Chapter 5
Consolidation
Subsequent To Acquisition
(No Intercompany Profits)
Conceptual Alternatives
Income Statements (Ponto Owns 70 Percent of Sonto)
Ponto
Sonto
Sales
$500,000
$200,000
Cost Of Goods Sold
$300,000
$110,000
80,000
40,000
Total Expenses
$380,000
$150,000
Net Income
$120,000
$50,000
Other Expenses
© 2008 Clarence Byrd Inc.
2
Consolidated Income Statement
Proprietary Solution
Sales [$500,000 + (70%)($200,000)]
$640,000
Cost Of Goods Sold [$300,000 + (70%)($110,000)]
$377,000
Other Expenses [$80,000 + (70%)($40,000)]
108,000
Total Expenses
$485,000
Net Income
$155,000
© 2008 Clarence Byrd Inc.
3
Consolidated Income Statement
Parent Company Solution
Sales ($500,000 + $200,000)
$700,000
Cost Of Goods Sold ($300,000 + $110,000)
$410,000
Other Expenses ($80,000 + $40,000)
120,000
Total Expenses
$530,000
Combined Income
$170,000
Non-Controlling Interest [(30%)($50,000)]
Net Income
© 2008 Clarence Byrd Inc.
15,000
$155,000
4
Consolidated Income Statement
Entity Solution
Sales ($500,000 + $200,000)
$700,000
Cost Of Goods Sold ($300,000 + $110,000)
$410,000
Other Expenses ($80,000 + $40,000)
120,000
Total Expenses
$530,000
Net Income
$170,000
Non-Controlling Interest [(30%)($50,000)]
Increase In Retained Earnings
© 2008 Clarence Byrd Inc.
15,000
$155,000
5
CICA Solution

Largely Parent Company
• Extraordinary items
disclosed on proprietary
basis
• Discontinued Operations
disclosed on proprietary
basis
© 2008 Clarence Byrd Inc.
6
Classification of Problems

Open Trial Balance
(Requires more than
just a Balance Sheet)
• Investment at Cost
• Investment at Equity
© 2008 Clarence Byrd Inc.
7
Classification of Problems

Closed Trial Balance
(Requires only a
Balance Sheet)
• Investment at Cost
• Investment at Equity
© 2008 Clarence Byrd Inc.
8
Classification of Problems


Focus on investment at
cost
Problems involving the
equity method are
given limited coverage
in Chapter 7
© 2008 Clarence Byrd Inc.
9
Step A Procedures




Step A-1 Procedure Eliminate 100 percent of the
Investment In Subsidiary account.
Step A-2 Procedure Eliminate 100 percent of all the
balances in the subsidiary’s common shareholders’ equity
that are present on the acquisition date.
Step A-3 Procedure Allocate any debit or credit
Differential that is present at acquisition to the investor’s
share of fair value changes on identifiable assets, fair value
changes on identifiable liabilities, and positive or negative
goodwill.
Step A-4 Procedure Allocate to a Non-Controlling
Interest account in the consolidated Balance Sheet, the
non-controlling interest’s share of the book value of the
total Shareholders’ Equity of the subsidiary at acquisition.
© 2008 Clarence Byrd Inc.
10
Step A Procedures


Complete coverage in Chapter 4
Will be repeated unchanged in every
problem
© 2008 Clarence Byrd Inc.
11
Step B Procedures

Chapter 4 Coverage
• Step B-1 Procedure
Eliminate 100 percent of all
intercompany assets and liabilities.

