Advanced Accounting Jeter ● Chaney Changes in Ownership Interest Prepared by Sheila Ammons, Austin Community College Learning Objectives • • • • • • Identify the types of transactions that change the parent company’s ownership interest in a subsidiary Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition Compute the controlling interest in income after the parent sells some shares of the subsidiary company 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Changes in Ownership Interest • • Parent company can effectively 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 effectively 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 Changes in ownership Copyright © 2015 John Wiley & Sons, Inc All rights reserved Changes in Ownership Interest • Current GAAP (ASC Topics 805 and 810): – 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 Changes in ownership Copyright © 2015 John Wiley & Sons, Inc All rights reserved Changes in Ownership Interest • Current 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 Changes in ownership Copyright © 2015 John Wiley & Sons, Inc All rights reserved Parent Acquires Subsidiary Stock Through Several Open-Market Purchases—Cost Method • Current GAAP (ASC paragraph 805-10-25-9): – 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 Multiple open market purchases Copyright © 2015 John Wiley & Sons, Inc All rights reserved Several Open-Market Purchases—Cost Method Illustration: S Company had 10,000 shares of $10 par value common stock outstanding and retained earnings as follows: S Company January 1, Retained Earnings st 2013 (1 stock purchase) $ 40,000 January 1, 2015 (control achieved) 120,000 P Co purchased S Co common stock on the open market for cash: January 1, 2013 1,500 shares (15% of 10,000 shares) $ 24,000 January 1, 2015 7,500 shares (75% of 10,000 shares) 187,500 Total 9,000 shares (90% of 10,000 shares) $211,500 LO Multiple open market purchases Copyright © 2015 John Wiley & Sons, Inc All rights reserved Several Open-Market Purchases—Cost Method Thus on P’s books, the following entries are made: January 1, 2013 January 1, 2015 Assumptions: Any difference between implied and book values of the purchases relates solely to goodwill and is, therefore, not subject to amortization or depreciation but is reviewed periodically for impairment S Company distributes no dividends during the periods under consideration Solution on note page LO Multiple open market purchases Copyright © 2015 John Wiley & Sons, Inc All rights reserved Several Open-Market Purchases—Cost Method Calculation of IMPLIED Value of S Company: LO Multiple open market purchases Copyright © 2015 John Wiley & Sons, Inc All rights reserved Several Open-Market Purchases—Cost Method Because P Company has owned a percentage of S Company (15%) since January 1, 2013, an entry is needed on P’s books to revalue the 1,500 shares purchased in 2013 to their fair value as of the date of control ( January 1, 2015) Initial purchase price (1,500 shares at $16/share) $24,000 Change in retained earnings of S since acquisition 15%: [.15 x ($120,000 - $40,000)] 12,000 Carrying value (implied) of initial investment $36,000 Thus the gain on revaluation of the initial shares is computed as: Implied value ($25/share 1,500) $37,500 Implied carrying value of initial shares Revaluation gain 36,000 $ 1,500 LO Multiple open market purchases 10 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock Issuance of Additional Shares by a Subsidiary • Assume that the parent company already has a controlling interest in a subsidiary – The newly issued shares may be purchased 1) entirely by the parent company, 2) partly by the parent company and partly by the noncontrolling stockholders, or 3) entirely by the noncontrolling stockholders LO Subsidiary issues new shares entirely to parent 38 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock New Shares Issued above Existing Carrying Value per Share • Illustration: P Company purchased 14,000 shares (70%) of S Company’s $10 par value common stock on January 1, 2008, for $210,000, which included a $20,000 excess of implied over book value; the excess cost was assigned to land S Company’s retained earnings on January 1, 2008, were $50,000 LO Issue of new shares entirely to the parent 39 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock LO Issue of new shares entirely to the parent 40 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock On January 1, 2016, P Company purchased 4,000 additional shares of S Company stock directly from S Company at its current market price of $22 per share ($88,000) This price is greater than the existing book value per share of S Company Noncontrolling stockholders elected not to participate in the new issue S Company’s stockholders equity on January 1, 2016, was: 41 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock LO Issue of new shares entirely to the parent 42 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock Essentially, because the controlling stockholders paid more than the existing carrying value per share, the noncontrolling stockholders’ carrying value must increase LO Issue of new shares entirely to the parent 43 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock If a workpaper were prepared immediately after the purchase of the new shares, the workpaper entries to establish reciprocity (convert to equity) and eliminate the investment account would be: 44 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock New Shares Issued at or below the Existing Carrying Value per Share Illustration: The shares are issued at their book value of $17.50 per share (or $70,000), the computation is as follows: LO New shares issued to the parent 45 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock Although the noncontrolling stockholders’ percentage of ownership decreases from 30% to 25%, their share of the net assets of S Company decreased only by the land value transferred, as shown here: LO New shares issued to the parent 46 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock Assume the new shares were issued at $14 per share (or $56,000) The excess of book value over cost is computed as follows: 47 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock In this case, the $4,500 excess of book value over cost is treated as an increase in the additional contributed capital of the parent Journal entry by P Company to record the purchase of the new shares is: P Company’s Books Investment in S company Cash 56,000 56,000 LO New shares issued to the parent 48 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock Workpaper entries: LO New shares issued to the parent 49 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock New Shares Purchased Ratably by Parent and Noncontrolling Stockholders • • If the noncontrolling stockholders had elected to exercise their rights, the percentage of stock owned by the parent and noncontrolling stockholders after the new issue would be the same as their respective interests prior to the new issue The book value of the interest acquired is equal to the cost of the shares to P Company – There is no need to adjust the parent’s additional contributed capital LO New subsidiary shares purchased ratably by the parent and noncontrolling shareholders 50 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Subsidiary Issues Stock New Shares Purchased Entirely by Noncontrolling Stockholders • As long as the number of new shares issued is not so large that it reduces the parent’s percentage of ownership below that needed for control, new financing can be made available and control retained – Issuance of new shares to noncontrolling stockholders reduces the parent’s percentage of ownership – Economic substance of the transaction is a sale of interest by P Company LO New subsidiary shares purchased by noncontrolling shareholders 51 Copyright © 2015 John Wiley & Sons, Inc All rights reserved IFRS and Step Acquisitions Under IFRS: A choice is available to measure noncontrolling interests –At their proportionate interest in the new identifiable assets –At fair value (which is similar to U.S GAAP) of the acquired firm or A change in control is a significant economic event –Acquisition accounting is applied only at the date the control is achieved LO Noncontrolling shareholders acquire new shares issued by subsidiary 52 Copyright © 2015 John Wiley & Sons, Inc All rights reserved ... issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders Copyright © 2015 John Wiley & Sons,... Ownership Interest • • Parent company can effectively increase its ownership interest in a subsidiary by either buying additional subsidiary shares directly from third parties or having a subsidiary... from third parties Parent company can effectively decrease its ownership interest in a subsidiary by either selling some subsidiary shares directly to third parties or having a subsidiary sell additional