Chapter11

CONSOLIDATIONTHEORIES,PUSH-DOWNACCOUNTING,AND

CORPORATEJOINTVENTURES

ChapterOutline

CONSOLIDATIONUNDERPARENTCOMPANYANDENTITYTHEORIES

(Illustration11-1)

AContemporarytheoryevolvedfrompracticeanditessentiallyanentityapproachto

thepreparationofconsolidatedfinancialstatements.

BTraditionaltheoryreflectedpartsofboththeparent-companytheoryandtheentity

theory.

CUnderlyingassumptionsoftheparentcompanytheoryaresummarizedasfollows:

1Theviewpointisthatconsolidatedfinancialstatementsareanextensionof

parentcompanystatementsandarepreparedfromtheviewpointofparent

companyshareholders.

2Consolidatednetincomeisameasureofincometotheparentcompany

stockholders.

3Noncontrollinginterestisaliabilityfromtheviewpointofparentcompany

shareholders.

4Similarily,noncontrollinginterestexpenseisconsideredanexpensefromthe

viewpointofthemajorityshareholders.

5Subsidiaryassetsandliabilitiesareinitiallyconsolidatedattheirbook

valuesplustheparent'sshareofanyexcessoffairvalueoverbookvalue.

aSubsidiarynetassetsarerevaluedonlytotheextentacquiredbythe

parentcompany.

6Thenoncontrollinginterestinsubsidiaryassetsandliabilitiesis

consolidatedatbookvalue.

7Allunrealizedgainsandlossesfromdownstreamintercompanysalesare

eliminateduntilrealized.

8Unrealizedgainsandlossesfromupstreamintercompanysalesare

eliminatedtotheextentoftheparentcompanyownershipinterest.

aTheamountnoteliminatedisconsideredrealizedfornoncontrolling

shareholders.

DUnderlyingassumptionsoftheentitytheoryaresummarizedasfollows:

1Theviewpointisthatoftheconsolidatedentityasawhole.

aTheconsolidatedstatementsshouldprovideinformationforall

interestholders.

2Totalconsolidatednetincomeisameasurementofincometoallequity

stockholders,anditisallocatedinthefinancialstatementstomajorityand

noncontrollinginterests.

3Noncontrollinginterestisanequityinterestshowninthestockholders5equity

sectionoftheconsolidatedbalancesheet.

4Subsidiaryassetsandliabilitiesareconsolidatedattheirfairvalues.

5Atotalsubsidiaryvalueisimputedfromthepricepaidbytheparent

companyforitsmajorityinterest.

6Allunrealizedgainsandlossesfromdownstreamintercompanysalesare

eliminateduntilrealized.

7Unrealizedgainsandlossesonupstreamintercompanysalesareeliminatedby

allocatingthemproportionatelytomajorityandnoncontrollinginterests.

ESeeExhibit11-1inthetextforacomparisonofconsolidationtheories.

FConsolidatedStockholdersEquity:Contemporarytheorydiffersslightlyfromentity

theoryinreportingconsolidatedstockholdersequity.Underentitytheory,both

controllingandnoncontrollinginterestsarecomponentsofconsolidatedequity.

Further,entitytheorywouldshowthecomponentsofeachinterest,i.e.,breakingthe

controllingandnoncontrollinginterestsintotheirrespectivesharesofcontributed

capitalandretainedearnings.UnderSFASNo.160,thenoncontrollinginterestis

shownasasingle,combinedamountunderconsolidatedstockholdersequity.

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PARENTCOMPANYACCOUNTINGUNDERTHEEQUITYMETHOD

AParentcompanyandentitytheoriesdonotaffectparentcompanyaccounting

undertheequitymethod.

1Thisisbecausetheextravaluesunderentitytheorywerereflectedin

thenoncontrollinginterest,notthemajorityinterest.

BTheseparatecompanystatementswillbethesamefortheparentandsubsidiary

underboththeories.

CConsolidatedstatementsareaffected,however,anddifferentamountsarelikelyfor

consolidatedassets,liabilities,andnoncontrollinginterests.

