9 Presentation and disclosures
9.1 Certain presentation and disclosure requirements related to consolidation
9.1.5 Disclosure
ASC 810 also required disclosure of any gain/loss recognized on the deconsolidation of a subsidiary or derecognition of a group of assets. The amount of any gain/loss and the classification of the gain/loss in the income statement (see 6.1.10) are disclosed in the notes to the consolidated financial statements along with the amount of the gain/loss related to the remeasurement of any retained interest in the deconsolidated subsidiary or group of assets.
ASC 810 requires disclosure of a description of the valuation technique(s) used to measure the fair value of any direct or indirect retained investment in a deconsolidated subsidiary or group of assets (e.g., a discounted cash flow approach). Disclosure is also required of the information that enables users of the parent’s financial statements to assess the inputs used to develop the fair value measurements used to measure the retained interest in the former subsidiary or group of assets.
For example, for a discounted cash flow approach, disclosures may include information on discount rates and the assumed capital structure, capitalization rates for terminal cash flows, assumptions about expected growth in revenues, expected profit margins, expected capital expenditures, expected
depreciation and amortization, expected working capital requirements and other assumptions that may have a significant effect on the valuation, such as discounts for lack of marketability or lack of control, as applicable. For a market approach, disclosures may include information on the valuation multiples used in the analysis, a description of the population of the guideline companies or similar transactions from which the multiples were derived, the timeliness of the market data used, the method by which the multiples were selected (e.g., use of the median, use of an average, the extent to which the financial performance of the subject company was compared to the relative performance of the guideline companies), discounts for lack of marketability and lack of control, as applicable. An entity also is required to disclose the valuation techniques used to measure an equity interest in an acquiree held by the entity immediately before the acquisition date in a business combination achieved in stages.
Furthermore, disclosure must be provided about the nature of continuing involvement with the
subsidiary or entity acquiring the group of assets after it has been deconsolidated and whether a related party relationship exists. This disclosure is intended to highlight circumstances in which a gain or loss is recognized, but the continuing relationship may affect the ultimate amounts realized from the sale and resulting relationship.
9 Presentation and disclosures
9.2 Comprehensive example
Illustration 9-2: Presentation and disclosure example
To illustrate ASC 810’s presentation and quantitative disclosure requirements, following are the financial statements and selected notes for Company P, which are based on the comprehensive example illustrated in Chapters 4 and 6. Note that the qualitative disclosure requirements of ASC 810-10-50-1B(d)-(h) are not included in the following comprehensive example. Further, the quantitative disclosures required by ASC 810-10-50-1A(c) are reflected in the consolidated statement of changes in equity in the example below. Alternatively, these may also be reflected in the notes to the
consolidated financial statements.
Company P
Consolidated Statement of Financial Position (all amounts in dollars)
31 December,
20X3 20X2
Assets:
Cash 83,700 39,600
Marketable securities 17,500 15,500
Inventory 30,000 30,000
Buildings and equipment, net 59,850 68,400
Goodwill 4,286 4,286
Total assets 195,336 157,786
Liabilities:
Accounts payable 75,000 75,000
Debt 27,000 27,000
Total liabilities 102,000 102,000
Equity:
Company P shareholders’ equity:
Common stock 1,500 1,500
Additional paid-in capital 15,440 5,747
Accumulated other comprehensive income 3,300 3,150
Retained earnings 57,240 40,770
Total Company P shareholders’ equity 77,480 51,167
Noncontrolling interest 15,856 4,619
Total equity 93,336 55,786
Total liabilities and equity 195,336 157,786
In the consolidated statement of financial position, Company P separately identifies Company P’s shareholders’ equity and the noncontrolling interest.
Consolidated net income is attributed to the controlling and noncontrolling interests.
