidance contained at FASB ASC 820 is based on exit value. It is the amount that a company would receive from selling an asset in an orderly sale. The company always makes a choice to sell and replace an asset or to keep it. The exit value measures the opportunity to sell. Once owned, the opportunity to sell is the only relevant current value. Since the company already owns the asset, the opportunity to purchase another one just like it is not relevant.
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