New In Chapter 5
• Realization of fair value changes
• Goodwill impairment
• Intercompany expenses and revenues
• Intercompany dividends
© 2008 Clarence Byrd Inc.
12
Step C

Distribution of subsidiary Retained
Earnings since acquisition
• Introduced in this Chapter
• Modified in Chapter 6
© 2008 Clarence Byrd Inc.
13
Step B(2) Realization of
Fair Value Changes

Basic Concept
• Acquisition amounts recorded in Step A
• As assets are sold or used, the recorded fair
value changes become realized
• As the fair value changes become realized, the
Step A amounts must be reduced, with the
changes taken into income
© 2008 Clarence Byrd Inc.
14
Step B(2) – Current Assets
On January 1, 2008, Par acquires 100 percent of the
voting shares of Sub. Sub has Inventories with a
carrying value of $550,000 and a fair value of $600,000.
During the year ending December 31, 2008, the
Inventories are sold, with Sub recording a Cost Of Goods
Sold of $550,000.
© 2008 Clarence Byrd Inc.
15
Step B(2) - Inventories

Required Adjustment 2008
Year Ending December 31, 2008
Cost Of Goods Sold
Inventories

$50,000
$50,000
Increases Cost Of Goods Sold and
reverses the Step A debit of $50,000
© 2008 Clarence Byrd Inc.
16
Step B(2) - Inventories

Required adjustment 2009
Year Ending December 31, 2009
Cost Of Goods Sold
Inventories

$50,000
$50,000
This entry will be required in every
subsequent year
© 2008 Clarence Byrd Inc.
17
Step B(2) - Depreciable Assets
On January 1, 2008, Par acquires 100 percent of the
voting shares of Sub. Sub has a factory building with a
carrying value of $810,000 and a fair value of $900,000.
The building will be used for 3 years and retired on
December 31, 2010 with no salvage value. It is subject
to straight line amortization at the rate of $270,000 per
year.
© 2008 Clarence Byrd Inc.
18
Step B(2) - Depreciable Assets

Required Adjustment 2008
Year Ending December 31, 2008
Amortization Expense ($90,000 ÷ 3)
Building (Net)

$30,000
$30,000
Increases Amortization Expense from $270,000
($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3).
Reduces the Step A allocation from $90,000 to
$60,000.
© 2008 Clarence Byrd Inc.
19
Step B(2) - Depreciable Assets

Required adjustment 2009
Year Ending December 31, 2009
Retained Earnings (Opening)
Amortization Expense
Building (Net)

$30,000
30,000
$60,000
Reduces the opening Retained Earnings to reflect
the 2008 amortization. Increases Amortization
Expense from $270,000 ($810,000 ÷ 3) to
$300,000 ($900,000 ÷ 3). Reduces the Step A
allocation from $90,000 to $30,000.
© 2008 Clarence Byrd Inc.
20
Step B(2) - Depreciable Assets

Required adjustment 2010
Year Ending December 31, 2010
Retained Earnings (Opening)
Amortization Expense
Building (Net)

$60,000
30,000
$90,000
Reduces the opening Retained Earnings to reflect
the 2008 and 2009 amortization. Increases
Amortization Expense from $270,000 ($810,000
÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the
Step A allocation from $90,000 to Nil.
© 2008 Clarence Byrd Inc.
21
Step B(2) Depreciable Assets

Required adjustment 2011
Year Ending December 31, 2011
Retained Earnings
Building (Net)

$90,000
$90,000
This entry will be required in every
subsequent year
© 2008 Clarence Byrd Inc.
22
Step B(2) - Land
On January 1, 2008, Par acquires 100 percent of the
voting shares of Sub. Sub has Land with a carrying
value of $450,000 and a fair value of $600,000.
Sub sells this parcel of Land on December 31, 2011 for
$700,000.
© 2008 Clarence Byrd Inc.
23
Step B(2) - Land
As Land does not depreciate, no entry is
required in 2008, 2009, or 2010.
© 2008 Clarence Byrd Inc.
24
Step B(3) - Land

Sub’s entry when Land is sold
Year Ending December 31, 2011
Cash
Gain On Sale Of Land
Land
© 2008 Clarence Byrd Inc.
$700,000
$250,000
450,000
25
Step B(3) - Land

