ACCT6381
Advanced Accounting
Week 9
Changes in Ownership Interest
Changes in Ownership Interest
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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.
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Changes in Ownership Interest
• Parent company can effectively increase its ownership interest in a
subsidiary by either
1. buying additional subsidiary shares directly from third parties or
2. having a subsidiary purchase its (subsidiary’s) shares from third parties.
• Parent company can effectively decrease its ownership interest in a
subsidiary by either
1. selling some subsidiary shares directly to third parties or
2. having a subsidiary sell additional shares (including treasury shares) to third
parties.
LO 1 Changes in ownership.
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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 1 Changes in ownership.
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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 1 Changes in ownership.
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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 2 Multiple open market purchases.
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Several Open-Market Purchases—Cost Method
Illustration: S Company had 10,000 shares of $10 par value common stock
S Company
outstanding and retained earnings as follows: Retained Earnings
January 1, 2013 (1st 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 2 Multiple open market purchases. 8
Several Open-Market Purchases—Cost Method
Thus on P’s books, the following entries are made:
January 1, 2013
January 1, 2015
Assumptions:
1. 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.
2. S Company distributes no dividends during the periods under consideration.
Solution on
note page LO 2 Multiple open market purchases. 9
Several Open-Market Purchases—Cost Method
Calculation of IMPLIED Value of S Company:
LO 2 Multiple open market purchases. 10
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 36,000
Revaluation gain $ 1,500
LO 2 Multiple open market purchases. 11
Several Open-Market Purchases—Cost Method
The following entry is made on P company books.
Investment in S Company 1,500
Gain on revaluation 1,500
A workpaper entry is needed on December 31, 2015, to convert to equity
(establish reciprocity) from 2013 to 1/1/15.
Investment in S Company 12,000
1/1 Retained Earnings—P Company 12,000
[.15 x ($120,000 - $40,000) change in retained earnings from 1/1/13
to 1/1/15]
LO 2 Multiple open market purchases.
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Several Open-Market Purchases—Cost Method
On the workpaper, the investment is eliminated by the following entry:
Common Stock—S Company 100,000
1/1 Retained Earnings—S Company 120,000
Difference between Implied and Book Value 30,000
Investment in S Company ($187,500 + $37,500) 225,000
Noncontrolling Interest in Equity 25,000
LO 2 Multiple open market purchases.
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Several Open-Market Purchases—Cost Method
Comparison to IFRS
• IFRS 3, Business Combinations, provides the
guidance for step acquisitions under international
standards. Under IFRS 3, all previous ownership
interests are adjusted to fair value, with any gain or
loss recorded in earnings. This is similar to the rules
issued by the FASB.
LO 2 Multiple open market purchases.
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Sell Investment on Open-Market—Cost Method
Control Maintained
• The treatment of the sale of a portion of its investment by a parent
company depends on whether or not the sale results in the loss of
effective control of the subsidiary.
• If control is maintained, no gain or loss is recognized in the income statement.
• Instead, an adjustment is made to additional contributed capital of the controlling interest.
• If control is lost, the entire interest is adjusted to fair value, and a gain or loss
recorded in income on all shares owned prior to sale.
LO 3 Parent sells shares subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
• Illustration: P Company owns 9,000 shares of S Company that were
revalued to $25 a share on the date of acquisition, or $225,000.
Assume that P Company sold 1,800 shares of the 9,000 shares of S
Company stock on July 1, 2015, for $84,600 ($47/share). The cost of
the 1,800 shares sold equals $45,000 (or 20% of $225,000). After the
sale, P Company retains control with a 72% ((9,000 x 80%)/10,000)
interest. Note that the 1,800 shares sold represent 18% of total S
Company shares.
LO 3 Parent sells shares subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
Illustration: To record the sale of the shares, P Company makes the
following entry in its books on July 1, 2015.
