IGA 2021 Week 2 Lecture Slides

Chair of Accounting
Prof. Dr. Tami Dinh
International Group Accounting

MAccFin core electives course
Spring Term 2021
Based on the book:

Advanced
Prof.Financial
Dr. TamiAccounting
Dinh
Christensen/Cottrell/Budd (12e) 2019
Advanced Financial Accounting
International Group Accounting – Course Overview
Week ▪ Intercorporate Acquisitions and Block

▪ Deferred Taxes & Wrap-up
1 Investments in Other Entities 1
Week ▪ Reporting Intercorporate Block

▪ Student Presentations
2 Investments and Consolidation I 2
Week Block
▪ Consolidation II ▪ Excursion to PwC in Zurich
3 3
Week ▪ Intercompany Transaction

4
Week
▪ Foreign Currency Translation
5
Prof. Dr. Tami Dinh

Advanced Financial Accounting 2
Week 2
Readings in Christensen/Cottrell/Budd (12e) 2019
▪ Chapter 2: Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
▪ Chapter 3: The Reporting Entity and the Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
Learning objectives
▪ Understand and explain how ownership and control can influence the accounting for investments in common stock.
▪ Understand and explain the usefulness and limitations of consolidated financial statements.
▪ Prepare journal entries using the cost method and the equity method for accounting for investments.
▪ Understand and explain differences between the cost and equity methods.
▪ Make calculations and prepare basic elimination entries for a simple consolidation.
▪ Prepare a consolidation worksheet.
▪ Understand and explain differences in the consolidation process when the subsidiary is not wholly owned.
▪ Make calculations and prepare basic elimination entries for the consolidation of a less-than-wholly-owned subsidiary.
▪ Prepare a consolidation worksheet for a less-than-wholly-owned subsidiary.
▪ Understand and explain the purpose of combined financial statements and how they differ from consolidated financial
statements.
▪ Understand and explain rules related to the consolidation of variable interest entities.
▪ Understand and explain differences in consolidation rules under U.S. GAAP and IFRS.
Prof. Dr. Tami Dinh

Week 2
Ownership, Control and Theories of Consolidation
Influence of Ownership and Control on Investment Accounting
Theories of Consolidation
Accounting for Investments
Consolidation Techniques
Further Issues in Consolidation
Prof. Dr. Tami Dinh

Week 2
Poll 1
Poll Question #1… before we start!
Prof. Dr. Tami Dinh

Influence of Ownership/Control on Investment Accounting
Control model IFRS 10
Decisive concept in group accounting: Test of Control
Control – Definition IFRS 10
“An investor controls an investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its
power over the investee.” (IFRS 10.6)
link between power

power variable returns
and variable returns
(IFRS 10.10 ff.) (IFRS 10.15 f.)
(IFRS 10.17 f.)
Prof. Dr. Tami Dinh

Assessment of “power” IFRS 10
1) Voting Rights
▪ Power with a majority of voting rights
• Relevant activities are directed by vote; or
• A majority of the governing body is appointed by vote
▪ Majority of voting right but no power
• Relevant activities are not directed by vote
• Such voting rights are not substantive
2) De-facto control
▪ Power without a majority of voting rights
▪ Contractual arrangements with other vote holders exist
▪ Relevant activities directed by arrangements held
▪ The investor has practical ability to unilaterally direct relevant activities, considering all facts and
circumstances:
• Relative size and dispersion of other vote holders
• Potential voting rights held by the investor and other parties
• Rights arising from contractual arrangements
• Any additional facts or circumstances (i.e. voting patterns)
3) Potential voting rights
▪ Potential voting rights are only considered if substantive
▪ Must consider the purpose and design of the instrument
Prof. Dr. Tami Dinh
Influence of Direct and Indirect Control
Does X control K?
Does X control Y? X Does X control Z?
51% 75%
Does Y control K? Y Z Does Z control K?
20% 40%
Prof. Dr. Tami Dinh