Required Consolidation Adjustment
• Reduce gain to $100,000 ($700,000 - $600,000)
• Reverse the Step A allocation to Land
Year Ending December 31, 2011
Gain On Sale Of Land
Land
© 2008 Clarence Byrd Inc.
$150,000
$150,000
26
Step B(3) – Goodwill Impairment



Goodwill is no longer subject to
amortization
Must be tested annually for impairment
If impaired: The Step A allocation must
be adjusted and charged to income
© 2008 Clarence Byrd Inc.
27
Step B(4) – Intercompany
Expenses and Revenues


Must be eliminated for purposes
of consolidation
Unless an unrealized profit is
involved, the elimination does
not change consolidated Net
Income or the Non-Controlling
Interest in income
© 2008 Clarence Byrd Inc.
28
Step B(4) – Intercompany
Expenses and Revenues


During 2008, a subsidiary pays interest
of $50,000 to its parent
Required adjustment:
Year Ending December 31, 2008
Interest Revenue (Parent’s)
Interest Expense (Subsidiary’s)
© 2008 Clarence Byrd Inc.
$50,000
$50,000
29
Step B(5) – Intercompany
Dividends

Required Adjustments
• Eliminate the Dividend Revenue recorded by
the parent
• Eliminate 100 percent of the Dividends
Declared by the subsidiary


Statement Of Retained Earnings contains parent
company approach income (doesn’t include minority
share)
This means minority dividends cannot be shown in
the Statement of Retained Earnings
• Minority share of dividends debited to the
Non-Controlling Interest in the Balance Sheet
© 2008 Clarence Byrd Inc.
30
Step C – Concepts



Step A: Eliminate the noncontrolling share of Retained
Earnings At Acquisition
Step B: Make adjustments to
the balance since acquisition
Step C: Allocate the balance
since acquisition to NonControlling Interest and
consolidated Retained Earnings
© 2008 Clarence Byrd Inc.
31
Step C Schedule
Beginning Balance Of Retained Earnings
Step A Elimination
$1,200,000
(
Balance Since Acquisition
Step B Adjustments (Fair Value Changes
and Goodwill Impairment)
$ 400,000
(
Balance To Be Distributed
To Non-Controlling Interest (20%)
To Consolidated Retained Earnings
800,000)
$
(
120,000)
280,000
56,000)
$
224,000
*Numbers created for this example
© 2008 Clarence Byrd Inc.
32
Step C Schedule

This schedule will be modified in
Chapter 6 to deal with unrealized
intercompany profits
© 2008 Clarence Byrd Inc.
33
Preparing The Statements

General Approach
• Add parent and subsidiary figures
• Add or subtract the Step A and Step B
adjustments
© 2008 Clarence Byrd Inc.
34
Definitional Calculations


Useful for checking figures arrived at
through statements
In problems or exams, this may be
the only requirement
© 2008 Clarence Byrd Inc.
35
Consolidated Net Income –
Definitional Calculation
Parent Company Income
Less: Intercompany Dividends
$1,000,000
(
$
Parent’s Equity In Subsidiary Net Income
60,000)
940,000
220,000
$1,160,000
Fair Value And Goodwill Adjustments
For Current Year
Consolidated Net Income
(
105,000)
$1,055,000
*Numbers created for this example
© 2008 Clarence Byrd Inc.
36
Consolidated Retained Earnings –
Definitional Calculation
Parent Company Closing Retained Earnings
$3,500,000
Add: Parent’s Share Of Subsidiary
Retained Earnings Since Acquisition
800,000
$4,300,000
Fair Value And Goodwill Adjustments
(Cumulative Amounts)
Consolidated Retained Earnings
(
360,000)
$3,940,000
*Numbers created for this example
© 2008 Clarence Byrd Inc.
37
Non-Controlling Interest Calculation
- Balance Sheet

Using the procedures
•
•
•
•

Add: Step A Allocation
Subtract: non-controlling dividends
Add: Non-controlling interest in income
Add: Step C allocation
Direct Calculation Easier
• Multiply the non-controlling interest
percentage of ownership times the subsidiary’s
common Shareholders’ Equity
© 2008 Clarence Byrd Inc.
38
Subsidiary Preferred Shares


