1. Stock Ownership Less Than 100%
Ownership of more than 50% of voting stock requires consolidation of 100% of subsidiary with a parent’s own accounts
Noncontrolling interest
Portion of the subsidiary’s stock held by other investors
Noncontrolling interest appears as a separate line in the equity section of the balance sheet, and
Noncontrolling interest’s share of subsidiary’s income appears as a separate line on the income statement

2. Reasons for Less-Than-100% Acquisitions
Subsidiary’s previous owners wanted to retain an interest in the company
Acquirer does not want to invest the resources necessary to buy all of the acquiree’s stock
Acquirer cannot convince all the stockholders to sell
A smaller investment suffices to achieve the acquirer’s goals

3. Parent’s Acquisition Cost
Acquisition cost includes
Fair value of shares and debt issued
Net of registration and issue costs
Cash paid directly to the former shareholders of the acquired subsidiary
Any expected conditional payments

4. Valuation of Noncontrolling Interests and Goodwill at Acquisition
Current GAAP
Noncontrolling interests reported at fair value
Revaluations of acquired identifiable net assets and goodwill are attributed to both the controlling and noncontrolling interests
In proportion to ownership interests
Goodwill is separately attributable to each interest
Often in different proportions

5. Noncontrolling Interests and Goodwill at Acquisition Example
Admiral Casino pays $42,600,000 cash for 80% of the stock of Gold Road Motor Inn, Inc. on January 1, Gold Road’s book value equals $10 million, consisting of $2.5 million of stock and $7.5 million of retained earnings. The book values of net assets equal fair value except for previously unrecorded customer lists valued at $5 million with a 4-year life. The estimate of the fair value of the 20% noncontrolling interest is $8,400,000.
Total Goodwill calculation:
Acquisition cost
$ 42,600,000
Fair value of noncontrolling interest
8,400,000
Total fair value
51,000,000
Book value of Gold Road
(10,000,000)
Fair value in excess of Gold Road's book value
41,000,000
Difference between fair value and book value:
Customer lists
(5,000,000)
Goodwill
$ 36,000,000

6. Noncontrolling Interests and Goodwill at Acquisition Example
To allocate goodwill between controlling and noncontrolling interests:
Step 1 – Allocate goodwill to controlling interest:
Acquisition cost
$ 42,600,000
Less controlling interest in the fair value of Gold
Road's identifiable net assets:
80% × ($10,000,000 + $5,000,000)
(12,000,000)
Controlling interest’s share
$ 30,600,000
Step 2 – Allocate balance of goodwill to non-controlling interest:
Total goodwill
$ 36,000,000
Less goodwill to controlling interest
(30,600,000)
Noncontrolling interest's share
$ 5,400,000
Ownership interests do not govern goodwill allocation.

7. Measuring Fair Value of Noncontrolling Interests
Based on current market prices of a publicly-traded company for shares not held by the acquirer, if available
Reflects transactions among noncontrolling shareholders
Business valuation methods less a discount for lack of control

8. Noncontrolling Interests – Premium and Discounts
An acquiree’s current market price is $30 per share. The acquirer is willing to pay a 6.67% control premium.
Premium = 6.67% × $30 = $2
Cost to acquire per share = $30 + $2 = $32
Using a business valuation at $32 per share, a discount is applied to determine noncontrolling value:
Discount = 1 – (1 ÷ ( )) = 6.25%
Value per share = $32 × (1 – ) = $30

9. Measuring Without an Active Market Price
Use business valuation methods, such as
Capitalization of expected future earnings or cash flows
Estimated future returns are discounted using an appropriate discount rate
Capitalization of excess earnings
Firm value is estimated as the fair value of tangible net assets plus capitalized earnings in excess of earnings attributable to the tangible assets
Direct comparison approach
Using the terms of a similar acquisition
Such as a multiple of book value or billings

10. Disclosure of Initial Valuation of Noncontrolling Interest
Must disclose in year of acquisition per SFAS 141(R)
Information to disclose
Fair value of the noncontrolling interest in the acquiree at acquisition date
Valuation technique(s) and significant inputs used to measure the fair value of the noncontrolling interest

11. Consolidation Eliminating Entries at Acquisition Date
Goals of eliminating entries
Eliminate the investment account
Eliminate the subsidiary’s equity accounts
Revalue the subsidiary’s assets and liabilities to fair value at acquisition date
Create the noncontrolling interest in equity to be reported on the consolidated balance sheet