Concepts and Standards of Direct and Indirect Control
Ability to Exercise Control
▪ Sometimes, majority stockholders may not be able to exercise control even though they hold more
than 50 percent of outstanding voting stock.
➢ Subsidiary is in legal reorganization or bankruptcy
➢ Foreign country restricts remittance of subsidiary profits to domestic parent company
• The unconsolidated subsidiary is reported as an intercorporate investment.
Differences in Fiscal Periods
▪ Difference in the fiscal periods of a parent and subsidiary should not preclude consolidation.
▪ Often the fiscal period of the subsidiary is changed to coincide with that of the parent.
▪ Another alternative is to adjust the financial statement data of the subsidiary each period to place the
data on a basis consistent with the fiscal period of the parent.
Prof. Dr. Tami Dinh

Investment vs. Ownership
Cost method (investments

Usually equity method and
not intended to be held Equity method or
consolidation (but cost
long-term) or Fair Value Fair value option
method is also okay here)
Option
Ownership Percentage
(determines the appropriate accounting method
provided that the test for control does not imply otherwise)
0% No 20% 50% 100%

significant Significant
influence Control
influence
Prof. Dr. Tami Dinh

Accounting for Investments in Common Stock
Cost Method Equity Method Consolidation
▪ For reporting ▪ When the investor exercises ▪ Eliminates the investment

investments in equity significant influence over the account and replaces it with “the
securities operating and financial detail”
▪ Normally when both policies of the investee ▪ Involves combining the individual
consolidation and equity ▪ Normally when consolidation assets, liabilities, revenues, and
method reporting are is inappropriate expenses of two or more related
inappropriate companies for financial reporting
▪ May not be used in place of
consolidation if consolidation as if they were part of a single
is appropriate company
▪ Its primary use is in ▪ Normally appropriate when there
reporting non-subsidiary is a parent and a subsidiary
investments ▪ A subsidiary that is not
consolidated with the parent is
referred to as an unconsolidated
subsidiary and is shown as an
investment on the parent’s
balance sheet.
Prof. Dr. Tami Dinh

Benefits/Limitations of Consolidated Financial Statements
Benefits Limitations
▪ Presented primarily for the parties that have a ▪ Results of individual companies not disclosed
long-run interest in the parent company: (hides poor performance)
▪ Shareholders or ▪ Financial ratios are not necessarily
representative of any single company in the
▪ Long-term creditors or
consolidation
▪ Other resource providers ▪ Similar accounts of different companies may
▪ Provide means of obtaining a clear picture of not be entirely comparable
the total resources of the combined entity that ▪ Information is lost any time data sets are
are under the parent's control aggregated
Subsidiary Financial Statements

Creditors, preferred stockholders, and non-controlling common stockholders of subsidiaries are most
interested in the separate financial statements of the subsidiaries in which they have an interest.
Because subsidiaries are legally separate from their parents,
▪ the creditors and stockholders of a subsidiary generally have no claim on the parent, and
▪ the stockholders of the subsidiary do not share in the profits of the parent.
Prof. Dr. Tami Dinh

Week 2
Influence of Ownership and Control on Investment Accounting
Prof. Dr. Tami Dinh

Proprietary Theory and Parent Company Theory
Proprietary Theory
▪ Views the firm as an extension of its owners.
▪ Assets and liabilities of the firm are considered to be those of the owners.
▪ Results in a pro rata consolidation where the parent consolidates only its proportionate share of a
less-than-wholly owned subsidiary’s assets, liabilities, revenues, and expenses.
Parent Company Theory
▪ Recognizes that although the parent does not have direct ownership or responsibility, it has the ability
to exercise effective control over all of the subsidiary’s assets and liabilities, not simply a
proportionate share.
▪ Separate recognition is given, in the consolidated financial statements, to the non-controlling

interest’s claim on the net assets and earnings of the subsidiary.
Prof. Dr. Tami Dinh

