Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Consolidation Theories, Push Down
Accounting, and Corporate Joint Ventures
Pertemuan 21-22
Consolidation Theories, Push-Down Accounting and
Corporate Joint Ventures
1: Consolidation Theories
Parent Company Theory
Consolidated financial statements are
• Extension of parent company statement
• Viewpoint of parent company shareholders
Prepare consolidated statements
• To benefit parent company shareholders
Noncontrolling interests
• Have the separate (subsidiary) statements
Entity Theory
Consolidated financial statements
• Viewpoint of the total business entity
• All resources of the entity are valued consistently
– Impute the value of the firm from the acquisition price
• Income of noncontrolling interests is a distribution of the
total business income
Income Reporting
• Parent company theory and traditional theory
– Consolidated net income is income to the parent company
shareholders
• Entity theory
– Total consolidated income is to be shared between the
controlling and noncontrolling interests
Asset Valuation
• Parent company theory and traditional theory
– Assets and liabilities are adjusted to market value at acquisition,
but only to the extent of the parent's ownership share.
• Land with a book value of $50 and fair value of $80 would be consolidated at
$80 if the parent owned 100%, but at $71 (including only 70% of the $30
appreciation in value) if the parent owned 70%
• Entity theory
– Assets and liabilities are consolidated at fair value
• Land would be consolidated at $80 regardless of ownership percentage.
Unrealized Gains and Losses
• Parent company theory
– Unrealized gains and losses attributable to the subsidiary are
only eliminated to the extent of the parent's ownership
• 80% of the $10 unrealized profits on upstream sales would be
eliminated if the parent owned 80% of the subsidiary
• Entity theory and traditional theory
– Unrealized gains and losses are eliminated
• All theories treat downstream gains and losses the
same
Consolidated Stockholders' Equity
• Contemporary theory
– Noncontrolling interest is a single amount and a part of
stockholders' equity
• Entity theory
– Noncontrolling interest is also part of stockholders' equity
– It would be decomposed into paid in capital, retained
earnings, etc.
• Other ideas being promoted
– Use footnote disclosure for CI and NCI shares of
consolidated income
– Use proportional consolidation, excluding NCI from the
statements
Consolidation Theories, Push-Down Accounting and
Corporate Joint Ventures
2: Push-Down Accounting
SEC Requires Push-Down
• SEC requires push-down accounting for SEC filings
when the subsidiary
– Is substantially fully owned (97%), and
– Has substantially no public debt or preferred stock
• Establishes a new basis for the assets and liabilities
– Based on acquisition price
• Arguments against
– Subsidiary is not party to the acquisition
– Subsidiary receives no new funds, sells no assets
Push-Down Procedure
•
•
•
•
Assets and liabilities are revalued
Goodwill, if any, is recorded
Retained earnings (prior to acquisition) are eliminated
Push-down capital replaces retained earnings
– Includes old retained earnings
– Any adjustments to assets and liabilities, including goodwill
Push-Down Example
• Paly buys 90% of Sim. Sim's book and fair values are:
Cash
Inventory
Plant
Goodwill
Total
BV
FV
5
10
20
0
21
5
15
30
50
37
Liabilities
Capital stock
Retained
Total
BV
FV
25
10
90
21
30
• If Sim applies push-down accounting, it would revalue its
inventories, fixed assets, liabilities, and record goodwill.
Sim Uses Parent Company Theory
• Sim revalues assets and liabilities only to the extent of
Paly's ownership. Only 90% of the increases/decreases
are recorded.
Inventory
4.5
Plant assets
90.0
Goodwill
45.0
Retained earnings
90.0
Liabilities
Push-down capital
4.5
225.0
Sim Uses Entity Theory
• Sim fully revalues assets and liabilities. 100% of the
increases/decreases are recorded.
Inventory
Plant assets
5
100
Goodwill
50
Retained earnings
90
Liabilities
Push-down capital
5
240
Push-Down Differences
• The example used 90% ownership by the parent.
• SEC requires push-down accounting when the firm is
substantially owned… 97%
– Differences between the methods of application will be
considerably less
• Leveraged Buyouts with a change in controlling interest
– Changing accounting basis may be appropriate
Consolidation Theories, Push-Down Accounting and
Corporate Joint Ventures
3: Joint Ventures
Joint Ventures (def.)
• Form
– Partnership or corporate
– Domestic or foreign
– Temporary or relatively permanent
• It is a business entity that is owned, operated and
jointly controlled by a small group of investors for the
conduct of a specific business undertaking that
provides mutual benefit for each of the venturers.
Corporate Joint Ventures
• Investors who participate in the overall management of
the joint venture (APB Opinion No. 18)
– Use equity method for the joint venture
– If significant influence is not present, use the cost method
• Investors with more than 50% of the voting stock have a
subsidiary, not a joint venture
– Consolidate the subsidiary
Unincorporated Joint Ventures
• Although not specifically addressed by APB Opinion No.
18, application of the equity method to unincorporated
joint ventures is appropriate
• Industry specific practice
– Proportional consolidation in oil & gas and undivided interests in
real estate ventures
Consolidation Theories, Push-Down Accounting and
Corporate Joint Ventures
4: Identify Variable Interest Entities
Variable Interest (def.)
"Variable interests in a variable interest entity are
contractual, ownership, or other pecuniary interests
in an entity that change with changes in the fair
value of the entity's net assets exclusive of variable
interests." (FIN 46(R), para.2c)
The primary beneficiary of the variable interest entity
(VIE) must consolidate the VIE.
Primary Beneficiary
• The entity that will
– Absorb the majority of the expected losses, receive a majority of
the expected gains or both
– If separate entities are expected to absorb the profits and losses,
the entity expected to absorb the losses is the primary
beneficiary
• The primary beneficiary may be an equity holder and/or
creditor of the VIE
VIE Example
• Get Rich Quick is a VIE with equity contributed equally by 10
parties, including Corrine.
• The VIE will borrow additional amounts equal to twice the equity.
The bank is the major creditor/investor!
• Corrine agrees to absorb 75% of the losses and will take 28% of
the profits. The other nine investors will share equally.
– Corrine is the primary beneficiary and consolidates the VIE.
– All 10 equity investors will have to make detailed disclosures
about their interests in this VIE.
Consolidation Theories, Push-Down Accounting and
Corporate Joint Ventures
5: Consolidate Variable Interest Entities
Special Consolidation Considerations
• VIEs are consolidated like other subsidiaries
–
FASB Statement No. 141
• Exception
–
–
Goodwill can only be recorded if the VIE is a "business"
FIN 46(R)
If the VIE is not a "business," the excess paid is an
extraordinary loss
• "business"
"Self-sustaining, integrated set of activities and assets
conducted and managed for providing a return to
investors."