12. Eliminating Entries Entry E
Allocates subsidiary’s book value (equity) between the controlling interest (investment account) and the noncontrolling interest in proportion to ownership interests
Entry R
Revalues subsidiary’s identifiable net assets and allocates between controlling interest (investment) and noncontrolling interest in proportion to ownership interests
Goodwill allocated based on each interest’s share in the goodwill
If noncontrolling interest valuation discount exists
Goodwill allocation to noncontrolling interest equals a percentage basis less than the ownership interest

13. Acquisition Date Elimination Entries Example
Admiral Casino pays $42,600,000 cash for 80% of the stock of Gold Road on January 1, Gold Road’s book value is $10 million, consisting of $2.5 million of stock and $7.5 million of retained earnings. Previously unrecorded customer lists are valued at $5 million. Goodwill is $36 million, allocated $30.6 million to controlling interest and $5.4 million to noncontrolling interest.
To eliminate Gold Road's equity accounts and recognize the book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings
7,500,000
Investment in Gold Road (80%)
8,000,000
Noncontrolling interest in Gold Road (20%)
2,000,000
80% × $10 million
20% × $10 million

14. Acquisition Date Elimination Entries Example
Admiral Casino pays $42,600,000 cash for 80% of the stock of Gold Road on January 1, Gold Road’s book value of its net assets is $10 million with $2.5 million of stock and $7.5 million of retained earnings. Previously unrecorded customer lists are valued at $5 million. Goodwill is $36 million, allocated $30.6 million to controlling interest and $5.4 million to noncontrolling interest.
To revalue Gold Road's net assets to fair value and allocate the revaluations to the controlling and noncontrolling interest:
(80% × $5,000,000) + $30,600,000 = $34,600,000 (20% × $5,000,000) + $5,400,000 = $6,400,000
(R) Customer lists
5,000,000
Goodwill
36,000,000
Investment in Gold Road
34,600,000
Noncontrolling interest in Gold Road
6,400,000

15. Consolidation Working Paper for Admiral and Gold Road – January 1, 2010
Exhibit 5.1

16. Reporting Noncontrolling Interests
Reported on the consolidated balance sheet
Appears as a separate component of consolidated equity
Stockholders' equity
Capital stock
$ 5,000,000
Retained earnings
20,000,000
Total Admiral stockholders’ equity
25,000,000
Noncontrolling interest
5,200,000
Controlling Interest
Noncontrolling Interest is reported as a separate component of consolidated equity

17. Noncontrolling Interests on the Balance Sheet – January 1, 2010

18. Consolidating Variable Interest Entities
Primary beneficiaries (PB) of VIEs fall under consolidation procedures in FIN46(R)
Similar to SFAS 141(R) but feature two valuation alternatives
If PB and VIE are under common control, assets and liabilities of the VIE are included on consolidated balance sheet at book value
Not considered acquired since already part of the corporate family

19. Consolidating Variable Interest Entities
If PB and VIE are not under common control, assets and liabilities of the VIE and noncontrolling interest consolidated at fair value
Goodwill valuation follows SFAS 141(R)
Excess of acquisition cost and the fair value on noncontrolling interests over the fair value of identifiable net assets of the VIE

20. Noncontrolling Interests in Subsequent Years
Two additional considerations
The noncontrolling interest in consolidated income
Share of subsidiary’s reported net income adjusted for the noncontrolling interest’s share of revaluation write-offs
Changes in equity value of the noncontrolling interest over time
Initial fair value adjusted for the noncontrolling interest’s share of accumulated income and dividends after acquisition

21. Consolidation at End of First Year
Assume Gold Road reports net income of $5 million and pays cash dividends of $600,000 in Impairment testing reveals that goodwill is impaired by $500,000 during Admiral uses the complete equity method to report its share of Gold Road’s net income.
Calculation of equity in net income and noncontrolling interest in net income:
Total
Equity in Net Income
Noncontrolling Interest in
Net Income
Gold Road's reported income
$ 5,000,000
$ 4,000,000
$ 1,000,000
Adjustment for revaluation write-offs:
Customer lists ($5,000,000 ÷ 4)
(1,250,000)
(1,000,000)
(250,000)
Goodwill (85:15 ratio)
(500,000)
(425,000)
(75,000)
Totals
$ 3,250,000
$ 2,575,000
$ ,000
Write-offs of revaluations of identifiable net assets attributed to ownership interests, in this case, 80:20.
Goodwill controlling interest = $30.6 million
Goodwill noncontrolling interests = $5.4 million
$30.6 ÷ $36 = 85%
$5.4 ÷ $36 = 15%