If held intercompany:
they will be
eliminated
If outstanding: They
are a component of
the Non-Controlling
Interest in the
Balance Sheet
© 2008 Clarence Byrd Inc.
39
Application of the Equity Method


Paragraph 3051.08 Investment income as
calculated by the equity method should be the
amount necessary to increase or decrease the
investor's income to that which would have been
recognized if the results of the investee's
operations had been consolidated with those of
the investor. (August, 1978)
“One Line Consolidation”:
• All consolidation adjustments are treated as adjustments
of investment income
• No elimination of intercompany assets, liabilities,
expenses, or revenues
© 2008 Clarence Byrd Inc.
40
Investment Income
Under The Equity Method
Reported Investment Income (All Sources)
Less: Intercompany Dividends
$200,000
(
80,000)
$120,000
Parent’s Equity In Subsidiary Net Income
150,000
$270,000
Fair Value And Goodwill Adjustments
For Current Year
Equity Method Investment Income
(
45,000)
$225,000
*Numbers created for this example
© 2008 Clarence Byrd Inc.
41
Investment Account Balance
Under The Equity Method
Investment Cost
$1,200,000
Investor’s Equity In Investee Retained
Earnings Since Acquisition
320,000
$1,520,000
Fair Value And Goodwill Adjustments
(Cumulative Since Acquisition)
Equity Method Investment Account Balance
(
145,000)
$1,375,000
*Numbers created for this example
© 2008 Clarence Byrd Inc.
42
Consolidated
Statement Of Cash Flows


In general, the
procedures are the
same for consolidated
Cash Flow Statements
as for single entity
Cash Flow Statements
Preparation requires a
consolidated Net
Income figure
© 2008 Clarence Byrd Inc.
43
Consolidated
Statement Of Cash Flows

Differences
• Non-Controlling Interest must
be added back to get cash
from operations
• The dividend figure in this
statement (all dividends of
parent and sub) will be
different than the dividend
figure in the Statement Of
Retained Earnings (excludes
dividends to non-controlling
interest)
© 2008 Clarence Byrd Inc.
44
Consolidated
Statement Of Cash Flows

Parent acquires additional
subsidiary shares
• For cash from sub: an intercompany
transaction that would be eliminated
• For cash from non-controlling
shareholders: an outflow of
consolidated cash

Similar analysis for sales of shares
© 2008 Clarence Byrd Inc.
45
Section 1540 on
Business Combinations

Paragraph 1540.42 The aggregate cash
flows arising from each of business
combinations accounted for using the
purchase method and disposals of
business units should be presented
separately and classified as cash flows
from investing activities. (August, 1998)
© 2008 Clarence Byrd Inc.
46
Section 1540 on
Business Combinations

Paragraph 1540.43 An enterprise should disclose, in
aggregate, in respect of both business combinations
accounted for using the purchase method and disposals of
business units during the period each of the following:

(a) the total purchase or disposal consideration;

(b) the portion of the purchase or disposal consideration
composed of cash and cash equivalents;

(c) the amount of cash and cash equivalents acquired or
disposed of; and

(d) the total assets, other than cash or cash equivalents,
and total liabilities acquired or disposed of. (August, 1998)
© 2008 Clarence Byrd Inc.
47
Step-By-Step Acquisitions

Paragraph 1600.13 Where an
investment in a subsidiary is acquired
through two or more purchases, the
parent company's interest in the
subsidiary's identifiable assets and
liabilities should be determined as
follows:
• (a) the assignable costs of the subsidiary's
identifiable assets and liabilities should be
determined as at each date on which an
investment was required;
• (b) the parent company's interest in the
subsidiary's identifiable assets and
liabilities acquired at each step in the
purchase should be based on the
assignable costs of all such assets and
liabilities at that date. (April, 1975)
© 2008 Clarence Byrd Inc.
48
Step-By-Step Acquisitions