9 Presentation and disclosures
Company P
Consolidated Statement of Income (all amounts in dollars, except share amounts)
Year Ended 31 December,
20X3 20X2 20X1
Revenues 96,000 96,000 96,000
Cost of revenues 42,000 42,000 46,500
Gross profit 54,000 54,000 49,500
Selling and administrative 26,550 26,550 26,550
Consolidated net income 27,450 27,450 22,950
Less: Net income attributable to noncontrolling interest 10,980 2,745 6,885
Net income attributable to Company P 16,470 24,705 16,065
Earnings per share — basic and diluted:
Net income attributable to Company P common shareholders 10.98 16.47 10.71
Weighted-average shares outstanding 1,500 1,500 1,500
Company P
Consolidated Statement of Comprehensive income (all amounts of dollars)
Year Ended 31 December,
20X3 20X2 20X1
Net income 27,450 27,450 22,950
Other comprehensive income and reclassification adjustments:
Unrealized holding gain (loss) on available-for-sale securities
and reclassification adjustments 2,000 (1,500) 5,000
Total other comprehensive income and reclassification
adjustments 2,000 (1,500) 5,000
Comprehensive income 29,450 25,950 27,950
Less: Comprehensive income attributable to noncontrolling
interest 11,780 2,595 8,385
Comprehensive income attributable to Company P 17,670 23,355 19,565
The consolidated statement of changes in equity includes an additional column representing the changes in noncontrolling interest.
9 Presentation and disclosures
9 Presentation and disclosures
9 Presentation and disclosures
9 Presentation and disclosures
Company P also discloses the effects of changes in Company P’s ownership interest in its subsidiary on Company P’s equity. This schedule would be presented as a note in the company’s financial statements, as follows.
Company P
Notes to Consolidated Financial Statements Years Ended 31 December, 20X3, 20X2, 20X1
(all amounts in dollars)
Net Income Attributable to Company P and Transfers (to) from the Noncontrolling Interest
20X3 20X2 20X1
Net income attributable to Company P 16,470 24,705 16,065
Transfers (to) from the noncontrolling interest
Increase in Company P’s paid-in capital for sale of 9,000 Company S common
shares 9,693 — —
Decrease in Company P’s paid-in capital for purchase of 6,000 Company S
common shares — (28,753) —
Net transfers (to) from noncontrolling interest 9,693 (28,753) —
Change from net income attributable to Company P and transfers (to) from
noncontrolling interest 26,163 (4,048) 16,065
A Comprehensive example
This appendix provides a comprehensive example of the concepts described in this publication:
1. Control resulting from an increase in ownership interest
2. Changes in a parent’s ownership interest while the parent maintains control of the subsidiary meeting the scope of ASC 810-10-45-21A
3. The elimination of intercompany transactions 4. Deconsolidation of subsidiary
Work paper consolidating entries are numbered sequentially. While there are different ways to apply consolidation procedures, this comprehensive example illustrates consolidation based on push-down accounting to the subsidiary which is a retailer of luxury handbags qualifying as a business pursuant to ASC 805. The use of push-down accounting is the primary difference between this example and the comprehensive examples in Chapters 4, 5 and 6. Those examples cover the same concepts, but attribute the purchase price in consolidation.
Illustration A-1: Year 20X2 Assumptions:
1. As of 31 December 20X1, Company P (P) owns 40% of Company S (S), which is a retailer of luxury handbags and a voting interest entity, with net assets of $650,000. The carrying amount of Company P’s 40% investment in Company S is $260,000.
2. P purchases an additional 40% of the common stock of S on 1 January 20X2 for $400,000, increasing its ownership interest to 80% (assume no control premium). The fair value of S is
$1,000,000, and the fair value of the identifiable net assets of S is $800,000.
3. During the year, S sells inventory to P (upstream transaction) which P holds at year end. A summary of the effect of the transaction on S’s income statement is as follows:
Revenues $ 100,000
Cost of revenues 70,000
Gross profit $ 30,000
4. During the year, P sells inventory to S (downstream transaction) which S holds at year end. A summary of the effect of the transaction on P’s income statement is as follows:
Revenues $ 150,000
Cost of revenues 80,000
Gross profit $ 70,000
5. During the year, P makes an intercompany loan to S with principal of $1,000,000 and an annual
A Comprehensive example
6. During the year, P charges S a management fee of $1,500 for management services.
7. Company S has other comprehensive income of $25,000 from unrealized gains on available-for-sale securities for the year.