Entity Theory
Entity Theory
▪ Focuses on the firm as a separate economic entity rather than on the ownership rights of the
shareholders.
▪ Emphasis is on the consolidated entity itself, with the controlling and non-controlling shareholders
viewed as two separate groups, each having an equity in the consolidated entity.
▪ All of the assets, liabilities, revenues, and expenses of a less-than-wholly owned subsidiary are
included in the consolidated financial statements, with no special treatment accorded either the
controlling or non-controlling interest.
▪ With the issuance of ASC 805, the FASB’s approach to consolidation now focuses on the entity theory.
Prof. Dr. Tami Dinh

Recognition of Subsidiary Income
Prof. Dr. Tami Dinh

Reporting Net Assets of the Subsidiary
Prof. Dr. Tami Dinh

Acquisition Cost and Goodwill Calculations
Full Goodwill vs. Partial Goodwill
Accurate definition of goodwill according to IFRS and US GAAP considering ownership < 100%:
Consideration transferred
+ Amount of the non controlling interest*, if any
+ FV of any interest in the acquiree already held by the acquirer
.⁄. FV of the acquiree`s net identifiable assets
= Goodwill
*
If NCI measured at fair value → full goodwill
If NCI measured at the NCI’s proportionate share of net assets of the acquiree → partial goodwill
IFRS allows a choice between full and partial goodwill; US GAAP: full goodwill is mandatory
Prof. Dr. Tami Dinh
Example:
ABC has acquired XYZ on 1 January 2014. The book value of equity of XYZ was $900m and the
fair value of its identifiable net assets was $1,100m. ABC has acquired 70% of the shares of
XYZ for $990m. The fair value of non-controlling interest was measured at $360m.
Partial Goodwill Full Goodwill
Consideration transferred 990 Consideration transferred 990
NCI (30%x1,100) 330 NCI (measured at FV) 360
./. Net assets acquired 1,100 ./. Net assets acquired 1,100
Goodwill 220 Goodwill 250
Goodwill of 30 is attributable to NCI
Prof. Dr. Tami Dinh

Consideration
Book value of equity FV of identifiable net assets transferred/
FV
100% 900 1,100
200
30% 270 330 360
60 30
70% 630 770 990
Hidden reserves: 140 Goodwill: 220
Excess of purchase price over book value of acquired net assets: 360
“Differential“: 450 (including excess of FV over BV of NCI)
Prof. Dr. Tami Dinh

Week 2
Cost Method for Investment Accounting
Equity Method for Investment Accounting
Comparison Cost vs. Equity Method
Prof. Dr. Tami Dinh

How it works
Used when the investor lacks the ability either to control or to exercise significant influence over the
investee.
General Rules:
The investment remains on parent’s books at cost
▪ Record income at the parent level ONLY when sub declares a dividend.
P
S
Generally, the sub’s income does not affect parent’s investment account balance.
▪ However, the parent cannot ignore the sub’s losses.
▪ Parent writes-down investment ONLY IF value has been impaired.
▪ Write-downs result in a NEW cost basis.
Prof. Dr. Tami Dinh

How it works
The cost method is a one-way street!
The investment can be written down—but never written up.
Investment Account
Cost
Impairment
Loss
New Cost
Basis
Prof. Dr. Tami Dinh

How it works - Example
Review
Assume P Corp creates a subsidiary, S Corp, and invests $100,000 cash in exchange for all of the $1 par
common stock (1,000 shares).
What journal entries would P and S make at the time of the investment?
P Corp:
P Investment in S Corp
Cash
100,000
100,000
S Corp:
S Cash
Common Stock
Additional Paid-in capital— CS
100,000
1,000
99,000
Prof. Dr. Tami Dinh

The Cost Method
Accounting Procedures
▪ The cost method is consistent with the treatment normally accorded noncurrent assets.
▪ At the time of purchase, the investor records its investment in common stock at the total cost incurred
in making the purchase.
▪ The investment continues to be carried at its original cost until the time of sale.
▪ Income from the investment is recognized as dividends are declared by the investee.
▪ Recognition of investment income before a dividend declaration is inappropriate.
Prof. Dr. Tami Dinh