PUSH-DOWNACCOUNTING(Illustration11-2)

AUnderpush-downaccounting,thefairvaluesofanacquiredsubsidiary^assetsand

liabilitiesarerecordedintheseparatefinancialstatementsofthepurchased

subsidiary.

1TheSECrequirespush-downaccountinginitsfilingswhenasubsidiaryis

substantiallywhollyowned(usually97%)withnosubstantialpubliclyheld

debtorpreferredstockoutstanding.

2Push-downaccountingaffectsonlythesubsidiary'sseparatefinancial

statements.

aWithoutpush-downaccounting,theallocationofthepurchasepriceto

identifiableassetsandgoodwillisdoneintheconsolidationworking

papers.

bUnderpush-downaccounting,theallocationisdoneonthebooksofthe

subsidiary.

cConsolidatedfinancialstatementsareexactlythesameundereither

procedure.

BSupportersofpush-downaccountingarenotinagreementregarding

Thepercentageownershipnecessaryforpush-downaccounting,and

2Whethertheallocationshouldreflect100%ofthefairvaluesofthe

subsidiary'sassetsandliabilitiesiflessthana100%changeinownershiphas

occurred.

CPush-downaccountingcanbeappliedundereitherparentcompanytheoryorentity

theory.

1Push-downaccountingunderparentcompanytheory:

aCost/bookvaluedifferentialsareallocatedintheusualmanner.

bThevaluesfromtheallocationschedulearepusheddowntothe

subsidiaryrecords.Thesubsidiarymakesajournalentrytorevalue

assetsandliabilities,eliminateretainedearnings,andenterpush-down

capital.

(1)Forexample,ifa90%interestispurchased,90%ofthe

differencebetweencostandfairvalueispusheddowntothe

subsidiary'sbooks.

2Push-downaccountingunderentitytheory:

aAtotalvalueofthesubsidiaryisimputedfromthepricepaidbythe

parentfortheinterestacquired.

(1)Theexcessimpliedvalueoverthebookvalueofthe

subsidiary'snetassetsisassignedtotheindividualassetsand

liabilitiesonthebasisof100%ofthefairvalue/bookvalue

differentialsandtheremaindertogoodwill.

(2)Forexample,ifa90%interestispurchased,100%ofthe

impliedvalue(differencebetweencostandfairvalue)ispushed

downtothesubsidiary'sbooks.

bThesubsidiarymakesajournalentrytorevalueassetsandliabilities,

eliminateretainedearnings,andrecordpush-downcapital.

JOINTVENTURES

AJointventuresarebusinessentitiesthatareowned,operated,andjointlycontrolled

byasmallgroupofinvestors(venturers)fortheconductofspecificbusiness

undertakingsthatprovidemutualbenefitforeachoftheventurers.

1Nosingleventurercontrolstheoperations.

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BJointventuresmaybeorganizedascorporations,partnerships,orundividedinterests.

TheAICPA'sSOP78-9definesthefollowingformsofjointventures:

Acorporatejointventureisacorporationownedandoperatedbyasmall

groupofventurerstoaccomplishamutuallybeneficialventureorproject.

aVenturersthatcanparticipateinthemanagementofthecorporate

jointventureandholdnomorethan50%interestintheventure

accountfortheirinterestbytheequitymethod.

bAcorporationthatisasubsidiaryofanothercorporationisnota

corporatejointventure.

(1)Thesubsidiaryisconsolidatedintheflnancialstatementsof

themajorityowner.Theotherinvestorsaccountfbrtheir

investmentsundertheequitymethod.

2Unincorporatedjointventuresincludethefollowing:

aAgeneralpartnershipisanassociationinwhicheachpartnerhas

unlimitedliability.Alimitedliabilitypartnershipisanassociationin

whichoneormoregeneralpartnershaveunlimitedliabilityandoneor

morepartnershavelimitedliability.

