Chapter 8: Consolidations – Changes in Ownership Interests by Jeanne M David, Ph.D., Univ of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn © Pearson Education, Inc publishing as Prentice 8-1 Changes in Ownership: Objectives Prepare consolidated statements when parent company's ownership percentage increases or decreases during the reporting period Apply consolidation procedures to interim (midyear) acquisitions Record subsidiary/investee stock issuances and treasury stock transactions © Pearson Education, Inc publishing as Prentice 8-2 Consolidations – Changes in Ownership Interests 1: Changes in Ownership Percentage © Pearson Education, Inc publishing as Prentice 8-3 Changes in Parent Ownership Increases Parent acquires controlling interest during interim period Parent acquires controlling interest in stages Parent acquires additional shares from noncontrolling interest Decreases Parent sells shares but maintains control Parent sells shares giving up control © Pearson Education, Inc publishing as Prentice 8-4 Initial Acquisition of Control Parent obtains control – Determine implied value and allocate excess – Apply consolidation procedures © Pearson Education, Inc publishing as Prentice 8-5 Control is Maintained Parent increases its share by buying more stock or decreases its share by selling some stock – Change in Investment in sub is based on the underlying fair value of equity – No gain or loss is recognized; paid in capital is adjusted © Pearson Education, Inc publishing as Prentice 8-6 Control Relinquished Parent sells part of its Investment and no longer retains control – Reduce the Investment based on proportion of interest sold – Record gain or loss on sale – Discontinue consolidation © Pearson Education, Inc publishing as Prentice 8-7 Is There a Gain or Loss? Basic rule: No gain or loss is recorded on equity transactions with a firm's owners Control before and after the transaction is an equity transaction – No gain or loss – Adjust paid in capital, if needed No control before and control after – Point of business acquisition – No loss – Might have gain on bargain purchase Control before and no control after – Disposition of asset – Gain or loss is recorded © Pearson Education, Inc publishing as Prentice 8-8 Consolidations – Changes in Ownership Interests 2: Interim Acquisitions © Pearson Education, Inc publishing as Prentice 8-9 Preacquisition Issues Entity theory (APB Opinion No 51) – Income statement includes all revenues and expenses – Total consolidated income LESS • • • Preacquisition earnings Noncontrolling interest share Equals Controlling interest share Parent theory (FASB Statement No 160) – Income statement includes revenues and expenses since acquisition – Total consolidated income LESS • • Noncontrolling interest share Equals Controlling interest share © Pearson Education, Inc publishing as Prentice 8-10 Worksheet Entries Income from Sergio (8.1+21.6) Dividends Investment in Sergio Noncontrolling interest share (0.9+5.4) Dividends Noncontrolling interest Common stock Retained earnings 1/1 Goodwill Investment in Sergio (288-32.9) Noncontrolling interest, 1/1 Noncontrolling interest, 4/1 29.7 16.0 13.7 6.3 200.0 100.0 20.0 © Pearson Education, Inc publishing as Prentice 4.0 2.3 255.1 32.0 32.9 8-28 Interim Sale, Loss of Control Bring investment account up to date, recognizing partial year's income as appropriate Determine BV of fraction of investment sold Compare to selling price Record a gain or loss on difference The "parent" no longer consolidates the "subsidiary" • • That relationship has been dissolved Parent will use equity or fair value/cost method as appropriate © Pearson Education, Inc publishing as Prentice 8-29 Consolidations – Changes in Ownership Interests 3: Subsidiary's Stock Transactions © Pearson Education, Inc publishing as Prentice 8-30 Subsidiary Actions Subsidiary actions increasing Parent share Sub issues additional shares to Parent Sub reacquires shares from noncontrolling interest Subsidiary actions decreasing Parent share Sub issues additional shares to noncontrolling interests Sub reacquires shares from Parent Subsidiary actions not impacting ownership shares Sub issues stock to both parent & noncontrolling interest Sub issues stock split or stock dividend © Pearson Education, Inc publishing as Prentice 8-31 Stroh Issues Stock to Purdy Purdy owns 80% of Stroh, acquired at $180 Cost of 80% of Stroh $180 Implied value of Stroh $225 Book value of Stroh 200 Excess, goodwill $25 Stroh issues additional shares to Purdy Outstanding shares increased from 10K to 12K Purdy had owned 8K of the 10K, but now owns 10K of the 12K shares © Pearson