The Cost Method - Example
ABC Company acquires 20 percent of XYZ Company’s common stock for $100,000 at the beginning of the
year but does not gain significant influence over XYZ. During the year, XYZ has net income of $60,000 and
pays dividends of $20,000. ABC Company records the following entries:
Record purchase of XYZ Company stock.
Investment in XYZ Company Stock 100,000

Cash 100,000
Record dividend income from XYZ Company stock: $20,000 * 0.20.
Cash 4,000
Dividend Income 4,000
Prof. Dr. Tami Dinh

Week 2
Prof. Dr. Tami Dinh

How it works
The equity method is accrual basis driven:
Record income at the parent level based on sub’s earnings and losses
▪ It is not the same as fair value accounting.
▪ Nevertheless, the investment generally goes up and down based on the operations of the investee
company.
Subsidiary’s dividends reduce the parent’s investment (the parent has less invested).
Investment in Sub Income from Sub
Cost
Income Losses Losses Income
Dividends
Adj. Bal.
Prof. Dr. Tami Dinh

How it works
The equity method is a two-way street!
The investment can be:
▪ written up based on the sub’s income
▪ written down based on sub losses and dividends
Prof. Dr. Tami Dinh

How it works
The equity method is intended to reflect the investor’s changing equity or interest in the investee.
The investment is recorded at the initial purchase price and adjusted each period for the investor’s share
of the investee’s profits or losses and the dividends declared by the investee.
IAS 28.16 requires that the equity method be used for:
1. Corporate joint ventures: A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement (IAS 28.3)
2. Associated companies: An associate is an entity over which the investor has significant influence.
Significant influence is the “power to participate in the financial and operating policy decisions of the
investee but is not control or joint control of those policies. “(IAS 28.3)
Prof. Dr. Tami Dinh

How it works
The existence of “significant influence” by an entity is usually evidenced in one or more of the following
ways:
(a)representation on the board of directors or equivalent governing body of the investee;
(b)participation in policy-making processes, including participation in decisions about dividends or
other distributions;
(c)material transactions between the entity and its investee;
(d)interchange of managerial personnel; or
(e)provision of essential technical information
(IAS 28.6)
“Significant influence” criterion – 20 percent rule (IAS 28.5)
▪ In the absence of evidence to the contrary, an investor holding 20 percent or more of an investee’s
voting stock is presumed to have the ability to exercise significant influence over the investee
Prof. Dr. Tami Dinh

How it works
Investor’s equity in the investee
▪ The investor records its investment at the original cost
▪ This amount is adjusted periodically:
Reported by Investee Effect on Investor’s Accounts
Net income Record income from investment
Increase investment account
Net loss Record loss from investment
Decrease investment account
Dividend declaration Record asset (cash or receivable)
Decrease investment account
Prof. Dr. Tami Dinh

The Equity Method – Example (I/II)
ABC Company acquires significant influence over XYZ Company by purchasing 20 percent of the common
stock of the XYZ Company for $100,000, XYZ earns income of $60,000 and pays dividends of $20,000.
Recognition of income
▪ This entry (equity accrual) is normally made as an adjusting entry at the end of the period
▪ If the investee reports a loss, the investor recognizes its share of the loss and reduces the carrying
amount of the investment by that amount
Record income from investment in XYZ Company ($60,000 * 0.20)
Income from XYZ Company 12,000
Prof. Dr. Tami Dinh

The Equity Method – Example (II/II)
Recognition of dividends
Record receipt of dividend from XYZ Company ($20,000 * 0.20).
Cash 4,000
Carrying amount of the investment
Investment in XYZ Common Stock
Original Cost 100,000

Equity Accrual Dividends
(60,000 * 0.20) 12,000 ($20,000 * 0.20) 4,000
Ending Balance 108,000
Prof. Dr. Tami Dinh

