Learning Objective 4-1
A business can hold below 100% ownership of a subsidiary. There are various reasons why a company could hold a stake of less than 100% in its subsidiary. First, the parent company might have lacked adequate resources for obtaining all of the outstanding stock. Also, some of the subsidiaries might choose to retain their ownership, maybe hopping to get a higher price in the future. Besides, lack of complete ownership is often faced with overseas subsidiaries. Some countries have laws which outlaw foreign companies from having total control of domestic companies. Also, some parent companies could seek to create enhanced relationships with the local government, customers and employees of their subsidiary through keeping certain percentage of local ownership. A good example of a multinational company which holds less than 100% stake on its subsidiaries is Wal-Mart.
Learning Objective 4-2
After acquiring a controlling ownership interest with below 100% of the voting shares of a subsidiary, a parent firm should take into account non-controlling interest of shareholders in its consolidated financial reports. The non-controlling interest is a representation of other owners with legitimate claim to subsidiary’s net assets. The parent corporation in its consolidated financial accounts should identify the subsidiary’s liabilities and assets, allocate value to the liabilities and assets of the subsidiary, and worth and reveal the existence of the other shareholders.
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The acquisition approach can be used to address the three issues described above using the concept fair value and economic unit. The economic unit model sees the subsidiary and parent companies as single economic unit for the purposes of financial reporting. Therefore, a controlled business should always be consolidated as a whole irrespective of the ownership level of the parent company. Also, the acquisition technique takes into consideration the fair values’ acquisition-date of the subsidiary as the applicable element for recording the financial impacts of the business combination which includes the non-controlling interest. Besides, fair values offer management responsibility to creditors and investors for evaluating the failure or success of the merger. On the contrary, the liabilities and assets of the parent firm are not changed from their previous carrying amounts.
Overall, although a company acquires below 100% of another business, financial reporting standards necessitate the parent to include 100% of the acquired assets and assumed liabilities. At the acquisition date, the parent measures at fair value the whole subsidiary and identified liabilities and assets. Similarly, the parent acknowledges the non-controlling interest at its fair value’ acquisition-date. For instance if a parent enterprise controls a subsidiary via a 70% ownership, the parent ought to consolidate 100% of its liabilities and assets and those of the subsidiary to reflect the single economic unit. Consequently, the consolidated balance sheet offers an owner’s equity amount for the interest of non-controlling owners – an acknowledgment that the parent does not possess 100% ownership stake of the subsidiary’s liabilities and assets.
Learning Objective 4-3
For proper reporting of consolidated financial accounts containing ownership equity, date of goodwill acquisition must be allocated in both the controlling and non-controlling interests. First, the parent apportions goodwill to its controlling assets for the additional fair value of its equity interest over its fair value share of the identifiable net assets. Then, any outstanding goodwill is ascribed to the non-controlling interest. Subsequently, the apportioned goodwill would not constantly be proportionate to the proportion owned. Also, when the acquired firm’s total fair value is below the total sum of its recognizable net assets, there is a bargain purchase. In such exceptional combination, the parent acknowledges the total gain on bargain acquisition in present revenue. The amount of gain is in no case apportioned to the non-controlling interest.
Learning Objective 4-4
Consolidated net revenue assesses the outcomes of activities for the merged entity. Consolidated net income reflects the economic unit concept through including 100 percent of the parent firm’s net revenue and 100 percent of subsidiary’s net revenue, adjusted for the surplus acquisition-date fair value over the amortizations of book value. After determining the consolidated net income, it is subsequently allotted to the parent firm and the non-controlling interests. Since the non-controlling ownership interest related only to the subsidiary, their consolidated net revenue’s share is restricted to the share of the subsidiary’s net revenue adjusted for the excess fair value of acquisition-date amortizations.
Learning Objective 4-5
Overall, the acquisition method is focused on integrating the consolidated financial reports 100% of the liabilities and assets of the subsidiary at their fair values of acquisition date. However, after acquisition, shifts in current fair values for liabilities and assets are not reported. Rather, the subsidiary liabilities assumed and assets acquired are reported in upcoming consolidated financial accounts through the use of their acquisition-date fair values of succeeding excess fair value amortizations. The parent firm should define and enter four figures while preparing a consolidation record:
The non-controlling interest of subsidiary at the start of the present year.
