Chapter 4:

Consolidation of
Non-wholly Owned
Subsidiaries
Consolidation of Non-wholly Owned
Subsidiaries
Objectives:
► Define noncontrolling interest and explain how it is measured on the
consolidated balance sheet

► Prepare a consolidated balance sheet using the fair value enterprise

method

► Prepare a consolidated balance sheet using the identifiable net assets

method
Consolidation of Non-wholly Owned
Subsidiaries
Objectives:
► Explain the concept of negative goodwill and describe how it should be
treated when it arises in a business combination

► Account for contingent consideration based on its classification as a

liability or equity

► Analyze and interpret financial statements involving consolidation of

non-wholly owned subsidiaries
Consolidation of Non-wholly Owned
Subsidiaries
Noncontrolling Interest
► Noncontrolling shareholders own those shares that were not acquired by
the parent company.

► Noncontrolling interest (NCI) is the value of the shares attributed to the

noncontrolling shareholders, presented on the consolidated financial
statements.

► The NCI represents an additional set of owners who have legal claim to
the subsidiary’s net assets.
Consolidation of Non-wholly Owned
Subsidiaries
Methods to measure and present NCI:
► Proportionate consolidation method

► Parent company method

► Fair value enterprise (FVE) method

► Identifiable net asset (INA) method

Consolidation of Non-wholly Owned
Subsidiaries
Proportionate consolidation method:
► Used to be called the Proprietary Theory

► Was an option under GAAP prior to 2013

► Is used when consolidating certain joint ventures (Chapter 9)

► NCI is not recognized

► Recognize the parent’s share of the fair value of the subsidiary’s net
assets
Consolidation of Non-wholly Owned
Subsidiaries
Parent company method:
► Similar to the Proportionate consolidation method

► Was an option under GAAP prior to January 1, 2011

► NCI was recognized and reflected as a liability

Consolidation of Non-wholly Owned
Subsidiaries
Fair value enterprise (FVE) method:
► Used to be called the Entity theory or Full goodwill method

► An acceptable option for consolidating subsidiaries after January 1,

2011

► NCI is presented as a separate component of shareholders’ equity

► NCI is measured at its fair value, usually based on the trading price of
the subsidiary’s shares or using the price paid by the parent or based on
an independent business valuation
Consolidation of Non-wholly Owned
Subsidiaries
Identifiable net assets (INA) method:
► Used to be called the Parent Company extension theory or Partial
goodwill method

► An acceptable option for consolidating subsidiaries after January 1,

2011

► Only the parent’s share of the subsidiary’s goodwill is recognized

► NCI is recognized as a separate component of shareholders’ equity and

measured based on the subsidiary’s fair value of its net assets
Proportionate Consolidation

On June 30, Year 1 S Ltd. had 10,000 shares outstanding and P Ltd.
purchased 8,000 shares (80%) for a total of $72,000.

P Ltd.’s journal entry to record the purchase is as follows:

Investment in S Ltd. $72,000

Cash $72,000
When consolidating financial statements, we combine the parent company's assets with its share of the
subsidiary's fair value. This helps us reflect only the parent’s portion of assets and liabilities from the subsidiary.

Proportionate Consolidation
Proportionate Consolidation
Proportionate Consolidation
Fair Value Method – NCI by Market Price

On June 30, Year 1 S Ltd. had 10,000 shares outstanding and P Ltd.
purchased 8,000 shares (80%) for a total of $72,000 ($9 per share).

S Ltd.’s shares had been trading in the $7.65 to $7.85 range. Which shows
that the $9 per share paid by P Ltd. is not representative of the fair value
for the NCI.

NCI’s 2,000 shares fair value would be $15,500 ($7.75 x 2,000 shares).

Total fair value of S Ltd. is as follows:

Fair value of controlling interest ($9 x 8,000 shares) $72,000
Fair value of NCI ($7.75 x 2,000 shares) 15,500
Total acquisition-date fair value of S Ltd. $87,500
 NCI shares continued to trade at $7.75 per share, so the fair value of the NCI is
best determined using the market price for the noncontrolling shares, not the $9
paid for control.

Fair Value Method – NCI by Market Price

Fair Value Method – NCI by Market Price
Fair Value Method – NCI by Implied Price

On June 30, Year 1 S Ltd. had 10,000 shares outstanding and P Ltd.
purchased 8,000 shares (80%) for a total of $72,000 ($9 per share).

Assume that the market price is close to $9 per share or that the NCI
would have demanded the same price per share paid by P Ltd.

NCI’s 2,000 shares fair value would be $18,000 ($9 x 2,000 shares).