22. Write-Offs of Subsidiary’s Asset and Liability Revaluations
No specific authoritative guidance on how to attribute write-offs
Text assumes revaluation write-offs shared in same proportions used to attribute the original revaluations

23. Write-Offs of Revaluations Example
Assume Gold Road reports net income of $5 million and pays cash dividends of $600,000 in Impairment testing reveals that goodwill is impaired by $500,000 during Admiral uses the complete equity method to report its share of Gold Road’s net income.
To record equity in net income for 2010:
Investment in Gold Road
2,575,000
Equity in income of Gold Road
To record dividends received in 2010:
$480,000 = 80% x $600,000
Cash
480,000
Investment in Gold Road
Investment in Gold Road
42,600,000
2,575,000
480,000
44,695,000

24. Elimination Entries RequiredC
Eliminate current year’s equity method entries E
Eliminate subsidiary’s beginning-of-year stockholders’ equity account balances R
Revalue the subsidiary’s assets and liabilities as of the beginning of the year O
Recognize current year write-offs of the subsidiary’s asset and liability revaluations N
Recognize the noncontrolling interest in net income

25. Eliminating Entries C and E for Admiral and Gold Road - 2010
To eliminate equity in net income on the parent's books, the parent's share of the subsidiary's dividends, and restore the investment account to its beginning-of-year value:
(C) Equity in income of Gold Road
2,575,000
Dividends
480,000
Investment in Gold Road
2,095,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account and recognize the beginning-of-year book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings, January 1
7,500,000
Investment in Gold Road
8,000,000
Noncontrolling interest in Gold Road
2,000,000

26. Eliminating Entry R for Admiral and Gold Road - 2010
To revalue Gold Road's net assets to fair value and allocate the revaluations to the controlling and noncontrolling interest:
80% × $5,000,000 + $30,600,000 = $34,600,000
20% × $5,000,000 + $5,400,000 = $6,400,000
(R) Customer lists
5,000,000
Goodwill
36,000,000
Investment in Gold Road
34,600,000
Noncontrolling interest in Gold Road
6,400,000

27. Eliminating Entries O and N for Admiral and Gold Road - 2010
To write off the revaluations for the current year:
(O) Goodwill impairment loss
500,000
Other operating expenses
1,250,000
Goodwill
Customer lists
To recognize the noncontrolling interest in the subsidiary's income and dividends for the current year:
Dividends = 20% × $600,000 = $120,000
(N) Noncontrolling interest in net income
675,000
Dividends
120,000
Noncontrolling interest in Gold Road
555,000

28. Consolidated Working Paper for Admiral and Gold Road, December 31, 2010
Exhibit 5.2

29. Noncontrolling Interests in the Consolidated Income Statement
Face of consolidated income statement
Consolidated net income in total
Portions of net income attributable to controlling and noncontrolling interests
EPS only for controlling interest
Either face of income statement or notes
Amounts attributable to controlling interest
Income from continuing operations
Discontinued operations
Extraordinary items

30. Admiral Consolidated Statement of Income and Retained Earnings - 2010

31. Admiral Consolidated Balance Sheet December 31, 2010

32. Consolidation at End of Year 2
Gold Road reports net income of $6 million and pays cash dividends of $500,000 in Goodwill is impaired by $200,000 in 2011.
Calculation of equity in net income and noncontrolling interest in net income:
Total
Equity in Net Income
Noncontrolling Interest in Net Income
Gold Road's reported income for 2011
$ 6,000,000.
$4,800,000.
$1,200,000.
Adjustment for revaluation write-offs:
Customer lists ($5,000,000 ÷ 4)
(1,250,000)
(1,000,000)
(250,000)
Goodwill (85:15 ratio)
(200,000)
(170,000)
(30,000)
Totals
$ 4,550,000.
$3,630,000.
$ ,000.
Revaluations of identifiable net assets attributed to ownership interests, 80:20.
Goodwill controlling interest = $30.6 million
Goodwill noncontrolling interests = $5.4 million
$30.6 ÷ $36 = 85%
$5.4 ÷ $36 = 15%

