When a subsidiary is less than wholly owned, the general approach to consolidation is the same as discussed in Chapter 2, but the consolidation procedures must be modified slightly to recognize the noncontrolling interest. Thus, the difference between the consolidation procedures illustrated in Chapter 2 and what we will demonstrate here is that we now have to account for the NCI shareholders’ ownership in the income and net assets of the acquired company. The following two-by-two matrix indicates that the only difference in consolidation in Chapter 3 relative to Chapter 2 is the separate recognition of the NCI shareholder share of income and net assets.
Before examining the specific procedures used in consolidating a less-than-wholly- owned subsidiary, we discuss the computation of consolidated net income, consolidated retained earnings, and the noncontrolling interest’s claim on income and net assets. We also discuss modifications to the consolidation worksheet.
No NCI shareholders
NCI shareholders Investment = Book value
Wholly owned subsidiary
Partially owned subsidiary
Chapter 2
Chapter 4
Chapter 3
Chapter 5 Investment > Book value
Consolidated Net Income
Consolidated net income, as it appears in the consolidated income statement, is the differ- ence between consolidated revenues and expenses. In the absence of transactions between companies included in the consolidation, consolidated net income is equal to the parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries.
When all subsidiaries are wholly owned, all of the consolidated net income accrues to the parent company, or the controlling interest. If one or more of the consolidated LO 3-4
Make calculations for the consolidation of a less-than- wholly-owned subsidiary.
FYI
In Berkshire Hathaway’s 2011 consolidated income statement, the com- pany reported total consolidated net income of $10.75 billion, which included $492 million in earnings attributable to noncontrolling interests.
Additionally, Berkshire’s 2011 consolidated balance sheet reported total noncontrolling interests in net assets of $4.1 billion.
subsidiaries is less than wholly owned, a portion of the consolidated net income accrues to the NCI shareholders. In that case, the income attributable to the subsid- iary’s noncontrolling interest is deducted from consolidated net income on the face of the income statement to arrive at consolidated net income attributable to the control- ling interest.
Income attributable to a noncontrolling interest in a subsidiary is based on a propor- tionate share of that subsidiary’s net income. The subsidiary’s net income available to common shareholders is divided between the parent and noncontrolling stockholders based on their relative common stock ownership of the subsidiary. Note that the NCI shareholders in a particular subsidiary have a proportionate claim only on the income of that subsidiary and not on the income of the parent or any other subsidiary.
As an example of the computation and allocation of consolidated net income, assume that Push Corporation purchases 80 percent of the stock of Shove Company for an amount equal to 80 percent of Shove’s total book value. During 20X1, Shove reports separate net income of $25,000, while Push reports net income of $120,000, including equity-method income from Shove of $20,000 ($25,000 3 0.80). Consolidated net income for 20X1 is computed and allocated as follows:
Push’s net income $120,000
Less: Equity-method income from Shove (20,000)
Shove’s net income 25,000
Consolidated net income $125,000
Income attributable to noncontrolling interest (5,000 ) Income attributable to controlling interest $120,000
Consolidated net income is equal to the separate income of Push from its own opera- tions ($100,000) plus Shove’s net income ($25,000). The $20,000 of equity-method income from Shove that had been recognized by Push must be excluded from the com- putation to avoid double-counting the same income. Consolidated net income is allo- cated to the noncontrolling stockholders based on their 20 percent share of Shove’s net income. The amount of income allocated to the controlling interest is equal to Push’s income from its own operations ($100,000) and Push’s 80 percent share of Shove’s income ($20,000) because Push used the equity method of accounting for its invest- ment in Shove.
Consolidated Retained Earnings
The retained earnings figure reported in the consolidated balance sheet is not entirely consistent with the computation of consolidated net income. Retained earnings in the consolidated balance sheet is that portion of the consolidated entity’s undistributed earn- ings accruing to the parent’s stockholders. Assuming the parent company correctly uses the fully adjusted equity method to account for its investments, consolidated retained earnings should equal the parent’s retained earnings. It is calculated by adding the par- ent’s share of subsidiary cumulative net income since acquisition to the parent’s retained earnings from its own operations (excluding any income from the subsidiary included in the parent’s retained earnings) and subtracting the parent’s share of any differential write-off. Any retained earnings related to subsidiary NCI shareholders is included in the Noncontrolling Interest in Net Assets of Subsidiary amount reported in the equity section of the consolidated balance sheet.
To illustrate the computation of consolidated retained earnings when a noncontrolling interest exists, assume that Push purchases 80 percent of Shove’s stock on January 1, 20X1, and accounts for the investment using the equity method. Assume net income and dividends as follows during the two years following the acquisition:
Push Shove Retained earnings, January 1, 20X1 $400,000 $250,000
Net income, 20X1 120,000 25,000
Dividends, 20X1 (30,000 ) (10,000 ) Retained earnings, December 31, 20X1 $490,000 $265,000
Net income, 20X2 148,000 35,000
Dividends, 20X2 (30,000 ) (10,000 ) Retained earnings, December 31, 20X2 $608,000 $290,000
Consolidated retained earnings as of two years after the date of combination is computed as follows:
Push’s retained earnings, December 31, 20X2 $608,000 Equity accrual from Shove since acquisition ($25,000 1 $35,000) 3 0.80 (48,000 ) Push’s retained earnings from its own operations, December 31, 20X2 $560,000 Push’s share of Shove’s net income since acquisition ($60,000 3 0.80) 48,000 Consolidated retained earnings, December 31, 20X2 $608,000
We note several important points from the example. First, the subsidiary’s retained earnings are not combined with the parent’s retained earnings. Only the parent’s share of the subsidiary’s cumulative net income since the date of combination is included. Sec- ond, consolidated retained earnings are equal to the parent’s retained earnings because the parent uses the equity method to account for its investment in the subsidiary. If the parent accounted for the investment using the cost method, the parent’s retained earnings and consolidated retained earnings would differ. Finally, we note that the consolidated financial statements include the equity accounts of the parent. In the Push and Shove example, Push’s shareholders effectively control both Push and Shove. Hence, Push’s equity accounts, along with the noncontrolling interest in Shove’s net assets, comprise the equity section of the consolidated group of companies. For the same reason, only Push’s dividends influence consolidated retained earnings.
Push Shareholders
NCI Shareholders Push
Shove
80% 20%
Worksheet Format
The same three-part worksheet described in Chapter 2 can be used when consolidat- ing less-than-wholly-owned subsidiaries, with only minor modifications. The worksheet must allow for including the noncontrolling interest’s claim on the income and net assets
of the subsidiaries. The noncontrolling interest’s claim on the income of a subsidiary is deducted from consolidated net income at the bottom of the worksheet’s income state- ment section in the Consolidated column to arrive at consolidated net income attributable to the controlling interest. The noncontrolling interest’s claim on the subsidiary’s net assets is placed at the bottom of the worksheet’s balance sheet section. The noncontrol- ling interest’s claims on both income and net assets are entered in the worksheet through consolidation entries and then carried over to the Consolidated column. As discussed in Chapter 2, the amounts in the Consolidated column are used to prepare the consolidated financial statements.
Income Statement Revenues Expenses
Consolidated Net Income NCI in Net Income
Controlling interest in Net Income Statement of Retained Earnings Retained Earnings (1/1) Add: Net Income Less: Dividends
Retained Earnings (12/31) Balance Sheet
Assets Total Assets Liabilities
Equity
Common Stock Retained Earnings
NCI in Net Assets of Subsidiary Total Liabilities & Equity
Parent Subsidiary DR
Consolidation Entries
CR Consolidated