Chapter 16 - Solution Manual

Thus by assigning all of the excess amount paid to

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goodwill plus the control premium. Thus, by assigning all of the excess amount paid to purchase subsidiary shares to goodwill, means that the value reported as the purchase price of goodwill is overstated. So, if the parent company would then use the price paid to purchase subsidiary shares as a basis to infer the amount of the subsidiary’s total goodwill would result in an additional overstatement of goodwill. Team 2: Argue that Goodwill reported in balance sheets should be the amount of goodwill for the total company acquired. Your arguments should refer to entity theory. According to the entity theory, the parent company and its subsidiaries are a single entity. The consolidated group is an entity, separate from its owners. Thus, the emphasis is on control of the group of legal entities operating as a single unit. All of the assets belong to the entity. All of the debts are debts of the entity. And the income earned by investing in those assets is income to the consolidated entity rather than to either the parent company stockholders or to the subsidiary’s noncontrolling stockholders. Consequently, the purpose of consolidated statements is to provide information to all shareholders— parent company stockholders and outside noncontrolling stockholders of the subsidiaries. Stockholders (both parent company stockholders and stockholders that comprise the noncontrolling interest in subsidiaries of the parent company provide capital to the entity. The earnings accrue to the entity and are distributed to providers of capital – debt holders and stockholders. The revision of SFAS No. 141 and the FASB’s requirements outlined in SFAS No. 160 are consistent with entity theory. Companies are now required to report 100% of the fair value of both the assets and liabilities of an acquired company even when there is a noncontrolling interest remaining in the acquired company or subsidiary. The noncontrolling interest must be measured initially at its fair value which means that its initial value is no longer unaffected by the consolidation process. The result is that
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359 goodwill is now reported at the amount purchased by the parent company plus the noncontrolling interest’s share as measured by its fair value. This treatment is consistent with the initial measurement of an asset at its fair value. At acquisition, an asset’s fair value is equal to what it could be sold for in an ordinary exchange transaction. The parent company’s purchase of a controlling interest in the subsidiary is an arm’s length transaction and thus the fair value of the share of the subsidiary that was purchased. The fair value of the noncontrolling interest’s share of goodwill is determined by first measuring the fair value of the noncontrolling interest itself. The resulting fair value of goodwill is relevant to users of the financial statements. From their perspective the partial fair value adjustment that would occur under the parent company theory represents neither historical cost nor fair value.
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