1. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-1 Irwin/McGraw-Hill 4 C H A P T E R Consolidated Financial Statements and Outside Ownership

2. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-2 Irwin/McGraw-Hill l In a purchase, the amount of the acquired company’s stock that is not acquired by the parent. l The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements. l In a purchase, the amount of the acquired company’s stock that is not acquired by the parent. l The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements. ? Noncontrolling Interest

3. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-3 Irwin/McGraw-Hill l Consolidation requires the incorporation of 100% of the sub’s net assets into the parent’s financial statement. v Even if parent’s ownership < 100% l 3 approaches are outlined by the FASB v Economic Unit Concept v Proportionate Consolidation Concept v Parent Company Concept l Consolidation requires the incorporation of 100% of the sub’s net assets into the parent’s financial statement. v Even if parent’s ownership < 100% l 3 approaches are outlined by the FASB v Economic Unit Concept v Proportionate Consolidation Concept v Parent Company Concept ? Noncontrolling Interest

4. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-4 Irwin/McGraw-Hill Accounting for Noncontrolling Interest On the Balance Sheet: A credit balance account called Noncontrolling Interest is set up to recognize the noncontrolling stockholders’ investment in the subsidiary. The account appears in the equity section. On the Balance Sheet: A credit balance account called Noncontrolling Interest is set up to recognize the noncontrolling stockholders’ investment in the subsidiary. The account appears in the equity section.

5. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-5 Irwin/McGraw-Hill Accounting for Noncontrolling Interest On the Income Statement: An account called Noncontolling Equity in Subsidiary Net Income is set up to recognize the noncontrolling shareholders’ share of the sub’s net income. The account appears on the Income Statement. On the Income Statement: An account called Noncontolling Equity in Subsidiary Net Income is set up to recognize the noncontrolling shareholders’ share of the sub’s net income. The account appears on the Income Statement.

6. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-6 Irwin/McGraw-Hill Recommended by the FASB. Noncontrolling Interest is a % of the sub’s implied value. Noncontrolling Interest in Sub Net Income is a % of the sub’s net income less amortization of FMV adjustments and Goodwill. The sub is viewed as an indivisible unit within the business combination. Economic Unit Concept

7. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-7 Irwin/McGraw-Hill Proportionate Consolidation Concept Little evidence exists to suggest widespread use of this method. Only the portion of the sub’s assets that are acquired by the parent are consolidated. Noncontrolling Interest is not reported under this method. This method has been used where control exists, but less than 50% of the sub has been acquired.

8. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-8 Irwin/McGraw-Hill Considered to be the most common method in practice. Noncontrolling Interest is a % of the sub’s book value at the balance sheet date. Noncontrolling Interest in Sub Net Income is a % of the sub’s net income. Noncontrolling Interest may appear in the equity section or between the equity section and the liability section. Parent Company Concept

9. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-9 Irwin/McGraw-Hill Noncontrolling Interest Example Let’s look at an example using the Parent Company Concept.

10. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-10 Irwin/McGraw-Hill Noncontrolling Interest Example On 1/1/98, Jumbo purchases 80% of Li’l Bit for $800,000 cash.

11. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-11 Irwin/McGraw-Hill Record the initial investment on Jumbo’s books. Noncontrolling Interest Example

12. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-12 Irwin/McGraw-Hill Goodwill computation: This computation will be needed again when the consolidation is done in years subsequent to the year of acquisition. Noncontrolling Interest Example

13. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-13 Irwin/McGraw-Hill As of the date of acquisition, the balances for each company are entered into the worksheet. Enter the consolidation entries on the worksheet.

14. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-14 Irwin/McGraw-Hill

15. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-15 Irwin/McGraw-Hill

16. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-16 Irwin/McGraw-Hill

17. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-17 Irwin/McGraw-Hill Noncontrolling Interest Example Let’s do the consolidation at the end of 1998.

18. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-18 Irwin/McGraw-Hill First, update Jumbo’s numbers for the equity method entries.

19. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-19 Irwin/McGraw-Hill Noncontrolling Interest Example

20. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-20 Irwin/McGraw-Hill $60,000 dividends were paid to Jumbo by Li’l Bit during the year. Noncontrolling Interest Example

21. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-21 Irwin/McGraw-Hill Goodwill & FMV adjustment amortization is computed as follows: Noncontrolling Interest Example

22. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-22 Irwin/McGraw-Hill Assume that the building has a remaining useful life of 10 years and the equipment has a remaining useful life of 4 years. Goodwill is amortized over 10 years. Noncontrolling Interest Example Amortization computation:

23. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-23 Irwin/McGraw-Hill Amortization computation: Noncontrolling Interest Example

24. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-24 Irwin/McGraw-Hill Note Jumbo’s updated numbers. Post consolidation entries to the worksheet. Note Jumbo’s updated numbers. Post consolidation entries to the worksheet.

25. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-25 Irwin/McGraw-Hill

26. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-26 Irwin/McGraw-Hill

27. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-27 Irwin/McGraw-Hill

28. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-28 Irwin/McGraw-Hill

29. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-29 Irwin/McGraw-Hill

30. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-30 Irwin/McGraw-Hill

31. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-31 Irwin/McGraw-Hill l Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”. l Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization. l Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”. l Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization. Step Acquisitions

32. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-32 Irwin/McGraw-Hill When control of a subsidiary is acquired at a time subsequent to the beginning of the sub’s fiscal year, the income statement accounts are consolidated as if the acquisition was made at the beginning of the period. A line-item is included in the income statement for the sub’s income prior to the date of acquisition. Preacquisition Income

33. ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-33 Irwin/McGraw-Hill End of Chapter 4 Ten cups of this stuff and I still don’t get it!