Implementation Issues
• 1st purchases without significant
influence


No need to acquire fair value data
Use fair values at the time of the first
application of the equity method
• Numerous small purchases can be
accounted for as one step
© 2008 Clarence Byrd Inc.
49
Step-By-Step Acquisitions

Procedures
• Nothing really new –
multiple applications of the
same procedures
• Journal entries do not work
for this type of problem
• Rely on direct definitional
calculations
© 2008 Clarence Byrd Inc.
50
Step-By-Step Retained Earnings
Example
On January 1, 2008, Part acquires 20 percent of
the shares of Smart. At that time Smart has
Retained Earnings of $2,000,000.
On January 1, 2009, Part acquires an additional
40 percent of Smart. At that time Smart has
Retained Earnings of $2,400,000.
On December 31, 2009, Part has Retained
Earnings of $4,000,000 and Smart has Retained
Earnings of $2,600,000.
© 2008 Clarence Byrd Inc.
51
Step-By-Step Retained Earnings
Consolidated Retained Earnings – December 31, 2009
Part’s Balance
$4,000,000
Equity Pickups
1st Purchase [(20%)($2,600,000 –
$2,000,000)]
$120,000
2nd Purchase [(40%)($2,600,000 –
$2,400,000)]
80,000
Consolidated Retained Earnings
200,000
$4,200,000
*This solution ignores possible Step B Adjustments
© 2008 Clarence Byrd Inc.
52
Step-By-Step Retained Earnings
Alternative Calculation
Consolidated Retained Earnings – December 31, 2009
Part’s Balance
$4,000,000
Equity Pickups
1st Purchase [(20%)($2,400,000 –
$2,000,000)]
$ 80,000
2nd Purchase [(60%)($2,600,000 –
$2,400,000)]
120,000
Consolidated Retained Earnings
200,000
$4,200,000
*This solution ignores possible Step B Adjustments
© 2008 Clarence Byrd Inc.
53
Summary Of
Consolidation Procedures




Step A-1 Procedure Eliminate 100 percent of the Investment In
Subsidiary account.
Step A-2 Procedure Eliminate 100 percent of all the acquisition
date balances in the subsidiary’s shareholders’ equity (includes
both contributed capital and retained earnings).
Step A-3 Procedure Allocate any debit or credit Differential that
is present at acquisition to the investor’s share of fair value
changes on identifiable assets, fair value changes on identifiable
liabilities, and positive or negative goodwill.
Step A-4 Procedure Allocate to a Non-Controlling Interest
account in the consolidated Balance Sheet, the non-controlling
interest’s share of the at acquisition book value of the common
shareholders’ equity of the subsidiary (includes both contributed
capital and retained earnings).
© 2008 Clarence Byrd Inc.
54
Summary Of
Consolidation Procedures



Step B-1 Procedure Eliminate 100 percent of all intercompany
assets and liabilities.
Step B-2 Procedure Give recognition to the post-acquisition
realization of acquisition date fair value changes on assets and
liabilities that have been used up or sold during the post-acquisition
period. To the extent that this realization occurred in prior periods,
recognition will require an adjustment of the opening retained
earnings of the subsidiary. Alternatively, if the realization occurred
in the current period, the adjustment will be to the subsidiary’s
current period expenses, revenues, gains, or losses.
Step B-3 Procedure Recognize current and cumulative goodwill
impairment losses that have been measured since the acquisition of
the subsidiary and the initial recognition of the goodwill balance. To
the extent that the impairment took place during the current period,
the measured amount will be charged to Goodwill Impairment Loss.
To the extent that it occurred in prior periods, it will be charged to
retained earnings.
© 2008 Clarence Byrd Inc.
55
Summary Of
Consolidation Procedures


