2. Meaning of Consolidation:
In a general sense
consolidation refers to “Join things
together or become joined into one ”
3. Scope of consolidated
financial statements:
Nature of financial statement
The concept of control versus
Ownership as the basis for such financial
statements
Preparation of financial statements
involving both wholly owned and partially
owned subsidiaries
Nature of minority (non-controlling)
interest and it’s valuation
4. Holding Company & its Relation
With Subsidiary Company:
When the investor acquires a
controlling interest in the investee, a
parent - subsidiary relationship
establishes.
The investee becomes a subsidiary of
the acquiring parent company
(investor) but remains a separate legal
entity.
5. Holding Company & its Relation
With Subsidiary Company:
A strict follow of legal aspects of such
business combination would enable
companies to prepare separate financial
statements for the parent company and for
the subsidiary company.
A strict follow of legal aspects will disregards
the substance of most parent-subsidiary
relationships.
A parent company and its subsidiaries are a
single economic entity. In recognition of this
fact, consolidated financial statements are
issued to report the financial position and
operating results of a parent company and its
subsidiaries as though they comprised a
6. Nature of
Consolidated Financial
Statement: Similar to the combined financial
statements for a home office and its
branches.
Assets, liabilities, revenue, and
expenses of the parent company and its
subsidiaries are totaled; inter-company
transactions and balances are
eliminated; and the final consolidated
amounts are reported in the balance
sheet, income statements, statement of
stockholders’ equity, and statement of
cash flows.
However, the separate legal entity status
of the parent and subsidiary corporations
necessitates eliminations that are
generally more complex
7. Meaning of Controlling
Interest(cost of control / Good will / Capital
reserve ) : If the holding company purchases
the shares of the subsidiary company at a
price which is more than the paid up value of
the share, The excess amount paid
represents payment for
goodwill or cost of acquiring control of the
subsidiary company, if there exist no
reserves/profit/loss, balance in the subsidiary
company on the date of acquisition of shares
of the subsidiary company are
reserves/profit/loss.
If the shares are purchased at a
shares which is less than the paid up value of
the shares, the less amount paid represents
capital reserve or profit.
8. Meaning of Controlling
Interest:
For example :Thus, if 9,000 shares of
₹.10/- each are purchased @ ₹.1,00,000/- .
The excess amount of ₹.10,000/- (1,00,000-
90,000) is GOOD WILL & will be shown in
consolidated Balance Sheet as GOOD WILL
as an intangible asset. On the other hand , if
the price paid for 9,000 shares is ₹. 80,000,
the less amount of ₹. 10,000/- is CAPITAL
PROFIT & will be shown as CAPITAL
RESERVE.
9. Criticism of
Traditional Concept of Control:
Many accountants criticize the traditional
definition of control which emphasizes on
legal form.
These accountants maintain that an
investor owning less than 50% of an
investee’s voting common stock in
substance may control the affiliate,
especially if the remaining common stock
is scattered among a large number of
stockholders who do not attend stock
holder meetings or give proxies
10. Criticism of
Traditional Concept of Control:
Effective control of an investee is also
possible if the individuals comprising
management of the investor
corporation own a substantial number
of shares of common stock of the
investee or successfully solicit proxies
from the investee’s other stockholders.
11. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
The first journal entry is similar to the
entry for statutory merger. An
Investment in Common Stock ledger
account is debited with the current fair
value of the combinor’s common stock
issued to effect the business
combination, and the paid-in-capital
accounts are credited in the usual
manner for any common stock
issuance.
12. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
In the second journal entry, the direct
out-of-pocket costs of the business
combination are debited to the
Investment in Common Stock ledger
account, and the costs that are
associated with SEC registration
statement, being costs of issuing the
common stock, are applied to reduce
the proceeds of the common stock
issuance.
13. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
The foregoing journal entries do not
include any debit or credits to record
individual assets and liabilities of S
Company, in the accounting records of
P Corporation, because S was not
liquidated.
After the posting of foregoing journal
entries, the affected ledger accounts
of P Corporation (the combinor) are as
follows:
14. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
Accounting for the business combination
for P Corp. and S Comp., requires fresh
start for the consolidated entity.
The business combination involves
parent-subsidiary relationship, so the
theory reflects that an acquisition of the
combinee’s net assets by the combinor
is involved.
A consolidated balance sheet is the only
consolidated financial statement issued
by P Corp on December 31, 2002.
15. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
The parent company’s investment
account and the subsidiary’s
stockholders’ equity accounts do not
appear in the consolidated balance
sheet because they are essentially
reciprocal accounts.
The parent company’s assets and
liabilities are reflected at carrying
amounts, and the subsidiary
(combinee) assets and liabilities are
reflected at current fair values, in the
consolidated balance sheet.