Net income linked to the non-controlling interest
Subsidiary dividends associated with the non-controlling interest.
Non-controlling interest at the year end.
Learning Objective 4-6
After successful consolidation of the material, the resultant financial reports for the two companies are generated. A good example is in the case of King and Pawn in Exhibit 4.7. Exhibit 4.7 demonstrates first the consolidated income statement. Consequently, consolidated net revenue is calculated at the level of the merged entity, which is $416,000 and subsequently apportioned to the non-controlling as well as controlling interests. The report on changes in owners’ equity offers information on change of ownership for the year for the non-controlling and controlling interest stockholders. Lastly, the posting of the non-controlling interest in the equity of subsidiary directly in the Owners’ consolidated equity segment.
Learning Objective 4-7
As illustrated in the example of King and Pawn companies, the parent firm utilizes the equity technique and bases each worksheet entry on the method. The initial value technique disregards two accrual-based amendments. One, the parent identifies dividend revenue instead of an equity revenue accumulation. Therefore, the parent firm does not accumulate the portion of the net income of subsidiary received in previous periods in surplus of dividends. Also, the parent company does not document repayment cost in the initial value approach and thus should encompass it in the course of consolidation to achieve appropriate totals.
Learning Objective 4-8
Once a midyear date a firm obtains control, some manifest changes are required. The new parent should calculate the subsidiary’s book value as of that time to for determining surplus total fair value over the allocations of book value. Surplus amortization costs and any equity accumulation and dividend sharing are acknowledged for a time below a year. Lastly, since only net revenue which the subsidiary received after the new owners’ date of acquisition, it is proper to take account of any post-acquisition income and costs in consolidated sums.
In most circumstances, a parent firm owns non-controlling equity interest in company before gaining control. In these instances, the parent combines the post-acquisition income and costs of its new subsidiary. Since the parent held an equity stock in the subsidiary before the date of control, nevertheless, the parent records on its income statement which accumulated until the date of gaining the control. In this situation, in the acquisition year, the consolidated revenue report presents both joint incomes and costs - post-acquisition – of the subsidiary and equity technique revenue – pre-acquisition. In succeeding years, the necessity to differentiate pre-acquisition and post-acquisition amounts is constrained to making sure that surplus amortizations accurately show the midyear date of acquisition. Lastly, when the parent uses the initial value accounting technique for the stock in subsidiary in its accounts, the change to the equity technique should as well show only post-acquisition amounts.
Learning Objective 4-9
In a step acquisition, a parent firm attains control in a sequence of equity acquisitions, rather than one transaction. Similar to all commercial amalgamations, the acquisition technique evaluates the acquired company at the date of obtaining control at fair value. Acquiring a controlling interest is regarded a significant financial assessment activity. Subsequently, the parent uses a distinct identical evaluation foundation for each subsidiary acquired asset acquired and assumed liability – fair value at the date of gaining control.
When the parent formerly had a non-controlling interest in the bought company, the parent reevaluates that interest to fair value and acknowledges loss or profit. For instance, after eBay increased its equity ownership from 10% to 93%, it gained a control over GittiGidiyor. If after gaining control, the parent company grows its ownership stake in the subsidiary, no more reevaluation occurs. The parent only takes into account the surplus subsidiary shares purchased through an equity deal.
Learning Objective 4-10
Notably, the accounting impact of selling shares relies on if the parent company remains maintaining control following the acquisition. If selling the parent company’s ownership interest leads to the subsidiary’s loss of control, it acknowledges any resultant loss or profit in consolidated net revenue. When the parent firm sells part of shares of the subsidiary but maintains control, it acknowledges no losses or profits on the sale. Based on the acquisition technique, provided that the parent has control, transactions in the stock of the subsidiary are regarded as activities in the consolidated entity’s establishment. Given that these transactions are perceived to happen with shareholders, the parent reports any variance between the transaction’s earnings and carrying sum as surplus paid-in capital.