Step B-4 Procedure Eliminate 100 percent of all
intercompany expenses and revenues.
Step B-5 Procedure Eliminate 100 percent of
subsidiary dividends declared. The parent’s share of
this amount will be deducted from the revenues of
the parent company and the non-controlling
interest’s share of this amount will be deducted from
the Non-Controlling Interest in the Balance Sheet.
© 2008 Clarence Byrd Inc.
56
Summary Of
Consolidation Procedures


Step C-1 Procedure Determine the appropriate
allocation of the subsidiary’s adjusted retained earnings
since acquisition. The Non-Controlling Interest’s share
will be based on book value. After the Non-Controlling
Interest’s share is subtracted, the resulting balance will
be adjusted for the fair value write-offs called for in Step
B(2), as well as any goodwill impairment as described in
Step B(3). The balance remaining after these
adjustments will be allocated to consolidated Retained
Earnings.
Step C-2 Procedure Eliminate the subsidiary’s
adjusted Retained Earnings since acquisition. This
amount will be allocated to the Non-Controlling Interest
in the consolidated Balance Sheet and to consolidated
Retained Earnings as determined in Step C-1.
© 2008 Clarence Byrd Inc.
57
Summary Of
Definitional Calculations

Identifiable Assets And Liabilities The amount to be included
in the consolidated Balance Sheet for any identifiable asset or
liability is calculated as follows:
• 100 percent of the carrying value of the identifiable asset (liability) on
the books of the parent company at the Balance Sheet date; plus
• 100 percent of the carrying value of the identifiable asset (liability) on
the books of the subsidiary company at the Balance Sheet date; plus
(minus)
• the parent company’s share of the fair value increase (decrease) on
the asset (liability) (i.e., the parent company’s share of the difference
between the fair value of the subsidiary’s asset or liability at time of
acquisition and the carrying value of that asset or liability at the time
of acquisition); minus (plus)
• amortization of the parent company’s share of the fair value increase
(decrease) on the asset (liability) for the period since acquisition to the
current Balance Sheet date.
© 2008 Clarence Byrd Inc.
58
Summary Of
Definitional Calculations

Goodwill The Goodwill to be
recorded in the consolidated
Balance Sheet is equal to:
• the excess of the cost of the
investment over the parent company’s
share of the fair values of the
subsidiary’s net assets at the time of
acquisition; minus
• the amount of any goodwill
impairment that has been recognized
in the period since the acquisition to
the current Balance Sheet date.
© 2008 Clarence Byrd Inc.
59
Summary Of
Definitional Calculations

Non-Controlling Interest - Balance Sheet The NonControlling Interest to be recorded in the consolidated
Balance Sheet is an amount equal to the non-controlling
interest’s ownership percentage of the book value of the
subsidiary’s common stock equity at the Balance Sheet
date.
© 2008 Clarence Byrd Inc.
60
Summary Of
Definitional Calculations

Contributed Capital The
Contributed Capital to be
recorded in the consolidated
Balance Sheet is equal to
the contributed capital from
the single entity Balance
Sheet of the parent
company.
© 2008 Clarence Byrd Inc.
61
Summary Of
Definitional Calculations

Retained Earnings The Retained Earnings
amount to be included in the consolidated
Balance Sheet is calculated as follows:
• 100 percent of the Retained Earnings of the parent
company; plus (minus)
• the parent company’s share of the subsidiary’s Retained
Earnings (Deficit) since acquisition; plus (minus)
• 100 percent of the adjustments to consolidated
expenses, revenues, gains, and losses for realized fair
value changes during the period since acquisition to the
current Balance Sheet date; minus
• 100 percent of any goodwill impairment that has been
recognized since the acquisition to the current Balance
Sheet date.
© 2008 Clarence Byrd Inc.
62
Summary Of
Definitional Calculations