(1)AlthoughAPBOpinionNo.18叩pliesonlytoinvestmentsin

commonstock,InterpretationNo.2concludedthatmanyofthe

provisionsoftheequitymethodfromAPB18shouldbeapplied

toinvestmentsinunincorporatedjointventures.

(2)Partnershipprofitsandlossesaccruedbytheventurersare

generallyreflectedinthepartners9financialstatements.

(3)Theeliminationofintercompanyprofitsandlossesisgenerally

appropriate.

bAnundividedinterestisanownershiparrangementinwhichtwoor

morepartiesjointlyownpropertyandtitleisheldindividuallytothe

extentofeachparty'sinterest.Eachventurerisproportionately

liablefbrtheventurer'sshareofeachliability.

(1)Someundividedinterestsareaccountedforinthesamemanner

aspartnershipjointventurers.

(2)Othersfollowspecializedindustrypracticesinwhicheach

ventureraccountsforitsproratashareoftheassets,liabilities,

revenues,andexpensesofthejointventureinitsownfinancial

statements.Thisiscalledprorataorproportionate

consolidation.

VARIBALEINTERESTENTITIES

ATheFASBcoinedthetermvariableinterestentityinFIN46(R)

1Avariableinterestentity(VIE)isaspecialpurposeentity,whichwillrequire

consolidationduetocontractualorfinancialarrangementsotherthan

votinginterests.

BAvariableinterestentitycantaketheformofapartnership,limitedliability

companyortrust-typearrangement.

1ApotentialVIEmustbeaseparateentity,notasubset,branchordivisionof

anotherentity.

2Pensionsandcertainotherentitiesarespecificallyexcluded.

CTheFASB'sdefinitionofVIEsrequiringconsolidationencompassessituationswhere

acompanymayonlyownaminimalvotingequityinterest,butbecontractually

requiredtoprovideadditionalfinancialsupportintheeventoffutureoperating

losses.

DPrimarybeneficiariesarerequiredtoconsolidateVIEs.

1AnenterpriseshallconsolidateaVIEifithasavariableinterestthatwill

absorbamajorityoftheVIE'sexpectedlosses,receiveamajorityofthe

VIE'sexpectedreturns,orboth.

2IfoneentitywillreceivethemajorityofaVIE'slosses,andanotherthemajority

ofresidualreturns,theoneabsorbingthelossesconsolidatestheVIE.

EAllenterprisesholdingasignificantinterestinaVIEmustprovidecertain

disclosures.

1TheprimarybeneficiariesofaVIEmustprovidemoreextensivedisclosures

thantheotherenterprisesnotdeemedtheprimarybeneficiary.

FTheprimarybeneficiaryconsolidatesbasedonfairvalueonthedatetheybecome

primarybeneficiary.

1IftheprimarybeneficiaryhastransferredassetstotheVIE,theyare

transferredatbookvalueandnogainorlossisrecordedonthetransfer.

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2GoodwillmayberecordedonlyiftheVIEisabusiness(asdefinedinFIN

46(R)).Otherwise,anyexcessofconsiderationpaidoverfairvalueofassetsis

treatedasanextraordinaryloss.

3EstimatingfairvaluemaybechallengingiftheVIEinvestsinuniqueassets;

firmsmayneedtouseexpectedfuturecashflowsasameansofestimatingfair

value.

ELECTRONICSUPPLEMENT

Thisprovidedadiscussionofhowconsolidationmightbealteredifacurrentcostapproach

wereadopted.

DescriptionofassignmentmaterialMinutes

Questions(12)

Exercises(13)

El1-17MCgeneralquestions(parentcompanyandentitytheories)14

El1-25MCgeneralquestions(Jointventures)10

El1-35MCproblem-typequestions(parentcompanyandentitytheories)20

Ell-4[Pond/Staff]Computations(parentcompanyandentitytheories)20

El1-5[Perry/Shelly]Computationsunderparentcompanyandentitytheories20

(fair-bookvaluedifferentials)

El1-6[Polak/Stahl]Computationsunderparentcompany,entityandcontemporary20

theories(mid-yearacquisitionandgoodwill)

