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Learning Objective 1
3-2
P
S
3-3
Review
How do we report the results of subsidiaries?
Parent
Company
80%
Sub A
51%
Sub B
21%
Sub C
Consolidated Financial
Statements
Consolidated financial statements
present the financial position and results
of operations for:
3-5
shareholders,
long-term creditors, or
Learning Objective 2
3-10
3-11
Control
Reporting entity
3-14
Learning Objective 3
3-18
3-19
3-20
3-21
Examples:
Acquire financing for a project
Package receivables and sell them to third
parties
Raptors
Established by Enron CFO to provide a
quick buyer for Enron assets.
3% third party
3-23
3-24
3-26
Purpose of FIN46R
Junior Debt
($12k)
Lease Pmts.
ABC Corp.
$100k
Leasing Corp.
Use of Building
Building Owner
Building
Investor ($3k)
voting rights.
3-30
VIEs: Contractual
Arrangements
Contractual Arrangement Types:
Options
Leases
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Learning Objective 4
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Topic
U.S. GAAP
shares.
However, majority
ownership may not
indicate control of a
VIE.
Thus, VIE rules must be
evaluated first in all
situations.
The primary beneficiary
must consolidate a VIE.
The majority
shareholder
consolidates most nonVIEs.
Control is based on
direct or indirect voting
interests.
An entity with less than
IFRS
Normally, control is
determined by majority
ownership of voting shares.
In addition to voting shares,
convertible instruments
and other contractual rights
that could affect control are
considered.
A parent with less than 50
percent of the voting
shares could have control
through contractual
arrangements allowing
control of votes of the
board of directors.
Control over SPEs is
determined based on
judgment and relevant
facts.
Substance over form
considered in
3-40 determining
U.S. GAAP
IFRS
Accounting
for Joint
Ventures
U.S. GAAP
IFRS
No SPE-specific disclosure
requirements.
There are specific disclosure
requirements related to
consolidation in general.
Joint ventures can be
accounted for using either
proportionate consolidation
or the equity method.
Proportionate consolidation
reports the venturers share
of the assets, liabilities,
income, and expenses on a
line-by-line basis based on
the venturers financial
statement line items.
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Learning Objective 5
3-44
Noncontrolling Interest
Only a controlling interest is needed for the
parent to consolidate the subsidiarynot
100% interest.
Shareholders of the subsidiary other than
the parent are referred to as
noncontrolling shareholders.
Noncontrolling interest or refers to the claim
of these shareholders on the income and net
Parent
assets of the subsidiary.NCI
<50%
>50%
Sub
3-45
Two Issues:
Parent
NCI
<50%
>50%
Sub
(1)Should 100% of
the financial
statements be
consolidated?
(2) Where to
report NCI in
the financial
statements?
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Noncontrolling Interest
Presentation
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Learning Objective 6
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Different Approaches to
Consolidation
Theories that might serve as a basis
for preparing consolidated financial
statements:
Proprietary theory
Entity theory
Proprietary Theory
Views the firm as an extension of its
owners.
Assets and liabilities of the firm are
considered to be those of the
owners.
Results in a pro rata consolidation
where the parent consolidates only
its proportionate share of a lessthan-wholly owned subsidiarys
assets, liabilities, revenues and
expenses.
3-54
Entity Theory
Focuses on the firm as a separate
economic entity, rather than on the
ownership rights of the shareholders.
Emphasis is on the consolidated
entity itself, with the controlling and
noncontrolling shareholders viewed
as two separate groups, each having
an equity in the consolidated entity.
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Entity Theory
All of the assets, liabilities, revenues,
and expenses of a less-than-wholly
owned subsidiary are included in the
consolidated financial statements, with
no special treatment accorded either
the controlling or noncontrolling
interest.
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3-59
Current Practice
FASB 141R has significantly changed
the preparation of consolidated
financial statements subsequent to the
acquisition of less-than-wholly owned
subsidiaries.
Current Practice
Current approach clearly follows the
entity theory with minor modifications
aimed at the practical reality that
consolidated financial statements are
used primarily by those having a longrun interest in the parent company.
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Proprietary theory.
Parent company theory.
Equity theory.
Entity theory.
none of the above.
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Learning Objective 7
Summary of differences in
consolidation
Wholly
Owned
Subsidiary
Partially
Owned
Subsidiary
Investmen
t = Book
Value
Chapter
2
Chapter
3
No
Differentia
l
Investmen
t > Book
Value
Chapter
4
Chapter
5
Differentia
l
No NCI
NCI
Shareholders Shareholders
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Photo
Book Value
Calculations
Investment
Additional
Account CommonPaid-in
NCI (30%)
(70%) Stock
Beginning Balance
+ Net Income
Dividends
Retained
=
Capital Earnings
Ending Balance
3-67
70%
Snap
Investment
Additional
Account CommonPaid-in Retained =
NCI (30%)
(70%) Stock
Capital Earnings
Beginning Balance
+ Net Income
Dividends
Ending Balance
Investment in Snap
Basic Elimination
Entry
Common Stock
Add PIC CS
Retained Earnings, BB
Income from Snap
NCI in Net Income
Dividends Declared
Investment in Snap
NCI in Net Assets
3-68
Learning Objective 8
Prepare a consolidation
worksheet for a lessthan-wholly-owned
consolidation.
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3-70
Basic Elimination
Entry
Common Stock
Retained Earnings, BB
Income from Smith
NCI in Net Income
Dividends Declared
Investment in Smith
NCI in Net Assets
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Accumulated
Depreciation
210,000
3-74
20,000
3-75
Conclusion
The End
3-76