Chapter 4
Consolidated Balance Sheet
At Acquisition
The Objective Of Consolidation
Sub A
Parent
Sub B
Parent And Subs As If One Entity Therefore One Set
Of Financial Statements
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User Needs

Creditors


Consolidated Entity ≠ Legal Entity
Creditors must look to single entity parent or
subsidiary
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User Needs

Taxation Authorities


U.S. has consolidated tax return
In Canada – the single legal entities must file
therefore the consolidated statement is
essentially ignored
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User Needs

Non-Controlling
Shareholders

Must look to single entity
statements to evaluate their
investment
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User Needs

Majority Shareholders

The major users of
consolidated financial
statements
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Consolidation Policy
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Terminology

The “correct” term is “Non-Controlling Interest”



Control may not required holding a majority share of
voting shares.
Consolidation is still required
“Minority Interest” is still widely used


In most cases, control requires a majority of the
voting shares
In these situations, Minority Interest is an appropriate
description of the Non-Controlling Interest
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Conceptual Alternatives
In Consolidation
Controlling Interest
Non-Controlling
Interest
What Is The Nature
Of This Interest?
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Conceptual Alternatives
In Consolidation

Entity Approach


The Non-Controlling Interest
is an equity interest in the
consolidated entity. Differs
from controlling only in
terms of size.
Section 1582: Entity is one
of the acceptable choices)
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Entity Approach Procedures


Assets: Includes 100 percent of subsidiary fair
values (Identifiable assets and goodwill)
Non-controlling interest



In assets: With shareholders’ equity
In income: Shown as distribution of income (like
preferred dividends) on the Statement of Retained
Earnings
Unrealized Profits: Eliminate 100 percent
(upstream and downstream)
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Conceptual Alternatives
In Consolidation

Proprietary Approach


The Non-Controlling
Interest is not part of
the consolidated entity
Like proportionate
consolidation
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Proprietary Approach Procedures


Assets: Only the parent’s share of
identifiable assets and goodwill
Non-controlling interest



In assets: None disclosed
In income: None disclosed
Unrealized Profits:
Eliminate parent’s share
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Conceptual Alternatives
In Consolidation

Parent Company
Approach


The Non-Controlling
Interest is a debt-like
interest in the consolidated
entity
The old CICA approach.
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Parent Company Approach
Procedures


Assets:
Includes 100% of subsidiary carrying values,
plus the parent’s share of fair value changes
Non-controlling interest



In assets: With the long-term liabilities
In income: Deducted in the determination of income
(like interest)
Unrealized Profits:
Eliminate parent’s share
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Conceptual Alternatives
In Consolidation
Why Study?



Aids in understanding the current rules and their
inconsistencies
Will assist with the changeover to IFRSs (will use
two different approaches)
For Students: It can be examinable – Sections
1582, 1601 and 1602 will be the focus of the
text
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Conceptual Alternatives Under
Section 1582 (And IFRS 3)

Provides For Alternative Measures
Alternative 1
NCI =
Proportionate
share of the fair
value of the
Identifiable Net
Assets of
Subsidiary
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This approach
recognizes 100
percent of the fair
values of identifiable
assets, but only the
parent’s share of
goodwill (not a
consistent appraoch)
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Conceptual Alternatives Under
Section 1582 (And IFRS 3)

Provides For Alternative Measures
Alternative 2
NCI based on its
fair value
measured directly
or based on
investment cost
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This approach
recognizes 100
percent of the fair
values of identifiable
assets and 100
percent of goodwill
(Entity Approach)
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Procedural Approaches



Every text has a different
approach
Everyone who has ever
taught the subject believes
that they have a better
way
Difficult to move between
alternatives
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Procedural Approaches

Work Sheets



A mechanistic approach that is
easy to use, provided a proper
format is provided
Provides no understanding of
the underlying concepts
In our view:
Consolidations for “Dummies”
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Procedural Alternatives

Direct Calculations Of Required Balances



The most efficient approach
Requires complete understanding of
concepts
Consolidations for the “gifted”
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Procedural Alternatives

Journal Entries into direct calculations




Stresses an understanding of concepts
Provides for movement towards direct
calculations of required balances
Is not dependent on the format of the
problem
Supported by a large quantity of problem
material in this text
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General Approach



Eliminate the investment account against the subsidiary
Shareholders’ Equity at time of acquisition
Allocate the excess of the investment cost over the carrying
values of the subsidiary assets to fair value changes and
goodwill
Establish the Non-Controlling Interest At Acquisition
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General Approach

Various adjustments and eliminations


Only intercompany asset eliminations in
this chapter
Others in chapters 5 and 6
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General Approach

