Slide 3-1 3 CHAPTER 3 PARTIALLY OWNED CREATED SUBSIDIARIES.
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Transcript of Slide 3-1 3 CHAPTER 3 PARTIALLY OWNED CREATED SUBSIDIARIES.
Slide 3-2
3 FOCUS OF CHAPTER 3
Partially Owned Created Subsidiaries Preparing Consolidated Statements:
The Cost Method The Equity Method
Control Other Than by Owning a Majority Voting Interest
Unconsolidated Subsidiaries--Ways to Value the Parent’s Investment
Taxation of domestic subsidiaries.
Slide 3-3
3 Proportional vs. Full Consolidation: At Opposite Ends of the Spectrum
Propor-tional Full
Percent consolidated. < 100% 100%
Reports NCI amounts.. NO YES
Complies--U.S. GAAP.. NO YES
Relative complexity.. EASY HARD
Slide 3-4
3
ParentCompanyConcept
EconomicUnit
ConceptPercent consolidated...... 100% 100%NCI reported as equity.. NO YESCurrent U.S. GAAP........ YES YESFASB’s 1995 proposedGAAP (now on hold)….. NO YES
Parent Company Concept vs. Economic Unit Concept: Not Much Difference for “Created “ Subsidiaries
Slide 3-5
3 Control by Other Means: A ClassicSubstance vs. Form Issue
Ways to Control Without Having a Majority Voting Interest--A HIGHLY JUDGMENTAL AREA: Having stock options exercisable at will
that can result in majority ownership. Lending arrangements--borrower’s powers
are severely restricted. Safest Course of Action If Publicly
Owned: Run it by the SEC (some try to slide it by).
Slide 3-6
3 Unconsolidated Subsidiaries: 100% Ownership Situations
Permissible Valuation Methods(for when control has been lost): Equity Method--but ONLY IF
significant influence exists. Cost Method--makes sense to use
when realization of sub’s expected future earnings is doubtful. The default method if NO
significant influence exists.
Slide 3-7
3 Unconsolidated Subsidiaries: Partial Ownerships--NCI Shares Are NOT Publicly Traded
Permissible Valuation Methods(for when control has been lost): Equity Method--but ONLY IF
significant influence exists. Cost Method.
The default method if NO significant influence exists.
Slide 3-8
3 Unconsolidated Subsidiaries:Partial Ownerships--NCI SharesARE Publicly Traded
Permissible Valuation Methods(for when control has been lost): Equity Method--but ONLY IF significant
influence exists.
Fair Value Method (the new kid)--must use if significant influence does NOT exist.
WSJ--12/31/04....”33 7/8”
Look for a new kid on the block.
Slide 3-9
3 Review Question #1
Which of the following is NOT permitted under GAAP?
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-10
3 Review Question #1--With Answer
Which of the following is NOT permitted under GAAP?
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-11
3 Review Question #2
The noncontrolling interest (NCI) is reported OUTSIDE consolidated stockholders’ equity under:
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-12
3 Review Question #2--With Answer
The noncontrolling interest (NCI) is reported OUTSIDE consolidated stockholders’ equity under:
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-13
3 Review Question #3
The noncontrolling interest (NCI) is reported AS PART OF consolidated stockholders’ equity under:
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-14
3 Review Question #3--With Answer
The noncontrolling interest (NCI) is reported AS PART OF consolidated stockholders’ equity under:
A. The economic unit concept.B. The parent company concept.C. Full consolidation.D. Proportional consolidation.E. None of the above.
Slide 3-15
3 Review Question #4
On 1/1/04, Parco invested $900,000 in Sarco (90%-owned). For 2004, Sarco: (1) earned $60,000, (2) declared dividends of $50,000, and (3) paid dividends of $40,000. What amounts does Parco report? Cost EquityInvestment income for 2004.....
Investment in Sarco at Y/E......Retained earnings increase.......
Slide 3-16
3 Review Question #4--With Answer
On 1/1/04, Parco invested $900,000 in Sarco (90%-owned). For 2004, Sarco: (1) earned $60,000, (2) declared dividends of $50,000, and (3) paid dividends of $40,000. What amounts does Parco report? Cost EquityInvestment income for 2004.....
Investment in Sarco at Y/E......Retained earnings increase.......
$45,000 $54,000
$900,000 $909,000
$45,000 $54,000
Slide 3-17
3 Review Question #5
On 1/1/04, Parco invested $900,000 in Sarco (90%-owned) and NCI shareholders invested $100,000. For 2004, Sarco: (1) earned $60,000, (2) declared dividends of $50,000, and (3) paid dividends of $40,000. What amounts does Parco report for the items below? NCI in net income for 2004..……. _________ NCI in net assets at 12/31/04….. _________Con. retained earnings increase.. _________
Slide 3-18
3 Review Question #5--With Answer
On 1/1/04, Parco invested $900,000 in Sarco (90%-owned) and NCI shareholders invested $100,000. For 2004, Sarco: (1) earned $60,000, (2) declared dividends of $50,000, and (3) paid dividends of $40,000. What amounts does Parco report for the items below? NCI in net income for 2004..……. $ 6,000 NCI in net assets at 12/31/04….. $101,000 Con. retained earnings increase.. $54,000
Slide 3-19
3 Review Question #6
A 100%-owned subsidiary is NOT consolidated. The parent could definitely NOT use:
A. The cost method B. The equity method. C. The lower of cost or market method. D. The fair market value method. E. None of the above.
Slide 3-20
3 Review Question #6--With Answer
A 100%-owned subsidiary is NOT consolidated. The parent could definitely NOT use:
A. The cost method B. The equity method. C. The lower of cost or market method. D. The fair market value method. E. None of the above.
Slide 3-21
3 Review Question #7
A LESS THAN 100%-owned subsidiary is NOT consolidated--the NCI shares ARE publicly traded. The parent definitely could NOT use:
A. The cost methodB. The equity method.C. The fair market value method.D. None of the above.
Slide 3-22
3 Review Question #7--With Answer
A LESS THAN 100%-owned subsidiary is NOT consolidated--the NCI shares ARE publicly traded. The parent definitely could NOT use:
A. The cost methodB. The equity method.C. The fair market value method.D. None of the above.
Slide 3-24
3 Appendix: Domestic Subs: Recording Taxes at Parent Level on Sub’s Income
Double vs. Triple Taxation--Ways to Easily Avoid the THIRD Tax: Own 80% or More of Sub’s Stock:
Can file a consolidated tax return or File separate tax returns--parent
uses a dividend received
deduction of 100%.Sub files its own IRS Form 1120
Slide 3-25
3 Appendix: Consolidated Tax Returns--Advantages Versus Disadvantages
Major Advantages: Can offset X’s LOSS against Y’s INCOME. Can offset X’s CAPITAL LOSS against
Y’s CAPITAL GAIN. Avoids Sec. 482 transfer pricing problems.
Major Disadvantages: X’s loss on intercompany sale is deferred. Complexity.
Slide 3-26
3 Appendix: Domestic Subs: Less Than 80% Ownership Situations
Triple Taxation CANNOT be Entirely Avoided: Dividend received deduction is only 80%. FASB: Parent must record any triple tax in
the year in which sub earns its income--NO EXCEPTIONS ARE ALLOWED FOR DOMESTIC SUBSIDIARIES.
Sub must file its own IRS Form 1120