Week 2
Poll 2
Poll Question #2
Prof. Dr. Tami Dinh

Pros and Cons of the Equity Method
Pros
▪ Based on economic activity not the parent-controlled dividend policy.
▪ Has two built-in checking figures:
• Consolidated Net Income = Parent’s Net Income
• Consolidated Retained Earnings = Parent’s retained Earnings
Cons
▪ Requires continual bookkeeping.
▪ Unnecessary work if parent-company-only statements are not used internally or issued to outsiders.
Prof. Dr. Tami Dinh

Week 2
Poll 3
Poll Question #3
Prof. Dr. Tami Dinh

Week 2
Prof. Dr. Tami Dinh

The Cost and Equity Methods Compared
Item Cost Method Equity Method
Recorded amount of Original cost Original Cost
investment at date of
acquisition
Usual carrying amount of Original cost Original cost increased (decreased)
investment subsequent to by investor’s share of investee’s
acquisition income (loss) and decreased by
investor’s share of investee’s
dividends
Income recognition by Investor’s share of investee’s Investor’s share of investee’s
investor dividends declared from earnings since acquisition, whether
earnings since acquisition distributed or not
Investee dividends (declared) Income Reduction of investment

from earnings since
acquisition by investor
Investee dividends (declared) Reduction of investment Reduction of investment
in excess of earnings since
acquisition by investor
Prof. Dr. Tami Dinh

Example (I/IV)
Pea Corporation created Soup Corporation with a transfer of $500 cash. During Soup Corp.’s first year of
operations, it generated a net loss of $100 and paid no dividends. During Soup Corp.’s second year of
operations, it generated net income of $200 and paid dividends of $50. What is the balance in the
Investment in Sub account on Parent’s books at the end of year 2 using the equity method?
Investment in Sub
Beginning balance 500

Net Loss 100
Ending balance 400
Net income 200 Dividends 50
Ending balance 550
What if Parent uses the cost method? → $500 Cost!
What journal entries would Parent make under each method?
Prof. Dr. Tami Dinh

Example (II/IV) – Summary of Year 1 – Equity Method
Record the initial investment in Soup Corp

Investment in Soup Corp. 500
Cash 500
Record Pea Corp.’s 100% share of Soup Corp.’s Year 1 net loss.
Income from Soup Corp. 100
Investment in Soup. Corp. 100
Investment in Soup Corp. Income from Soup Corp.
Acquisition Price 500 Net Loss 100 Net Loss 100

Dividends 0
Ending Balance 400 Ending Balance 100
Prof. Dr. Tami Dinh

Example (III/IV) – Summary of Year 2 – Equity Method
Record Pea Corp.’s 100% share of Soup Corp.’s Year 2 income.

Record Pea Corp.’s 100% share of Soup Corp.’s Year 2 dividends

Cash 50
Investment in Soup. Corp. 50
Beginning Balance 400

Net Income 200 Net Income 200
Dividends 50
Prof. Dr. Tami Dinh

Example (IV/IV)
Equity Method Cost Method
Investment in Soup Corp. 500 Investment in Soup Corp. 500

Cash 500 Cash 500
Income from Soup Corp. 100 No Entry

Investment in Soup Corp. 200 No Entry

Cash 50 Cash 50
Investment in Soup Corp. 50 Dividend Income 50
Prof. Dr. Tami Dinh

Comparison Cost vs. Equity Method BOS
Practice Quiz Question
On 1/1/X4, Phillip invested $650,000 in Sleeper (100% owned).
For 20X4, Sleeper:
(1) earned $90,000,
(2) declared dividends of $60,000, and
(3) paid dividends of $40,000.
What amounts does Phillip report?
Cost Equity
Investment income for 20X4
Investment in Sleeper at year-end
Retained earnings increase
Prof. Dr. Tami Dinh

Week 2
Consolidation Process
Preparation of Consolidation Worksheet
Consolidation of Partially Owned Subsidiary
Prof. Dr. Tami Dinh

