In its 1999 exposure draft on consolidation principles and procedures, the FASB supported the entity theory for the valuation of identifiable net assets and the parent company theory for the valuation of goodwill. Contrary to the then current GAAP, this proposal would require subsidiary assets, such as inventory, land, and buildings, to be valued at 100 percent of fair value at acquisition. The result would be that a portion of the difference between fair value and book value acquired would be attributed to the noncontrolling interest. Current GAAP is virtually consistent with this proposal. The only difference lies in the manner in which the initial valuation of noncontrolling interest may be determined. Consistent with the proposal, the fair value of noncontrolling interest may be equal to the amount implied by the purchase price paid by the parent company to acquire its share of the net assets of the subsidiary.
Alternatively, noncontrolling interest may be valued by multiplying the number of noncontrolling interest shares times the market value of the acquiree's shares on the date control is attained or by some other valuation technique. It is unfortunate that the FASB did not provide better guidance on how the acquiring company should value noncontrolling interest. Since all other assets and liabilities of the acquired entity are initially reported at their respective fair values, the amount of goodwill that is reported on consolidated balance sheets depends on the initial fair value measurement of noncontrolling interest and may not reflect the arm's length transaction that took place when the controlling interest was acquired. Drawbacks of Consolidation The growth of business combinations has created companies with diversified operations, termed conglomerates . The result has been the aggregation of financial information from various lines of business into one set of financial reports.Moreover, if the FASB does extend the definition of control below 50 percent ownership, the result will be even higher levels of aggregation and even greater loss of information regarding the performance of the individual combined companies. Each new business combination results in the loss of some information to the investing public because previously reported data is now combined with existing data in consolidating financial reports. The loss of information may be further exacerbated by the reporting requirements of the guidance contained at FASB ASC 810. Assets and liabilities of heterogeneous companies are now required to be consolidated. Although empirical research indicates that the liabilities of previously unconsolidated subsidiaries may be perceived by market participants as parent company liabilities, one would expect a loss of comparability among the financial information provided across companies comprising varying combinations of different types of business entities.