El1-7[Palumbo/Seal]Computationsunderparentcompanyandentitytheories15

(upstreamsales)

El1-8[Palid/Stark]Computeconsolidatednetincomeunderthethreetheories15

(upstreamanddownstreamsales)

El1-9[Pioneer/Security]Journalentriesforpush-downaccounting(parent20

companyandentitytheories)

El1-10[Sun-Belt]Determineinvestmentincomefbrventurersofacorporate12

jointventure

El1-11(Martin]Determineamountofnoncontrollingexpensetoappearin15

consolidatedincomestatement

El1-12fPaxel/Polo]Requiredfinancialreportinganddisclosurerequirementsfor15

aVIE

El1-13[Jennifer/Laura]DeterminetheprimarybeneficiaryofaVIE10

Problems(12)

Pl1-1[Picody/Scone]Consolidatedbalancesheets(parentcompanyandentity30

theories)

Pl1-2[Pisces/Scorpio]Consolidatedbalancesheetandincomestatementunder30

entitytheory

Pl1-3[Palace/Sign]Computations(parentcompanyandentitytheories)30

Pl1-4[Pierre/Smedley]Comparativeconsolidatedfinancialstatementsunder50

alternativetheories(goodwillandintercompanyinventorysale)

Pl1-5fPackard/Studs]Comparativebalancesheetsundertraditionaland40

entitytheories(goodwillandupstreaminventorysale)

Pl1-6AICPAfX/Y]Computationsandexplanations(separatecompany70

andconsolidatedfinancialstatementsgiven-entitytheory)

Pl1-7[Played/Splash]Prepareajournalentrytorecordthepushdown,preparea30

subsidiarybalancesheet,anddetermineinvestmentincomefora100%

ownedsubsidiary

Pl1-8[Parker/Sanue]Journalentriesandcalculationsfbrpush-downaccounting30

withnoncontrollinginterest

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Pl1-9[Power/Swing]Journalentriesandcomparativebalancesheetsatacquisition25

forpush-downaccountingatacquisition

Pl1-10[Power/Swing]Twoconsolidationworkingpapersoneyearaftercombination70

underpush-downaccounting(both90%and100%ownershipassumptions)

Pl1-11[Pepper/Jerry]Workingpapersforproportionateconsolidation(jointventure)50

Internetassignment

UsingtheCorning,Incorporated2006annualreportfromthewebsite,preparea

summaryofjointventureactivities.

Illustration11-1

COMPARISONOFPARENTCOMPANYTHEORYANDENTITYTHEORY

ASSETVALUATION

PetCompanyacquiresa90%interestinSamCompanyfor$63,000onJanuary1,20X2.

BookvaluesandfairvaluesofSam'sassetsandequitiesaresummarizedasfollows:

BookValueFairValueDifference

Othercurrentassets$40,000$40,000

Inventories15,00020,000$5,000

Plantassets-net30,00038,0008,000

Totalassets$85.000$98.000

Liabilities$38,000$38,000

Capitalstock$1()par25,000

Retainedearnings22,000

Totalequities$85,000

AllocationofPurchasePriceunderParentCompanyTheory:Theparent9sshareof

subsidiaryassetsandliabilitiesarerevalued.

Cost$63,000

Bookvalueacquired($47,000x90%)42,300

Excesscostoverbookvalueacquired$20,700

Excessallocatedto:

Inventories($5,000x90%)$4,500

Plantassets-net($8,000x90%)7,200

Remaindertogoodwill9,000

Excesscostoverbookvalueacquired$20.700

AllocationofPurchasePriceunderEntityTheory:Atotalimpliedvalueforthesubsidiary's

assetsandliabilitiesiscomputedbasedonthepricepaidfbrtheparent's90%share.

