2. Advanced Accounting, Third Edition8
Changes in
Ownership Interest
Advanced Accounting, Third Edition

3. Learning Objectives
Identify the types of transactions that change the parent company’s ownership interest in a subsidiary, and summarize the differences between current and proposed GAAP.
Describe the eliminating entries needed when the parent acquires subsidiary shares through multiple open market purchases.
Explain how the parent determines the cost basis of subsidiary shares sold subsequent to acquisition.
Compute the controlling interest in income after the parent sells some shares of the subsidiary company.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Learning Objectives
Describe the effect on the eliminating process when the subsidiary issues new shares entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.
Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

5. Changes in Ownership Interest
Parent company can increase its ownership interest in a subsidiary by either
buying additional subsidiary shares directly from third parties or
having a subsidiary purchase its (subsidiary’s) shares from third parties.
Parent company can decrease its ownership interest in a subsidiary by either
selling some subsidiary shares directly to third parties or
having a subsidiary sell additional shares (including treasury shares) to third parties.
LO 1 Changes in ownership and differences between current and proposed GAAP.

6. Changes in Ownership Interest
Current GAAP:
Acquisitions of additional shares are handled in a step-by-step manner.
Sales of shares are handled the same as any sale of an asset.
LO 1 Changes in ownership and differences between current and proposed GAAP.

7. Changes in Ownership Interest
Proposed GAAP:
Acquisitions that take place in stages or partial sales:
Measure and recognize acquiree’s identifiable assets and liabilities at 100% of their fair values on date the acquirer obtains control, and
Recognize all acquiree’s goodwill (not just parent’s share), measured as difference between fair value of acquiree on acquisition date and fair value of identifiable net assets.
(Continued)
LO 1 Changes in ownership and differences between current and proposed GAAP.

8. Changes in Ownership Interest
Proposed GAAP:
Acquisitions that take place in stages or partial sales:
Any previously held noncontrolling equity interests should be remeasured to fair value, with resulting adjustment recognized in income.
After control is achieved, subsequent adjustments due to increased ownership are shown as Additional Contributed Capital, not as income.
If parent loses control, retained investment should be remeasured to fair value with adjustments recognized in net income.
LO 1 Changes in ownership and differences between current and proposed GAAP.

9. Parent Acquires Subsidiary Stock Through Several Open-Market Purchases—Cost Method
When more than one purchase is made before control is obtained, acquisition date is date when control is achieved.
Current GAAP (Interpretation No. 2 of APB Opinion No. 17):
Requires purchasing company to identify the cost of each investment, the fair value of the underlying assets acquired, and the difference between cost and book value for each step purchase.
Previously held interests are not revalued at the date of subsequent purchases.
LO 2 Eliminating Investment.

10. Parent Acquires Subsidiary Stock Through Several Open-Market Purchases—Cost Method
Proposed GAAP (Exposure Draft, Business Combinations, June 30, 2005):
Previously held noncontrolling equity interest should be remeasured to fair value when control is achieved, and the resulting adjustment should be recognized in net income.
If a parent loses control but retains a noncontrolling interest, the portion retained should be remeasured to fair value on the date control is surrendered and the adjustment reflected in the income statement.
LO 2 Eliminating Investment.

11. Several Open-Market Purchases—Cost Method
P8-1 Sarko Company had 300,000 shares of $10 par value common stock outstanding at all times, and retained earnings balances as indicated here:
January 1, $ 260,000
January 1, ,000
January 1, ,000
January 1, ,000
Pelzer Co. acquired Sarko Co. common stock on the open market:
January 1, ,000 shares (10%) $ 365,000
January 1, ,000 shares (25%) 960,000
January 1, ,000 shares (45%) 1,860,000
Total 240,000 shares (80%) $3,185,000
LO 2 Eliminating Investment.

12. Several Open-Market Purchases—Cost Method
Computation and Allocation of Difference Schedule
January 1, 2006
January 1, 2006
P Company payment $ 1,860,000
Percentage acquired / 45%
Implied value $4,133,333
LO 2 Eliminating Investment.

13. Several Open-Market Purchases—Cost Method
Because Pelzer Company has owned a percentage of Sarko Company since January 1, 2004, a workpaper entry is needed on December 31, 2006, to convert to equity/establish reciprocity from 2004 to the beginning of 2006 as follows:
Investment in Sarko Company 59,500
1/1 Retained Earnings—Pelzer Company 59,500
LO 2 Eliminating Investment.

14. Several Open-Market Purchases—Cost Method
The investment is eliminated by the following workpaper entry on December 31, 2006, (per CAD Schedule):
January 1, 2006
Common Stock—Sarko Company 3,000,000
1/1 Retained Earnings—Sarko Company 630,000
Difference Between Implied and Book Value 503,333
Investment in S Company * 3,306,666
Noncontrolling Interest in Equity 826,667
LO 2 Eliminating Investment.

15. Several Open-Market Purchases—Cost Method
The following workpaper entry (Dec. 31, 2006), is made to allocate difference between implied and book value to goodwill.
January 1, 2006
Goodwill 503,333
Difference Between Implied and Book Value 503,333
LO 2 Eliminating Investment.

16. Parent Sells Subsidiary Stock Investment on the Open Market
Under the Exposure Drafts (ED No and ), the treatment of the sale of a portion (but not all) of its investment by a parent company depends on whether or not the sale results in the loss of effective control of the subsidiary.
If control is lost, the entire interest would be adjusted to fair value under this proposal, and a gain of loss recorded in income on all shares owned prior to sale.
Note, however, this proposed treatment is controversial.
LO 3 Determining the cost basis of the shares sold.

17. Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.