8. The remaining useful life of the buildings and equipment at 1 January 20X2 is 10 years.
9. Assume inventory held by S at the beginning of the year and affected by the step up to fair value on 1 January 20X2 is sold in the current year.
10. S pays cash dividends of $50,000 during the year, of which P’s share is $40,000.
Figure A-1: Balance sheet for Company P, 31 December 20X1 (all amounts in dollars)
Cash 640,000
Accounts receivable 190,000
Inventory 184,000
Buildings and equipment, net 220,000
Investment in Company S 260,000
1,494,000
Accounts payable 125,000
Other liabilities 250,000
Common stock 200,000
Additional paid-in capital 500,000
Retained earnings 419,000
1,494,000 Figure A-2: Acquisition-date balance sheet for Company S, 1 January 20X2 (all amounts in
dollars)
Book value Fair value
Cash 250,000 250,000
Available-for-sale securities 100,000 100,000
Accounts receivable 100,000 100,000
Inventory 150,000 200,000
Buildings and equipment, net 200,000 300,000
800,000 950,000
Accounts payable 150,000 150,000
Common stock 650,000
800,000
A Comprehensive example
Figure A-3: Acquisition-date consolidating work paper to arrive at consolidated balance sheet, 1 January 20X2 (all amounts in dollars)
Company P Company S
Figure A-3 illustrates the consolidating entries between P and S for the 1 January 20X2 business combination.
(1) Inventory of S is adjusted to fair value.
(2) Buildings and equipment of S are adjusted to fair value.
(3) The $400,000 investment purchased on 1 January 20X2 is added to the book value of the original investment ($260,000). In addition, a gain is recognized on the original investment to increase it to fair value. This gain on investment of $140,000 is calculated as the fair value of the original 40% investment ($400,000) less the book value of the original investment.
(4) Goodwill is determined by subtracting the fair value of S’s net identifiable assets acquired ($800,000) from the fair value of S’s net assets ($1,000,000). In push-down accounting, the goodwill is recorded on the books of S.
(5) P’s investment in S is eliminated.
(6) Retained earnings includes the original retained earnings of P ($419,000) and the gain on the investment in S ($140,000).
(7) In push-down accounting, the basis of the equity is increased to equal the fair value of the net assets less the noncontrolling interest.
(8) Noncontrolling interest is calculated by taking the fair value of S’s net assets ($1,000,000) and subtracting the fair value of P’s 80% investment in S ($800,000). For illustrative purposes, no control premium is assumed. In push-down accounting, the noncontrolling interest is recorded on
A Comprehensive example
Figure A-4: Work paper of consolidated income statement, for year ended 31 December 20X2 (all amounts in dollars)
Net income attributable to controlling
interest 481,500 72,000 319,500
Figure A-4 illustrates the consolidating entries between P and S for the year ended 31 December 20X2.
(10) The cost of revenues includes the fair value adjustment made to inventory at the beginning of the year because the inventory was sold during the year.
(11) Depreciation expense includes 20X2 depreciation of $10,000 ($100,000 / 10 years) related to the step up in fair value at 1 January 20X2.
(12) Net income attributable to the noncontrolling interest on a push-down basis is based on the percentage ownership interest of the noncontrolling interest (20%) and calculated as a percentage of S’s income on a push-down basis ($90,000 x 20%).
(13) Intercompany revenues from the upstream ($100,000) and downstream ($150,000) sales are eliminated.
(14) Intercompany cost of revenues from the upstream ($70,000) and downstream ($80,000) sales are eliminated.
A Comprehensive example
(17) The income recognized by P from the dividends received from S is eliminated.
(18) The intercompany profits from the upstream sale are eliminated in items (13) and (14). A proportionate share of the upstream elimination is attributed to the noncontrolling interest ($30,000 x 20%). The elimination of the downstream sale is 100% attributable to the parent.
(19) Adjustments to net income from the income statement. See prior explanations of eliminations.