ImpliedvalueofSam($63,000/90%)$70,000

BookvalueofSam'snetassets47.000

Excessimpliedvalueoverbookvalue$23.000

Excessallocatedto:

Inventory(100%ofdifference)$5,00()

Plantassets-net(100%ofdifference)8,000

Remaindertogoodwill10,00()

Excessimpliedvalueoverbookvalue$23.000

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ConsolidatedBalanceSheetsatAcquisition

ParentCompanyTheory

Pet90%AdjustmentsandConsolidated

SamEliminationsBalanceSheet

Othercurrentassets$55,000$40,000$95,000

Inventory25,00015,000a4,50044,500

Plantassets一net70,00030,00()a7,200107,200

InvestmentinSam63,000a63,000

Goodwilla9,0009,000

Totalassets$213,000$85,000$255,700

Liabilities$120,000$38,000$158,000

Capitalstock60,00025,000a25,00060,000

Retainedearnings33,00022,000a22,00033,000

Noncontrollinga4,7004,700

interest

Totalequities$213.000$85.000$255.700

*Noncontrollinginterestequals10%ofthebookvalueofSam'snetassets.

EntityTheory

Pet90%AdjustmentsandConsolidated

SamEliminationsBalanceSheet

Othercurrentassets$55,000$40,000$95,000

Inventory25,00015,000a5,00045,000

Plantassets一net70,00030,000a8,000108,000

InvestmentinSam63,000a63,000

Goodwilla10,00010,000

Totalassets$213,000$85.000$258,000

Liabilities$120,000$38,00()$158,00()

Capitalstock60,00025,000a25,00060,000

Retainedearnings33,00022,000a22,00033,000

Noncontrollinga7,0007,000

interest

Totalequities$213,000$85.000$258.000

*Noncontrollinginterestequals10%ofthevalueimpliedbyPet'spurchasepriceforits90%

interest($63,000/90%)x10%=$7,000.

Importantpointsfromtheillustration:

1Goodwill.Goodwillcanbedeterminedindependently.Underentitytheory,goodwill

isthedifferencebetweenthetotalimpliedvalueofSam'snetassets($70,000)andthe

fairvalueofSam'snetassets($60,000).Underparentcompanytheory,goodwillisthe

differencebetweentheinvestmentcost($63,000)andthefairvalueacquired($60,000x

90%).

2Assetandliabilityvaluations.Consolidatednetassetsare$2,300greaterunderentity

theory($100,000)thanunderparentcompanytheory($97,700).

*Consolidatednetassetsunderparentcompanytheoryconsistofthecombined

bookvaluesofPetandSam'snetassetsplus90%oftheexcessoffairvalueof

Sam'snetassetsoverthebookvalueofthoseassets.

*ConsolidatednetassetsunderentitytheoryconsistofthebookvalueofPet9snet

assetsplusthefairvalueofSam'snetassets.

3Stockholders9equity.Ontheconsolidatedbalancesheet,capitalstockandretained

earnings(themajorityinterestinconsolidatednetassets)arethesameunderparent

companyandentitytheories.

4Noncontrollinginterest.The$2,300differenceinthevalueofconsolidatednetassets

underparentcompanyandentitytheoriesliesinthemeasurementofnoncontrolling

interest($7,000underentitytheoryand$4,700underparentcompanytheory.Ifthere

isnononcontrollinginterest,Iherearenodifferencesinthevalueofconsolidatednet

assetsamongthethreetheories.

5Underparentcompanytheory,thepurchasepriceisallocatedtothefairvaluesofthe

identifiableassetsandgoodwillacquired.Underentitytheory,thetotalfairvalueofthe

entityimpliedbythepurchasepriceisallocatedtothefairvaluesoftheidentifiablenet

assetsandtogoodwill.

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Illustration11-2

PUSH-DOWNACCOUNTING

UNDERPARENTCOMPANYANDENTITYTHEORIES

Assumptions

1PipCompanyacquiresa90%interestinSkiCompanyfor$585,000onJanuary1,20X2.

2BookvaluesandfairvaluesofSki'sassetsandliabilitiesaresummarizedasfollows:

BookValueFairValueDifference

Currentassets$240,000$240,000

Land100,000120,000$20,()0()

Buildings-net250,000300,00050,000

Equipment-net300,000270,000(30,000)

Totalassets