Cash 84,600
Investment in S Company (20% x $225,000) 45,000
Additional Contributed Capital—P Company 39,600
After this entry, the balance in the investment in S Company account on P
Company books will be $168,000
($24,000 + $187,500 + $1,500 -$45,000).
LO 3 Parent sells shares subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
From a consolidated standpoint, the cost of the shares sold ($45,000)
needs to be adjusted for 18% of the undistributed earnings since the date
of acquisition.
LO 3 Parent sells shares subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
The correct consolidated amount of additional contributed capital on is:
An adjustment is needed on the workpapers to reduce additional
contributed capital:
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
• When more than one purchase is made before control is obtained, the
acquisition date is defined as the date at which control is achieved.
• The following example illustrates the procedures followed for open-
market purchases and sales of subsidiary stock under the equity
method.
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
Illustration: S Company had 10,000 shares of $10 par value common stock
outstanding during 2012–2015 and retained earnings as follows:
S Company
Retained Earnings
January 1, 2012 $ 40,000
January 1, 2014 120,000
January 1, 2015 185,000
December 31, 2015 265,000
P Co. purchased S Co. common stock on the open market for cash:
January 1, 2012 1,500 shares (15%) * $ 24,000
January 1, 2014 7,500 shares (75%) * 187,500
Total 9,000 shares (90%) * $211,500
* of 10,000 shares
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
Assumptions:
1. Any difference between implied and book value of net assets acquired relates to
goodwill.
2. S Company distributed no dividends during the periods under consideration. Since
no dividends were declared, the change in retained earnings represents the net
income for that year.
3. P Company sold 1,800 shares of S Company stock on July 1, 2015, for $84,600.
P Company’s Books:
1/1/12 1/1/14
Investment in S 24,000 Investment in S 187,500
Cash 24,000 Cash 187,500
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
Since P Company now has a 90% interest in S Company and intends to apply
the equity method, the investment account must be restated to recognize P
Company’s share (15%) of the increase in S Company’s retained earnings
from January 1, 2012, to January 1, 2014.
Investment in S Company 12,000
1/1 Retained Earnings—P Company 12,000
[.15 x ($120,000 x $40,000) or the change in retained earnings from 1/1/12 to 1/1/14].
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
To adjust the investment to fair value as of the date of acquisition, the gain on
revaluation of the initial shares is computed as:
P Company’s Books
Investment in S Company 1,500
Gain on revaluation 1,500
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
P Company will recognize its share of S Company income for 2014 as
follows:
Investment in S Company 58,500
Equity in Subsidiary Income 58,500
[90% x ($185,000 - $120,000)]
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
Assuming P Company received a six month interim income statement from S
Company reporting $40,000 of net income, the following entry will be made
by P Company on June 30, 2015.
Investment in S Company 36,000
Equity in Subsidiary Income 36,000
(90% x $40,000)
Investment in S 1/1/12 Purchase (15%) $ 24,000
Company 1/1/14 Adjustment of 15% to fair value 1,500
1/1/14 Purchase (75%) 187,500
1/1/14 Adjustment 12,000
12/31/14 Subsidiary Income 58,500
6/30/15 Subsidiary Income 36,000
Balance $319,500
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Equity Method—Purchase and Sale of Stock
To record the sale of the S Company shares on July 1, 2015, P Company will
make the following entry (recall that P Company is selling 20% of its shares):
Cash 84,600
Investment in S Company* 63,900
Additional contributed capital 20,700
* $63,900 = 20% of $319,500, the carrying value of the investment.
LO 3 Parent sells shares subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
After the sale of the 1,800 shares, P Company holds a 72% interest in S
Company. For the second six months of 2015 (and for subsequent periods), P
Company will recognize 72% of the reported income and dividends received
from S Company. The December 31, 2015, book entry by P Company is:
Investment in S Company 28,800
Equity in Subsidiary Income 28,800
($40,000 X 72%)
LO 3 Parent sells shares subsequent to acquisition
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