Changes in Ownership Interest | Advanced Accounting | CPA Exam FAR |

These lectures cover business combination, changes in ownership and  the definition of control, accounting for non-controlling interests, and changes in ownership interests.

Changes in Ownership Interest Advanced Accounting

Control Maintained Cost and Equity Method Advanced Accounting

Loss of Control Advanced Accounting

The parent may buy additional shares of the subsidiary from third parties; the parent may sell subsidiary shares to third parties; the subsidiary may issue additional shares, either to the parent or to others, or both; the subsidiary may buy its own shares either from its parent or from others.

The initial investment(s) is revalued to fair value when control is achieved, and adjustments are recorded in the income statement. Subsequent purchases result in adjustments to additional contributed capital.

If the parent maintains control, the difference is an adjustment to additional contributed capital. If not, the difference after adjusting any remaining ownership to fair value, is treated as a gain or loss.

The controlling interest in income is computed as the internally generated income of the parent plus or minus the usual adjustments for excess depreciation, and so on, plus the controlling percentage of the subsidiary adjusted income. The controlling percentage of the subsidiary adjusted income is layered in the year of sale so that the portion of the year’s income prior to the sale reflects the initial percentage ownership and the portion subsequent to the sale reflects the new lower percentage ownership.

The number of subsidiary shares outstanding is increased, and the proceeds from the stock issue flow increase the subsidiary’s total stockholders’ equity. This affects the additional contributed capital of the parent and the noncontrolling interest. The change in the parent’s share of the subsidiary’s equity is determined by comparing the parent’s share of the subsidiary’s equity immediately before and immediately after the new purchase. The noncontrolling interest will increase if the cost of the new shares is greater than the book value of the interest acquired and decrease if the cost is less than the book value. This change must be decreased (increased) for the value of goodwill transferred between the controlling and noncontrolling interests.

If the shares are purchased ratably by both, the percentage of stock owned by the parent and noncontrolling stockholders after the new issue would be the same as their respective interests prior to the new issue. If the shares are purchased entirely by the noncontrolling shareholders, the parent’s percentage of owner- ship is reduced. Thus, the economic substance of the transaction is a sale of interest by parent. However, the book value of the parent’s interest in the subsidiary may increase, decrease, or remain unchanged depending on the relationship of the issue price to book value per share of stock. If the price is higher than book value, the parent’s interest increases. If the price is lower than book value, the parent’s interest decreases.