The document discusses accounting for noncontrolling interests (minority interests) in consolidated financial statements. It explains that a noncontrolling interest represents the portion of a subsidiary's equity not owned by the parent company. When consolidating financial statements, the parent company records a noncontrolling interest account in the equity section to reflect the ownership of other investors, and also reports the noncontrolling interest share of the subsidiary's net income. The consolidation process otherwise treats the subsidiary as if 100% owned.

1. Chapter Four Consolidated Financial Statements and Outside Ownership McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Noncontrolling Interest - Example Assume that Parker Corporation wants to acquire 90% of Strong Company. Strong’s stock has been trading for $60 per share. If Parker has to pay $70 per share to induce enough stockholders to sell, how do we account for the 10% of Strong that Parker does not own? 4- Let’s look at an example.

5. Noncontrolling Interest - Example In this case, the Controlling Investor had to pay a premium for the shares they need to gain control . How do we value this premium, and how do we value the noncontrolling interest? 4-

6. Noncontrolling Interest - Example If Parker purchased 9,000 shares at this price, then the fair value of their consideration transferred is $630,000 . The remaining 1,000 shares of Strong have a fair value of $60,000 . This gives a total acquisition-date fair value of Strong Company of $690,000 . 4-

7. Noncontrolling Interest - Example The total acquisition-date fair value of Strong of $690,000 is greater than the fair value of the identifiable net assets acquired of $600,000 (10,000 shares x $60 per share). The difference is allocated to Goodwill . 4-

8. Noncontrolling Interest - Example If the shares were not actively traded, then the consideration transferred by Parker would be considered the best measure of fair value of Strong, and we would estimate the fair value of the noncontrolling interest at $70,000. 4-

12. Noncontrolling Interest - Example Noncontrolling Interest in Strong Company Net Income Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Subsidiary Strong net income . . . . . . . . . . . . . . . . 80,000 Excess acquisition-date fair-value amortization. . . 30,000 Net income adjusted for excess amortizations. . . $ 50,000 Noncontrolling interest percentage . . . . . . . . . . . . . . 10% Noncontrolling interest in Strong net income. . . . . $ 5,000 Note: The noncontrolling shareholders have a 10% interest in the subsidiary company, but no interest in the parent firm. 4-

15. Noncontrolling Interest - Worksheet Example Note: Comparing the total fair value based on the stock value of $975,000 to the fair value of identifiable net assets shown above, it appears Pawn has goodwill valued at $25,000. 4-

16. Noncontrolling Interest - Worksheet Example King uses the Equity Method to account for Pawn subsequent to acquisition. The consolidation process is substantially the same. At each consolidation, we will prepare the worksheet with the entries we referenced as S, A, I, D, and E, AND… We will add a column to our worksheet where we will record the noncontrolling interest in the subsidiary. 4-

17. Noncontrolling Interest - Worksheet Example 4-

18. Noncontrolling Interest - Worksheet Example 4- Continued…

19. Noncontrolling Interest – Worksheet Example 4-

20. Noncontrolling Interest – Worksheet Example 4-

21. Consolidated Financial Statement Income Statement 4-

22. Consolidated Financial Statement Balance Sheet 4-

23. Noncontrolling Interest – Premium Paid If King had paid $11.00 for their shares, at a time when they were trading for $9.75 , then the goodwill allocation would look like this: $11.00 x 80,000 shares $9.75 x 20,000 shares Acquisition-date FV 4-

29. Noncontrolling Interest – Int’l Accounting Standards IFRS permits fair value measurement, or the noncontrolling interest may be measured at a proportionate share of the Sub’s identifiable net asset fair value, which excludes goodwill. This option assumes that any goodwill created via acquisition applies solely to the controlling interest. U.S. GAAP requires fair value measurement. Thus, acquisition-date fair value provides a basis for reporting the noncontrolling interest which is adjusted for its share of subsidiary income and dividends subsequent to acquisition. US GAAP vs IFRS 4-

30. Noncontrolling Interest – The Legacy Purchase Method Under the purchase method , when less than 100% was purchased, only the parent’s percentage was adjusted to fair value. Therefore, the valuation principle for the noncontrolling interest under the purchase method was simply its share of the subsidiary’s book value . The consolidation worksheet entries must be adjusted accordingly. 4-