(20) Comprehensive income attributable to the noncontrolling interest on a push-down basis is based on the percentage ownership interest of the noncontrolling interest (20%) and calculated as a percentage of S’s comprehensive income on a push-down basis ($115,000 x 20%).
Figure A-5: Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X2 (all amounts in dollars)
The balance sheet is consolidated in Figure A-5, as follows:
(21) Intercompany receivables and payables are recorded from the sales transactions between P and S.
(22) An intercompany loan was made to finance the construction of a new building for S.
(23) Intercompany receivables and payables from the upstream ($100,000) and downstream ($150,000) sales are eliminated.
(24) Intercompany profit remaining in inventory at year end from the upstream ($30,000) and
A Comprehensive example
(26) Outstanding intercompany loan is eliminated.
(27) P’s investment in S is eliminated.
(28) P’s retained earnings are rolled forward as follows:
31 December 20X1 balance $ 419,000
Current year income 481,500
31 December 20X2 balance $ 900,500
(29) S’s retained earnings are rolled forward as follows. In push-down accounting, only the earnings and dividends attributable to the controlling interest are recorded in retained earnings.
31 December 20X1 balance $ –
Income attributable to controlling interest 72,000
Dividends declared (40,000)
31 December 20X2 balance $ 32,000
(30) In push-down accounting, only the other comprehensive income attributable to the controlling interest is recorded by S ($25,000 x 80%).
(31) Noncontrolling interest, on a push-down basis, is rolled forward as follows:
31 December 20X1 $ –
Creation of noncontrolling interest 200,000
Attributed net income 18,000
Attributed other comprehensive income 5,000
Dividends received (10,000)
31 December 20X2 balance $ 213,000
(32) The common stock of S is eliminated.
(33) Net adjustments to net income from income statement. See items in income statement for explanations of adjustments.
(34) The intercompany dividend is eliminated from S’s retained earnings.
(35) The intercompany profit from the upstream sale is proportionately eliminated from the noncontrolling interest. For illustrative purposes, this entry has been made as a consolidation entry; however, it typically would be made directly to the retained earnings and noncontrolling interest on S’s books.
Illustration A-2: Year 20X3 Assumptions:
1. P sells a 20% interest in S on 1 January 20X3 for $300,000.
2. During the year, S sells inventory to P, which P holds at year end. A summary of the effect of the transaction on S’s income statement is as follows:
A Comprehensive example
3. During the year, P sells inventory to S, which S holds at year end. A summary of the effect of the transaction on P’s income statement is as follows:
Revenues $ 100,000
Cost of revenues 60,000
Gross profit $ 40,000
4. The intercompany loan of $1,000,000 remains outstanding. Construction on the building is complete, so S does not capitalize the interest payment for the current year. Depreciation begins on the completed building (including the depreciation of the previously capitalized interest). The useful life of the building is ten years.
5. During the year, P charges S a management fee of $1,500 for management services.
6. S has other comprehensive income for the year of $15,000 from unrealized gains on available-for-sale securities.
7. All inventory held by S and P at 31 December 20X2 resulting from upstream and downstream intercompany sales is sold to a nonaffiliated party.
8. S pays cash dividends of $50,000 during the year, of which P’s share is $30,000.
Figure A-6: Work paper of consolidated income statement for year ended 31 December 20X3 (all amounts in dollars)
Net income (loss) attributable to
noncontrolling interest — (36) 18,000 (45) 32,000 (46) 12,000 (2,000)
Net income attributable to controlling
interest 531,500 27,000 438,500
A Comprehensive example
Figure A-6 illustrates the consolidating entries between P and S for the year ended 31 December 20X3.
(36) Net income attributable to the noncontrolling interest on a push-down basis is based on the new percentage ownership interest of the noncontrolling interest (40%) and calculated as a
percentage of S’s income on a push-down basis ($45,000 x 40%).
(37) Intercompany revenues from the upstream ($130,000) and downstream ($100,000) sales are eliminated.
(38) Intercompany cost of revenues from the upstream ($50,000) and downstream ($60,000) sales is eliminated.