33. Consolidation at End of Year 2 Entries
Gold Road reports net income of $6 million and pays cash dividends of $500,000 in Goodwill is impaired by $200,000 in 2011.
To record equity in net income for 2011:
Investment in Gold Road
3,630,000
Equity in income of Gold Road
To record dividends received in 2011:
$400,000 = 80% × $500,000
Cash
400,000
Investment in Gold Road
Investment in Gold Road
44,695,000
3,630,000
400,000
47,925,000

34. Eliminating Entries C and E for Admiral and Gold Road - 2011
To eliminate equity in net income on the parent's books, the parent's share of the subsidiary's dividends, and restore the investment account to its beginning-of-year value:
(C) Equity in income of Gold Road
3,630,000
Dividends
400,000
Investment in Gold Road
3,230,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account and recognize the beginning-of-year book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings, January 1
11,900,000
Investment in Gold Road
11,520,000
Noncontrolling interest in Gold Road
2,880,000

35. Eliminating Entry R for Admiral and Gold Road - 2011
To revalue Gold Road's net assets to fair value and allocate the revaluations to the controlling and noncontrolling interest:
[80% × $3,750,000] + [85% × $35,500,000] = $33,175,000
[20% × $3,750,000] + [15% × $35,500,000] = $6,075,000
(R) Customer lists
3,750,000
Goodwill
35,500,000
Investment in Gold Road
33,175,000
Noncontrolling interest in Gold Road
6,075,000

36. Eliminating Entries O and N for Admiral and Gold Road - 2011
To write off the revaluations for the current year:
(O) Goodwill impairment loss
200,000
Other operating expenses
1,250,000
Goodwill
Customer lists
To recognize the noncontrolling interest in the subsidiary's income and dividends for the current year:
Dividends = 20% × $500,000 = $100,000
(N) Noncontrolling interest in net income
920,000
Dividends
100,000
Noncontrolling interest in Gold Road
820,000

37. Consolidation Working Paper for Admiral and Gold Road at December 31, 2011
Exhibit 5.3

38. Admiral Consolidated Statement of Income and Retained Earnings - 2011

39. Admiral Consolidated Balance Sheet December 31, 2011

40. Noncontrolling Interest on the Balance Sheet

41. Noncontrolling Interest on the Income Statement

42. Bargain Gain
Occurs when an acquirer’s acquisition cost is less than fair value of the identifiable net assets
Calculation of bargain gain on acquisition
Fair value of identifiable net assets
Less acquisition cost
Less fair value of noncontrolling interest
Gain on acquisition
Firm Value
SFAS 141(R) requires the bargain gain be attributed entirely to the controlling interest.

43. Consolidation at Date of Acquisition When a Bargain Gain Exists
Admiral Casino pays $11 million for 80% of the stock of Gold Road on January 1, Gold Road’s book value equals $10 million, consisting of $2.5 million of stock and $7.5 million of retained earnings. The book value of net assets equals fair value except for previously unrecorded customer lists valued at $5 million with a 4-year life. The estimate of the fair value of the 20% noncontrolling interest is $2,500,000.
Book value
$10,000,000
Revaluation of identifiable net assets:
Customer lists
5,000,000
Fair value of identifiable net assets
15,000,000
Less acquisition cost
(11,000,000)
Less fair value of noncontrolling interest
(2,500,000)
Gain on acquisition
$ 1,500,000

44. Consolidation at Date of Acquisition When a Bargain Gain Exists continued
Admiral Casino pays $11 million for 80% of the stock of Gold Road on January 1, Gold Road’s calculated gain on acquisition is $1,500,000. (slide 47)
Admiral Casino’s (acquirer) books:
To record 80 percent acquisition of Gold Road:
Investment in Gold Road
12,500,000
Cash
11,000,000
Gain on acquisition of Gold Road
1,500,000
Because a bargain price was paid………..
The investment account and noncontrolling interest do not reflect the ownership shares of the revaluation of identifiable net assets.