16. Consolidation Of Wholly Owned
Subsidiary On Date Of Business
Combination:
Goodwill is recognized to the extent
the cost of the parent’s investment in
100% of the subsidiary’s outstanding
common stock exceeds the current
fair value of the subsidiary’s
identifiable net assets, both tangible
and intangible.
Applying foregoing principles to the P
Corp and S Company parent-
subsidiary relationship, the following
consolidated balance sheet is
produced.
17. Significant Aspects of the
Consolidated Balance Sheet:
The first amounts in the computation of
consolidated assets and liabilities are the
parent company’s carrying amounts; the
second amounts are the subsidiary’s
current fair values.
Inter-company accounts are excluded
from the consolidated balance sheet.
Goodwill, in the consolidated balance
sheet is the cost of the parent company’s
investment less the current fair value of
the subsidiary’s identifiable net assets.
18. Significant Aspects of the
Consolidated Balance Sheet:
The preparation of consolidated
balance sheet on the date of a
business combination usually requires
the use of a working paper for
consolidated balance sheet.
Developing The Eliminations.
The following features of the working
paper for consolidated balance sheet
on the date of the business
combination should be emphasized.
19. Consolidation of Partially Owned
Subsidiary:
The consolidation of a parent
company and its partially owned
subsidiary is not the same as
consolidation of a parent company
and its wholly owned subsidiary in one
major aspect – the recognition of
minority interest.
20. Consolidation of Partially Owned
Subsidiary:
Minority Interest, or non-controlling
interest, is a term applied to the claims
of stockholders other than the parent
company to the net income or losses
is displayed in the consolidated
income statement, and the minority
interest in the subsidiary’s net assets
is displayed in the consolidated
balance sheet.
21. Consolidation of Partially Owned
Subsidiary:
Because of the complexities caused by
minority interest in the net assets of a
partially owned subsidiary and the
measurement of goodwill acquired in the
business combination, it is advisable to use a
working paper for preparation of a
consolidated balance sheet for a parent
company and its partially owned subsidiary
on the date of the business combination. The
format of the working paper is identical to that
used in preparation of consolidated balance
sheet of a parent company with wholly owned
subsidiary.
22. Consolidation of Partially Owned
Subsidiary:
The preparation of eliminations for a
parent company and a partially owned
subsidiary parallels that for a wholly
owned subsidiary. First the inter-
company accounts are reduced to
zero in journal entry format and then
differences between Current Fair
Values and Carrying Amounts f
Combinee’s identifiable assets, are
determined.
23. Consolidation of Partially Owned
Subsidiary:
The next step is the use of elimination
to reflect current fair values of
identifiable assets of subsidiary on
date of Business Combination.
Then the computation of minority
interest in combinee’s Identifiable Net
Assets, and goodwill acquired by
combinor.
24. Consolidation of Partially Owned
Subsidiary:
The appropriate classification and
presentation of minority interest in
consolidated financial statements has
been a perplexing problem for
accountants.
Two concepts for have been
developed to account for minority
interest :
◦ The Parent Company Concept.
◦ The Economic Unit Concept.
25. Nature of Minority Interest:
The appropriate classification and
presentation of minority interest in
consolidated financial statements has
been a perplexing problem for
accountants.
Two concepts for have been
developed to account for minority
interest :
◦ The Parent Company Concept.
◦ The Economic Unit Concept.
26. Nature of Minority Interest:
The parent company concept
emphasizes the interests of the
parent’s shareholders. This concept
treats the minority interest in net
assets of a subsidiary as a liability.
This liability is increased each
accounting period subsequent to the
date of a business combination by an
expense representing the minority’s
share of the subsidiary’s net income
27. Nature of Minority Interest:
In the economic unit concept, the
minority interest in the subsidiary’s net
assets is displayed in the
stockholders’ equity section of the
consolidated balance sheet. The
consolidated income statements
displays the minority interest in the
subsidiary’s net income as a
subdivision of total consolidated net
income.
28. Alternative Methods For Valuing
Minority Interest And Goodwill:
Two alternatives to the procedure of
computing minority interest and
goodwill have been suggested.
The first alternative would assign
current fair values to a partially owned
purchased subsidiary’s identifiable
assets only to the extent of the parent
company’s ownership interest therein.
29. Alternative Methods For Valuing
Minority Interest And Goodwill:
The other alternative for valuing
minority interest in net assets of
subsidiary and goodwill is to obtain a
current fair value for 100% of a
partially owned purchased subsidiary’s
total net assets, either through
independent measurements of the
minority interest or by inference from
the cost of the parent company’s
investment in the subsidiary.
30. Alternative Methods For Valuing
Minority Interest And Goodwill:
Independent measurement of the
minority interest might be
accomplished by reference to quoted
market prices of publicly traded
common stock owned by minority
stockholders.
