1. Beams, Advanced Accounting 10e, Ch. 11
11/6/2018
Chapter 11: Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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2. Theories, Push-Down Accounting, and Joint Ventures: Objectives
Compare and contrast the elements of consolidation approaches under traditional theory, parent-company theory, and contemporary entity theory.
Adjust subsidiary assets and liabilities to fair values using push-down accounting.
Account for corporate and unincorporated joint ventures.
Identify variable interest entities.
Consolidate a variable interest entity.
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3. 1: Consolidation Theories
Consolidation Theories, Push-Down Accounting and Corporate Joint Ventures
1: Consolidation Theories
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4. 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
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5. 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
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6. 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
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7. 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.
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8. 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
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9. 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
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10. 2: Push-Down Accounting
Consolidation Theories, Push-Down Accounting and Corporate Joint Ventures
2: Push-Down Accounting
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11. 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
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12. 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
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13. Push-Down Example
Paly buys 90% of Sim. Sim's book and fair values are:
If Sim applies push-down accounting, it would revalue its inventories, fixed assets, liabilities, and record goodwill. BV FV
Cash 5
Liabilities 25 30
Inventory 10 15
Capital stock
100
Plant assets
200
300
Retained earnings 90
Goodwill 50
Total
215
370
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14. 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
Liabilities
Push-down capital
225.0
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15. Sim Uses Entity Theory
Sim fully revalues assets and liabilities. 100% of the increases/decreases are recorded.
Inventory 5
Plant assets
100
Goodwill 50
Retained earnings 90
Liabilities
Push-down capital
240
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16. 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
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17. Consolidation Theories, Push-Down Accounting and Corporate Joint Ventures
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18. 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.
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19. 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
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20. 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
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21. 4: Identify Variable Interest Entities
Consolidation Theories, Push-Down Accounting and Corporate Joint Ventures
4: Identify Variable Interest Entities
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22. 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.
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23. 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
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24. 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.
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25. 5: Consolidate Variable Interest Entities
Consolidation Theories, Push-Down Accounting and Corporate Joint Ventures
5: Consolidate Variable Interest Entities
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26. 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."
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Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall
© Pearson Education, Inc. publishing as Prentice Hall
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