Education, Inc publishing as Prentice 8-32 Stroh's equity Goodwill Total value Purdy's Investment in Stroh Purdy's share of BV of equity Goodwill Total value Before sale 200 25 225 180 160 20 180 Goodwill may go up or down depending on the value Purdy paid for the additional shares of Stroh Sell at BV Sell > BV Sell < BV for $40 for $70 for $30 Stroh's equity, after the issuance 240 270 230 Purdy's Investment, after 220 250 210.0 Purdy's share of equity, 10/12 share 200 225 191.7 New measure of goodwill 20 25 18.3 Total 220 250 210.0 © Pearson Education, Inc publishing as Prentice 8-33 Purdy's Entry Purdy acquires additional shares directly from Stroh at book value, $40 Investment in Stroh Cash 40 40 If Purdy had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change The analysis above shows different amounts of goodwill which will be used in the consolidation worksheet © Pearson Education, Inc publishing as Prentice 8-34 Stat Issues Stock to Outsiders Puny owns 80% of Stat, acquired at $180 Cost of 80% of Stat $180 Implied value of Stat $225 Book value of Stat 200 Excess, goodwill Stat issues additional shares to outside$25 entities Outstanding shares increased from 10K to 12K Puny had owned 8K of the 10K, but now owns 8K of the 12K shares © Pearson Education, Inc publishing as Prentice 8-35 Stat equity Goodwill Total value Puny's Investment Puny's share of BV of equity Goodwill Total value Stat equity, after Puny's Investment current balance Puny's share of equity, 10/12 share Old goodwill Total, new balance in Investment Adjustment Before sale 200 25 225 180 160 20 180 Puny's measure of goodwill does not change when Stroh issues the shares to outside entities Puny adjusts the value of its Investment in Stat account Sell at BV Sell > BV Sell < BV for $40 for $70 for $30 240 270 230 180 180 180.0 160 180 153.3 20 20 20.0 180 200 173.3 +20 -6.7 © Pearson Education, Inc publishing as Prentice 8-36 Puny's Adjusting Entry for $40: no entry needed for $70 Investment in Stat 20.0 Additional paid in capital for $30 20.0 Additional paid in capital Investment in Stat 6.7 © Pearson Education, Inc publishing as Prentice 6.7 8-37 Shelly Purchases Treasury Stock Pointer owns 80% of Shelly acquired for $160, at cost equal to book value Cost of 80% of Shelly $160 Implied value of Shelly $200 Book value of Shelly 200 goodwill10K shares$0 Pointer holdsExcess, 8K of Shelly's outstanding Shelly reacquires 0.4K shares from outsiders Pointer now holds 8K of Shelly's 9.6K shares outstanding © Pearson Education, Inc publishing as Prentice 8-38 Before treasury stock Shelly's equity 200 Goodwill Total value 200 Pointer's Investment in Shelly 160 Pointer's share of BV of equity 160 Goodwill Total value 160 Shelly's equity, after Pointer's Investment current balance Pointer's share of equity, 8/9.6 Old goodwill Total, new balance in Investment Adjustment needed There was no goodwill and none is created by Shelly purchasing treasury stock Pointer adjusts the balance in its Investment in Shelly account Buy = BV Buy > BV Buy < BV for $8 for $12 for $6 192 188 194 160 160 160.0 160 156.7 161.7 0.0 0.0 160 156.7 161.7 -3.3 +1.7 © Pearson Education, Inc publishing as Prentice 8-39 Pointer's Adjustment Pointer's entry when Shelly purchases treasury shares from outsiders Treasury stock purchased for $8 no entry needed Treasury stock purchased for $12 Additional paid in capital Investment in Stroh Treasury stock purchased for $6 Investment in Stroh Additional paid in capital © Pearson Education, Inc publishing as Prentice 3.3 3.3 1.7 1.7 8-40 Stock Splits/ Stock Dividends A subsidiary may issue stock dividends or stock splits – Impact is proportional on both controlling and noncontrolling interests – Percentage ownership does not change – Stock dividends capitalize some of the subsidiary's retained earnings © Pearson Education, Inc publishing as Prentice 8-41 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2009 Pearson Education, Inc Publishing as Prentice Hall © Pearson Education, Inc publishing as Prentice 8-42 ... 32.9 Additional paid in capital 7.1 No gain or loss is recorded Since Pablo retains control, the sale of some shares is treated as an owner transaction; the difference impacts paid in capital... Interim Acquisition Puma acquires 80% of Sega for $2,400 on 5/1/09 Fixed assets with a remaining life of years are undervalued by $600 Sega's trial balance on 12/31/09 was: Cash Inventories Fixed assets,... equity transactions with a firm's owners Control before and after the transaction is an equity transaction – No gain or loss – Adjust paid in capital, if needed No control before and control after