(39) Reversal of elimination of intercompany profit in inventory held by S and P at 31 December 20X2 to cost of revenues as inventory is sold to a nonaffiliated party during the first inventory turn of the year.
(40) Excess depreciation of $10,000 ($100,000 / 10 years) due to capitalized interest in the prior year is eliminated.
(41) Intercompany revenue and expense for the management fee charged to S is eliminated.
(42) The income recognized by P from the dividends received from S is eliminated.
(43) Interest income and expense from the intercompany loan are eliminated.
(44) P recognized a gain on its investment in S (on its stand alone financial statements), calculated as the excess of cash received ($300,000) over the carrying value of the portion of the investment sold ($200,000). This gain is eliminated.
(45) The intercompany profits from the upstream sale are eliminated in items (37) and (38). A proportionate share of the upstream elimination is attributed to the noncontrolling interest ($80,000 x 40%). The elimination of the downstream sale is 100% attributable to the parent.
(46) The intercompany profit from 20X2 on the upstream sale is realized in the current year because the inventory was sold to a nonaffiliated party. A proportionate share of the profit is attributable to the noncontrolling interest ($30,000 x 40%).
(47) Adjustments to net income from the income statement. See items above for explanations of adjustments.
(48) Comprehensive income attributable to the noncontrolling interest on a push-down basis is based on the percentage ownership interest of the noncontrolling interest (40%) and calculated as a percentage of S’s comprehensive income on a push-down basis ($60,000 x 40%).
A Comprehensive example
Figure A-7: Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X3 (all amounts in dollars) The balance sheet is consolidated in Figure A-7, as follows:
(49) P sold 20% of S (25% of its investment in S). The investment was reduced by 25% ($200,000) to
$600,000.
(50) Intercompany receivables and payables from the upstream ($130,000) and downstream ($100,000) sales are eliminated.
(51) Intercompany profit remaining in inventory at year end from the upstream ($80,000) and downstream ($40,000) sales is eliminated.
(52) Interest capitalized in 20X2 from the intercompany loan is eliminated ($100,000), less current year excess depreciation ($10,000).
(53) Outstanding intercompany loan is eliminated.
(54) P’s investment in S is eliminated.
(55) P’s retained earnings are rolled forward as follows:
31 December 20X2 balance $ 900,500
A Comprehensive example
(56) P sold a 20% interest in S for $300,000 on 1 January 20X3. On that date, the noncontrolling interest’s carrying value was $207,000, which represented a 20% interest in S. Thus, an additional 20% interest ($207,000) was transferred from S’s common stock to the noncontrolling interest.
(57) S’s retained earnings are rolled forward as follows. In push-down accounting, only the earnings and dividends attributable to the controlling interest are recorded in retained earnings.
31 December 20X2 balance $ 32,000
Noncontrolling interest profit elimination
from 20X2 booked to S 6,000
Income attributable to controlling interest 27,000
Dividends paid (30,000)
31 December 20X3 balance $ 35,000
(58) Accumulated other comprehensive income is rolled forward as follows:
31 December 20X2 balance $ 20,000
Comprehensive income attributable to controlling interest 9,000
31 December 20X3 balance $ 29,000
(59) Noncontrolling interest, on a push-down basis, is rolled forward as follows:
31 December 20X2 balance $ 213,000
Noncontrolling interest profit from 20X2
elimination booked to S (6,000)
Additional interest sold by P 207,000
Current year income 18,000
Current year other comprehensive income 6,000
Dividends received (20,000)
31 December 20X3 balance $ 418,000
(60) The common stock of S is eliminated.
(61) P sold a 20% interest in S for $300,000 on 1 January 20X3. This sale is treated as an equity transaction with no gain or loss recognized. The difference between the cash received and carrying value of the interest sold ($207,000) is recorded as an adjustment to APIC.
In addition, AOCI is adjusted to reallocate AOCI for the interest sold by P. The 31 December 20X2 balance in AOCI was $25,000. Since a 20% interest in S was sold, $5,000 (20% x $25,000) was transferred out of AOCI and recorded as an adjustment to APIC.