Total fair value of S Ltd. is as follows:

Fair value of controlling interest ($9 x 8,000 shares) $72,000
Fair value of NCI ($9 x 2,000 shares) 18,000
Total acquisition-date fair value of S Ltd. $90,000
Fair Value Method – NCI by Implied Price
Fair Value Method – NCI by Implied Price
Fair Value Method – NCI by Implied Price
Identifiable Net Assets Method

► The INA method values both the parent’s share and the NCI’s share of
identifiable net assets at fair value.

► Only the parent’s share of the subsidiary’s goodwill is recognized in the

consolidated financial statements at the value paid by the parent.

► NCI is based on the fair values of the identified net assets, but
excluding any value pertaining to the subsidiary’s goodwill.
Identifiable Net Assets Method
Identifiable Net Assets Method
Bargain Purchase – Negative Goodwill

► Negative goodwill arises when the total consideration given is less than
the fair value of identifiable net assets.

► The negative goodwill is recognized as a gain on a bargain purchase.

► Since negative goodwill is very rare, the parent should check the
valuations of the identifiable net assets before recording a gain on
bargain purchase.
Bargain Purchase – Negative Goodwill

On June 30, Year 1 S Ltd. had 10,000 shares outstanding and P Ltd.
purchased all the shares for a total of $72,000.
Bargain Purchase – Negative Goodwill
Bargain Purchase – Negative Goodwill
Bargain Purchase – Negative Goodwill

Assume that on June 30, Year 1, P Ltd. purchased 80% of the outstanding
shares of S Ltd. at a total cost of $60,000. If we used the implied value
approach, the value of the subsidiary as a whole would be $75,000
($60,000 / 80%) and NCI would be valued at $15,000 ($75,000 - $60,000).

This is less than the fair value of identifiable assets of $77,000 and would
imply a negative goodwill of $2,000.

IFRS 3 states that the gain on a bargain purchase can only be recognize by
the acquirer.
Bargain Purchase – Negative Goodwill
Bargain Purchase – Negative Goodwill
Bargain Purchase – Negative Goodwill
Negative Acquisition Differential

► It is possible for an acquisition differential to be negative, when the

total consideration given is less than the carrying amount of the
subsidiary’s net assets.

► A negative acquisition differential is not the same as a negative good

will. If the fair values of the subsidiary`s ne assets are less than the
carrying amounts, and the consideration given is greater, then there
would be a positive goodwill.
Subsidiary with a Goodwill

► The goodwill appearing on the balance sheet of a subsidiary on the date

of a business combination is not carried forward when the consolidated
balance sheet is prepared.

► From the perspective of the ne parent, the goodwill is not considered to

be an identifiable asset at the time of the business combination.

► A new goodwill will be determined at the date of acquisition.

Contingent Consideration

► The terms of a business combination may require an additional cash

payment, or an additional share issued, contingent on a future event.

► Contingent consideration should be recorded at the date of acquisition

at its fair value.

► The parent should determine the amount based on different scenarios

and assign probabilities of those scenarios occurring.

► The future amount to be paid would need to be discounted to the date

of acquisition.
Contingent Consideration

► The contingent consideration will be classified as either a liability or

equity.

► If it will be paid in cash, another asset, or a variable amount of shares

based on a fixed dollar amount, it will be classified as a liability.

► If issuing a fixed number of shares will satisfy the contingent

consideration, it will be classified as equity.

► After initial recognition, the contingent consideration classified as

equity will not be remeasured.
Contingent Consideration

► Changes in the fair value of a contingent consideration classified as a

liability should be recognized in earnings.

► Changes in the fair value of a contingent consideration due to gathering

new information about facts and circumstances that existed at the
acquisition date and within a maximum of one year subsequent to the
date of acquisition would be considered as an adjustment to the
acquisition cost.
Contingent Consideration

Due to the uncertainty involved, the following should be disclosed:

► The amount of contingent consideration recognized on the acquisition

date.

► A description of the arrangement and the basis for determining the

amount of the payment.

► An estimate of the range of outcomes (undiscounted) or, if a range

cannot be estimated, the fact and reasons of why it cannot be
estimated.
Analysis and Interpretation
Analysis and Interpretation

Proportionate FVE INA

Current Ratio
Debt-to-equity ratio
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23
Debt-to-equity ratio
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23 4.25
Debt-to-equity ratio
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23 4.25 4.25
Debt-to-equity ratio
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23 4.25 4.25
Debt-to-equity ratio 0.74
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23 4.25 4.25
Debt-to-equity ratio 0.74 0.72
Analysis and Interpretation

Proportionate FVE INA

Current Ratio 4.23 4.25 4.25
Debt-to-equity ratio 0.74 0.72 0.73
Chapter 4: Consolidation of Non-wholly
Owned Subsidiaries

To be continued …
Problems 4-3, 4-12 & 4-18
Thanks