Chapter 10
Consolidated
Financial Statements:
Special Problems
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2006
Scope of Chapter
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Changes in parent company’s ownership
interest in a subsidiary.
Subsidiary with preferred stock outstanding.
Stock dividends distributed by a subsidiary.
Treasury stock transactions of a subsidiary.
Indirect shareholdings and parent company’s
common stock owned by a subsidiary.
Changes in Parent Company’s
Ownership Interest in a Subsidiary
Changes in a parent company’s ownership
interest occur in the following scenarios:
 Parent
company acquisition of minority
interest.
 Parent company sale of a portion of its
subsidiary common stockholdings.
 Subsidiary’s issuance of additional shares of
common stock to the public.
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Parent Company Acquisition of Minority
Interest
Purchase accounting is applied to:
 Parent company’s or subsidiary’s acquisition of all
or part of minority interest in net assets of the
subsidiary.
 Even if business combination has been accounted
for as a pooling prior to June 30, 2001 when
pooling was denied to subsequent business
combinations by the FASB.
Note: Any other approach would be inconsistent with the basic
premises of pooling accounting.
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Parent Company Acquisition of Minority
Interest: Accounting Treatment
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If the parent pays more than carrying amount for
the minority interest, the difference is attributed to
goodwill.
If the parent company pays less than carrying
amount for the minority interest, the difference,
generally immaterial, may be treated as an offset
to goodwill recognized in prior acquisitions of the
subsidiary's common stock.
Parent Company Sale of a Portion of its
Subsidiary Common Stockholdings
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A parent company may be able to control its subsidiary
effectively without a majority ownership.
It may sell portions of its subsidiary’s common stock for
cash or other business combinations.
Such a sale involves accounting for and income
statement display of the disposal of a business
segment.
Accounting for this sale is similar to accounting for
disposal for any non-current asset.
Parent Company Sale of a Portion of its
Subsidiary Common Stockholdings:
Accounting Treatment
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The carrying amount of the common stock sold is
removed from the parent’s Investment in Subsidiary
common stock ledger.
The difference between carrying amount and cash/fair
market value of other consideration received is
recognized as gain/loss on disposal of stock.
This gain/loss is not an extraordinary item under
generally accepted accounting principles.
Specific identification is required to account for the
carrying amount if control is acquired by installment
purchase.
Subsidiary’s Issuance of Additional
Shares of Common Stock to the Public
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The parent company may instruct the subsidiary to
issue new common stock to obtain funds.
The parent company and minority stock holders
waive their preemptive right to obtain new stock.
Subsequently the parent company’s ownership
percentage changes.
The funds obtained is available to the consolidated
group via intercompany transactions.
Subsidiary’s Issuance of Additional
Shares of Common Stock to the Public:
Accounting Treatment
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A subsidiary's issuance of additional shares of
common stock to the public results in:
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Non-operating gain or loss to the parent company.
An increase in the minority interest in net assets of
the subsidiary.
The amounts are computed by comparing the
parent's and minority stockholders' interests
in the net assets of the subsidiary before and
after the subsidiary's issuance of common
stock to the public.
Subsidiary’s Issuance of Additional
Shares of Common Stock to the Parent
Company
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The Subsidiary may issue additional common
stock to the Parent Company directly.
This may happen if the Parent Company desires to
increase its investments in the Subsidiary
or
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If the Parent Company desires to reduce the
influence of the minority stock holders.
Subsidiary’s Issuance of Additional
Shares of Common Stock to the Parent
Company: Accounting Treatment
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Results in:
1.
2.
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A non-operating gain or loss to the parent
company
A change in the minority interest in net assets of
the subsidiary.
Computation of these amounts is carried out
in the same way as for subsidiary issuances
of common stock to the public.
Subsidiary with Preferred Stock
Outstanding
Some combinees in a business combination
have outstanding preferred stock which lead to:
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Parent company acquiring all of the
subsidiary’s preferred stock together with
all/majority of it’s common stock.
Parent company acquiring less than 100% of
the subsidiary’s preferred stock.
Subsidiary with Preferred Stock
Outstanding: Accounting Treatment
If a parent company does not acquire all the outstanding
preferred stock:
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In accordance with the going-concern principle:
– the amount of the lump-sum acquisition cost of the
investment in the subsidiary that is allocated to the
preferred stock is based on the call price of the
preferred stock.
– The cost assigned to the investment in the
subsidiary's preferred stock does not enter into the
measurement of goodwill.
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Subsidiary with Preferred Stock
Outstanding: Accounting Treatment
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The minority interest of preferred stockholders
in the net assets of the subsidiary is
measured by the call price of the preferred
stock.
The parent company's investment in the
subsidiary's preferred stock is accounted for:
1.
2.
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By the cost method, unless the subsidiary passes
dividends on cumulative preferred stock.
In that case, the parent uses the equity method of
accounting for the passed dividend.
Stock Dividends Distributed by a
Subsidiary
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Stock dividends declared by a subsidiary for which the
parent company uses the equity method of accounting
do not require any journal entries by the parent.
The working paper elimination reflects the post-stock
dividend balances of the subsidiary's stockholders'
equity ledger accounts.
Note: AICPA has stated that the retained earnings in the consolidated
financial statements should reflect the accumulated earnings of
the consolidated group not distributed to the shareholders of, or
capitalized by, the parent company.
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Treasury Stock Transactions of a
Subsidiary
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Treasury stock owned by a subsidiary on the
date of the business combination is treated as
retired stock in the preparation of
consolidated financial statements.
A working paper elimination is prepared to
account for the retirement .
Methods used:
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2.
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Par
Stated Value
Indirect Shareholding and Parent
Company’s Common Stock Owned by a
Subsidiary
Indirect/Reciprocal shareholdings are involved
where the following relationships exist:
 Indirect:
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One subsidiary and the Parent company jointly
owning a controlling interest in another subsidiary.
A subsidiary company itself being the parent
company of its own subsidiary.
Reciprocal: Subsidiary’s ownership of shares
of the parent company’s common stock.
Indirect Shareholding and Parent
Company’s Common Stock Owned by a
Subsidiary: Accounting Treatment
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Indirect Ownership: Equity method of
accounting should be applied for the operating
results of the various subsidiaries.
Reciprocal Ownership: Treasury Stock
treatment should be applied for consolidation
purposes.