Consolidated Financial Statements: outside interests (Non controlling…
Consolidated Financial Statements: outside interests
Previous chapter talks about when the parent acquire XXX of the voting interest
This chapter talks about when the parent acquire
less than wholly owned subsidiary
The portion of acquiring subsidiary is caled
non controlling interest
This chapter talks even though the ownership is not 100%, it consolidates subsidiary's assets, liability and so on
Non controlling section, the net assets of subsidiary is reported as separate line
Non controlling interests at acquisition date
Valuation of non controlling interests and goodwill at acquisition.
Reports it at
Fair value of non controlling interest
Total fair value
(Book Value of Sub)
fair value in excess of sub's BV
diff b/w fair value and book value
We allocate goodwill one is to controlling part, the other one is to non controlling part
Goodwill to controlling:
(%of interest * fair vale of subs, including intangible assets such as customer list)
Goodwill that belongs to controlling share
Goodwill to non controlling:
Total Goodwill - Goodwill that belongs to controlling share
So the share of interests and goodwill allocation% is not the same.
Measuring the fair value of non controlling interests
So the subsidiary's fair value is estimated. But how?
If there is an active market for the subsidiary's stock, the stock price at the date of the acquisition may be appropriate
If not, there are alternatives.
As a premise, controlling power is worth more than non controlling power. So the premium is offered.
The buyer has to pay more to persuade its existing shareholder to sell their stock to the buyer.
The current stock price is appropriate for valuing the non controlling interests.
Discount for lack of controll
Types of business valuation method
Capitalization of expected future earnings or cash flows using an appropriate discount rate
Capitalization of excess earnings, where a firm is estimated as the fair value of tangible net assets + capitalized earnings in excess of earnings attributable to the tangible assets
Direct comparison approach
Requirement for a disclosure
the fair value of the noncontrolling interest in the acquiree at the date of acquisition
the valuation method and significant inputs used to measure the fair value of the noncontrolling interest
Consolidation eliminating entries at acquisition date