45. Eliminating Entries E and R for Bargain Gain - 2010
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account and recognize the beginning-of-year book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings, January 1
7,500,000
Investment in Gold Road
8,000,000
Noncontrolling interest in Gold Road
2,000,000
To revalue Gold Road's net assets to fair value and allocate the revaluations to the controlling and noncontrolling interest:
$12,500,000 – $8,000,000 = $4,500,000
$2,500,000 – $2,000,000 = $500,000
(R) Customer lists
5,000,000
Investment in Gold Road
4,500,000
Noncontrolling interest in Gold Road
500,000

46. Bargain Purchase Consolidation at End of First Year
Gain is not shared with noncontrolling interest
Revaluations of acquired assets and liabilities are not fully shared
Must track the value at the end of the previous year, and use entry R to set the beginning-of-year value
Total
Equity in Net Income
Noncontrolling Interest in Net Income
Gold Road's income for 2010
$5,000,000
$4,000,000.
$1,000,000.
Adjustment for revaluation write-offs:
Customer lists ($5,000,000 ÷ 4)
(1,250,000)
(1,000,000)
(250,000)
Totals
$ 3,750,000.
$3,000,000.
$ 750,000.
Investment in Gold Road
12,500,000
3,000,000
480,000
15,020,000

47. Eliminating Entries C and E When a Bargain Gain Exists - 2010
To eliminate equity in net income on the parent's books, the parent's share of the subsidiary's dividends, and restore the investment account to its beginning-of-year value:
(C) Equity in income of Gold Road
3,000,000
Dividends
480,000
Investment in Gold Road
2,520,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account and recognize the beginning-of-year book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings, January 1
7,500,000
Investment in Gold Road
8,000,000
Noncontrolling interest in Gold Road
2,000,000

48. Eliminating Entry R When a Bargain Gain Exists - 2010
To revalue Gold Road's net assets to fair value and allocate the revaluations to the controlling and noncontrolling interest:
$12,500,000 – $8,000,000 = $4,500,000
$2,500,000 – $2,000,000 = $500,000
(R) Customer lists
5,000,000
Investment in Gold Road
4,500,000
Noncontrolling interest in Gold Road
500,000

49. Eliminating Entries O and N When a Bargain Gain Exists - 2010
To write off the revaluations for the current year:
(O) Operating expenses
1,250,000
Customer lists
To recognize the noncontrolling interest in the subsidiary's income and dividends for the current year:
Dividends = 20% × $600,000 = $120,000
(N) Noncontrolling interest in net income
750,000
Dividends
120,000
Noncontrolling interest in Gold Road
630,000

50. Consolidation Working Paper When a Bargain Gain Exists - 2010
Exhibit 5.4

51. Bargain Purchase Consolidation at End of Second Year - 2011
Gold Road reports net income totaling $6 million and pays cash dividends of $500,000 in 2011.
Calculation of equity in net income and noncontrolling interest in net income for 2011:
Total
Equity in Net Income
Noncontrolling Interest in Net Income
Gold Road's income for 2011
$6,000,000
$4,800,000.
$1,200,000.
Adjustment for revaluation write-offs:
Customer lists ($5,000,000 ÷ 4)
(1,250,000)
(1,000,000)
(250,000)
Totals
$ 4,750,000.
$3,800,000.
$ 950,000.
Investment in Gold Road
15,020,000
3,800,000
400,000
18,420,000

52. Eliminating Entries C and E When a Bargain Gain Exists - 2011
To eliminate equity in net income on the parent's books, the parent's share of the subsidiary's dividends, and restore the investment account to its beginning-of-year value:
(C) Equity in income of Gold Road
3,800,000
Dividends
400,000
Investment in Gold Road
3,400,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account and recognize the beginning-of-year book value of the noncontrolling interest:
(E) Capital stock
2,500,000
Retained earnings, January 1
11,900,000
Investment in Gold Road
11,520,000
Noncontrolling interest in Gold Road
2,880,000

53. Eliminating Entry R When a Bargain Gain Exists - 2011
To revalue Gold Road's net assets to fair value, eliminate the remaining investment balance, and bring the noncontrolling interest balance to its beginning-of-year value of $3,130,000:
(R) Customer lists
3,750,000
Investment in Gold Road
3,500,000
Noncontrolling interest in Gold Road
250,000

54. Eliminating Entries O and N When a Bargain Gain Exists - 2011
To write off the revaluations for the current year:
(O) Operating expenses
1,250,000
Customer lists
To recognize the noncontrolling interest in the subsidiary's income and dividends for the current year:
Dividends = 20% × $500,000 = $100,000
(N) Noncontrolling interest in net income
950,000
Dividends
100,000
Noncontrolling interest in Gold Road
850,000

55. Consolidation Working Paper When a Bargain Gain Exists - 2011
Exhibit 5.5