(62) Net adjustments to net income from income statement. See items in income statement for explanations of adjustments.
(63) The intercompany dividend is removed from S’s retained earnings.
(64) Interest income recognized by P in 20X2 is eliminated ($100,000), less current year depreciation ($10,000).
(65) The intercompany profit from the upstream sale is proportionately removed from the
noncontrolling interest. For illustrative purposes, this entry has been made as a consolidation entry; however, it ordinarily would be made directly to the retained earnings and noncontrolling interest on S’s books.
A Comprehensive example
Illustration A-3: Year 20X4
As of 31 December 20X3, P owns 60% of S, which has net assets of $945,000. The carrying amount of the noncontrolling interest’s 40% interest in Company S is $398,000, which includes $16,000 of accumulated other comprehensive income.
Assumptions:
1. P sells an additional 15% of its ownership for $300,000, assuming no control premium on Company S, on 1 January 20X4, resulting in a loss of control and deconsolidation of S on 1 January 20X4. The fair value of the retained 45% interest in S is $900,000.
2. The fair value of the intercompany loan on 1 January 20X4 is $1,000,000.
Figure A-8: Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X4 (all amounts in dollars)
Other liabilities 588,000 588,000
Total liabilities 908,000 908,000
Common stock 200,000 200,000
Additional paid-in capital 500,000 (72) 98,000 598,000
Retained earnings 1,432,000 (73) 255,000 (74) 677,000 1,854,000
Accumulated other comprehensive
income — —
Total parent shareholders’ equity 2,132,000 2,652,000
Noncontrolling interest — —
Total equity 2,132,000 2,652,000
Total liabilities and equity 3,040,000 3,560,000
Figure A-8 illustrates the deconsolidating entries between P and S, as follows:
(67) The creditor interest in S would be adjusted to fair value. For illustrative purposes, the carrying value of the intercompany loan is equal to the fair value of the intercompany loan at the date of deconsolidation.
(68) Cash is received on the sale of 15% interest.
A Comprehensive example
(70) The intercompany profit included in inventory held by P at 1 January 20X4 is eliminated.
(71) The retained 45% interest in S is adjusted to fair value.
(72) APIC is adjusted for the sale of a 20% interest in S in 20X3, treated as an equity transaction.
(73) Retained earnings of P is adjusted for all prior intercompany adjustments and earnings of S.
(74) Company P’s gain is calculated as follows:
Proceeds $ 300,000
Fair value of retained interest 900,000
Carrying value of noncontrolling interest 398,000
AOCI attributable to P 24,000
1,622,000
Carrying amount of S’s net assets (945,000)
Gain $ 677,000
On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest should be derecognized, and the cash proceeds and gain should be recognized through the following journal entry:
Cash $ 300,000
Noncontrolling interest 398,000
Accounts payable 330,000
Intercompany loan 1,000,000
Intercompany payable 100,000
AOCI 24,000
Investment in Company S 900,000
Cash $ 330,000
Available-for-sale securities 140,000
Accounts receivable 160,000
Intercompany receivable 130,000
Inventory 220,000
Buildings and equipment, net 1,195,000
Goodwill 200,000
Gain 677,000
B Comparison of ASC 810 to IAS 27(R)
The following table compares certain aspects of the major tenets of ASC 810 and IAS 27(R),
Consolidated and Separate Financial Statements. The table below only addresses consolidated financial statements (that is, it does not address parent-only financial statements). In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements, which replaces portions of IAS 27(R). IFRS 10 is effective for years beginning after 1 January 2013 with early adoption permitted. IFRS 10 did not modify the IAS 27 (R) accounting requirements depicted in the table below.
ASC 810 IAS 27 (R)
Noncontrolling interest’s share of identifiable net assets recognized at fair value at date control is obtained. Step acquisitions/disposals are to be accounted for as equity transactions while control is maintained.
Redeemable noncontrolling interest is
measured pursuant to ASC 480-10-S99-3A for SEC registrants
Companies may elect to recognize the
Companies may elect to recognize the