Revenue The amount of any revenue to be included in the
consolidated Income Statement is calculated as follows:
• 100 percent of the amount reported in the parent company’s financial
statements; plus
• 100 percent of the amount reported in the subsidiary’s financial
statements; minus
• 100 percent of any intercompany amounts included in the parent or
subsidiary figures; plus (minus)
• the parent’s share of any fair value changes realized during the period
through usage or sale of subsidiary assets (fair value amortization and
amounts realized through the sale of subsidiary assets prior to the end
of their economic life). It would be unusual for fair value realizations
to be related to revenues. However, it could happen. For example,
amortization of a fair value change on a long-term receivable would be
treated as an adjustment of interest revenue.
© 2008 Clarence Byrd Inc.
63
Summary Of
Definitional Calculations

Expense The amount of any expense to be included in the
consolidated Income Statement is calculated as follows:
• 100 percent of the amount reported in the parent company’s
financial statements; plus
• 100 percent of the amount reported in the subsidiary’s
financial statements; minus
• 100 percent of any intercompany amounts included in the
parent or subsidiary figures; plus (minus)
• the parent’s share of any fair value changes realized during
the period through usage or sale of subsidiary assets (fair
value amortization and amounts realized through the sale of
subsidiary assets prior to the end of their economic life).
© 2008 Clarence Byrd Inc.
64
Summary Of
Definitional Calculations

Goodwill Impairment Loss
If the required annual test of
goodwill for impairment
determines that any
impairment has occurred during
the current period, this amount
will be recorded as a Goodwill
Impairment Loss.
© 2008 Clarence Byrd Inc.
65
Summary Of
Definitional Calculations



Non-Controlling Interest - Income Statement
The non-controlling interest in the consolidated Income
Statement is an amount equal to the non-controlling
interest’s ownership percentage of the reported Net
Income.
Note that, if the subsidiary has extraordinary items or
results from discontinued operations, this Non-Controlling
Interest will be based on the subsidiary’s Income Before
Extraordinary Items And Discontinued Operations.
Also note that, in situations where there are preferred
shares with a prior claim on the income of the subsidiary,
the Non-Controlling Interest to be disclosed in the
consolidated Income Statement will include such claims.
© 2008 Clarence Byrd Inc.
66
Summary Of
Definitional Calculations

Consolidated Net Income Consolidated Net Income can
be calculated as follows:
• 100 percent of the parent company’s Net Income, excluding
dividends received from the subsidiary; plus (minus)
• the parent’s share of the subsidiary’s reported Net Income
(Net Loss); plus (minus)
• the parent’s share of any fair value changes realized during
the period through usage or sale of subsidiary assets (fair
value amortization and amounts realized through the sale of
subsidiary assets prior to the end of their economic life);
minus
• any Goodwill Impairment Loss that is recognized during the
period.
© 2008 Clarence Byrd Inc.
67
International Convergence

Standards
• IFRS No. 3, Business
Combinations
• IAS No. 27, Consolidated
And Separate Financial
Statements
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International Convergence
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Differences (Current Standards)
• Asset Valuation IFRS No. 3 requires that 100 percent of fair
value changes on identifiable assets be recognized at the time of
acquisition. Section 1581 only allows the acquirer’s share to be
recognized. Note, however, IFRS No. 3 does not allow the
recognition of 100 percent of goodwill. Only the acquirer’s share
of this asset can be recognized.
• Non-Controlling Interest Consistent with the entity
approach, IAS No. 27 requires the non-controlling interest to be
presented as a component of consolidated Shareholders’ Equity.
The value to be recognized will include the non-controlling
interest’s share of fair value changes on identifiable assets.
• Terminology IAS No. 27 continues to use the term Minority
Interest, rather than the more accurate Non-Controlling Interest.
However, this is certain to be changed by the amendments
resulting from the FASB/IASB project. Given this, we will ignore
this difference in presenting examples based on current IFRSs.
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International Convergence
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Proposals
• At this time (December,
2007), it appears that the
IASB will require the
recognition of 100 percent
of goodwill
• There may also be a
different approach to its
measurement
© 2008 Clarence Byrd Inc.
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© 2008 Clarence Byrd Inc.
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