Allocate the subsidiary’s Retained
Earnings since acquisition

To Controlling Interest

To Non-Controlling Interest
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Investment Analysis Schedule
Example
Investment Cost
Add: Non-controlling interest
(Two Alternative Approaches))
Subtotal
Less: Fair Value of Subsidiary Net Identifiable Assets
Goodwill
$1,000,000
200,000
$1,200,000
1,000,000
$ 200,000
This type of analysis is required in almost every consolidation
problem. The basic rules are as shown in this example. The numbers
were created for this example.
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Example –
Consolidation At Acquisition
Parco purchases 80 percent of the outstanding voting shares of Subco
for cash of $2,000,000. Subco’s identifiable assets have a fair value of
$1,800,000 (net fair value equals $1,000,000).
Parco
Subco
Assets
$3,500,000
$2,000,000
Liabilities
$1,300,000
$ 800,000
900,000
200,000
1,300,000
1,000,000
$3,500,000
$2,000,000
Shareholders’ Equity
Common Stock
Retained Earnings
Total Equities
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Example –
Investment Analysis Schedule –
based on identifiable net assets
Investment Cost (Consideration transferred)
Non-Controlling interest (20% of $1,000,000)
Subtotal
Less: Fair Value of Subco’s Identifiable net assets
Goodwill
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$2,000,000
200,000
$2,200,000
1,000,000
$1,200,000
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Example –
Investment Analysis Schedule –
based on fair value
Investment Cost (Consideration transferred)
Non-Controlling interest
(20%)($2,000,000/80%)
Subtotal
Less: Fair Value of Subco’s Identifiable assets
Goodwill
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$2,000,000
500,000
$2,500,000
1,000,000
$1,500,000
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Consolidated Balance Sheet
NCI On Identifiable Assets
Assets ($3,500,000 - $2,000,000 + $1,800,000)
Goodwill
$3,300,000
1,200,000
Total Assets
$4,500,000
Liabilities
Regular ($1,300,000 + $800,000)
$2,100,000
Non-Controlling Interest [(20%)($1,000,000)]
Total Liabilities
200,000
$2,300,000
Shareholders’ Equity
Common Stock (Parco’s)
Retained Earnings (Parco’s)
Total Equities
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900,000
1,300,000
$4,500,000
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Consolidated Balance Sheet
NCI On Fair Value
Assets ($3,500,000 - $2,000,000 + $1,800,000)
Goodwill
$3,300,000
1,500,000
Total Assets
$4,800,000
Liabilities ($1,300,000 + $800,000)
$2,100,000
Shareholders’ Equity
Non-Controlling Interest [(20%)($2,000,000/80%)]
500,000
Common Stock (Parco’s)
900,000
Retained Earnings (Parco’s)
Total Equities
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1,300,000
$4,800,000
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International Convergence


Chapter 4 based on
Section 1582, 1601, 1602
These sections are
consistent with IFRS No. 3
and IAS No. 27
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Summary Of Chapter 4 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 common shareholders’ equity (includes both
contributed capital and retained earnings).
Step A-3 Procedure Allocate any debit or credit Differential to 100 percent
of the fair value changes on identifiable assets, 100 percent of the fair
value changes on identifiable liabilities, and Goodwill (or a Bargain Purchase
Gain). The amount allocated to Goodwill is dependent on the measurement
used for non-controlling interest.
Step A-4 Procedure Record Non-Controlling interest at the time of
acquisition. Depending on management’s choice, the amount to be
recorded will be either the non-controlling interest’s share of the fair value
of the subsidiary’s net identifiable assets or, alternatively, the fair value of
the non-controlling interest.
Step B-1 Procedure Eliminate 100 percent of all intercompany assets and
liabilities.
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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)
100 percent of the fair value increases (decreases) on
the identifiable assets (liabilities) of the subsidiary
company at the Balance Sheet date.
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Definitional Calculations

Goodwill (Bargain Purchase Gain) The Goodwill to be
recorded in the consolidated balance sheet is equal to:



The sum of the consideration transferred (investment cost) plus
the measured value of Non-Controlling Interest; less
The fair value of the identifiable net assets of the subsidiary
Non-Controlling Interest - Balance Sheet – there are 2
alternatives:


The Non-Controlling Interest can be based on the noncontrolling shareholders’ percentage interest in the fair value of
the identifiable net assets in the subsidiary
The Non-Controlling Interest can be based on the fair value of
the non-controlling shareholders’ interest in the enterprise. The
estimate of this value can be based on the fair value of the
controlling interest as measured by the investment cost or,
alternatively, through some form of separate measurement
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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.
Retained Earnings Consolidated Retained
Earnings will be equal to the Retained Earnings
balance that is included in the Balance Sheet of
the parent company.
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