Overview of the Consolidation Process
The objective is to combine the financial statements of two or more entities as if they are a single
corporation.
Wholly Owned Subsidiary Partially Owned Subsidiary
Investment = Book Value Week 2 Week 2
Investment > Book Value Week 3 Week 3
▪ It is either a created subsidiary or we assume it is purchased for an amount equal to the book value of
net assets.
▪ The consolidation worksheet facilitates the combining of the two companies.
▪ Certain accounts need to be eliminated in the consolidation process to avoid “double counting.”
▪ Replaces “one-line” consolidation with the “detail.”
Prof. Dr. Tami Dinh

The Consolidation Worksheet
Elimination Entries
Parent Subsidiary DR CR Consolidated
Income Statement
Revenues
Expense
Expense
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
Total Liabilities and Equity
Prof. Dr. Tami Dinh

The Consolidation Worksheet
In the consolidation worksheet, the three financial statements show
▪ the flow of net income from the income statement to the statement of retained earnings and
▪ the transfer of the ending balance in retained earnings to the balance sheet.
Elimination entries are entered into the “Elimination Entries” column (debit or credit) to eliminate any
amounts that would result in “double counting.”
Prof. Dr. Tami Dinh

The Basic Elimination Entry: The Equity Method
What needs to be eliminated?
▪ The parent’s investment account (It represents the initial investment adjusted for the parent’s
cumulative share of the subsidiary’s income and dividends)
▪ The parent’s income from sub account
▪ The subsidiary’s equity accounts
Prof. Dr. Tami Dinh

Example Equity Method
Pea Corporation created Soup Corporation with a transfer of $500 cash ($50 common stock and $450
Additional Paid-In Capital). During Soup Corp.’s first year of operations, it generated a net loss of $100
and paid no dividends. During Soup Corp.’s second year of operations, it generated net income of $200
and paid dividends of $50. What is the balance in the Investment in Sub account on Parent’s books at the
end of year 2 using the equity method?
Investment in Sub
Beginning balance
500 Net Loss 100
Ending balance 400 Dividends 50

Net income 200
Ending balance 550
What accounts need to be eliminated?

How are they eliminated?
Prof. Dr. Tami Dinh

The investment account represents the initial investment adjusted for the parent’s cumulative share of the
subsidiary’s income and dividends.
Therefore, the elimination entry eliminates:
▪ The subsidiary’s paid-in capital accounts (original investment)
▪ Beginning retained earnings (past earnings / dividends)
▪ The subsidiary’s current year earnings and dividends
Generically, it looks like this:
Common Stock XXX

Additional Paid-in Capital XXX
Retained Earnings (Beginning Balance) XXX
Income from Sub XXX
Dividends Declared XXX
Investment in Sub XXX
Prof. Dr. Tami Dinh

Total = Common + Additional + Retained

Book Value Stock Paid-In Earnings
Capital
Original Book Value 400 50 450 (100)

+ Net Income 200 200)
− Dividends (50) (50)
Ending Book Value 550 50 450 50)
Note that the “blue” numbers appear Note that this is a deficit
in the basic elimination entry. balance!
Basic Elimination Entry

Common Stock 50  Original amount invested (100%)
Additional Paid-in Capital 450  Original amount invested (100%)
Income from Soup Corp. 200  Soup Corp.’s reported income
Retained Earnings (BB) 100  Beginning balance in retained earnings
Dividends Declared 50  100% of Soup Corp.’s dividends
Investment in Soup Corp. 550  Net book value in investment account
Prof. Dr. Tami Dinh

Common Stock 50
Additional Paid-in Capital 450
Retained Earnings (BB) 100
Dividends Declared 50
Beginning Balance 400

Net Income 200 Net Income 200
Dividends 50

550 Basic 200
0 0
Prof. Dr. Tami Dinh

Week 2
Prof. Dr. Tami Dinh

Pre-Consolidation Balances
Elimination Entries
Pea Corp. Soup Corp. DR CR Consolidated
Income Statement
Sales 1,200 600
Less: COGS (600) (300)
Less: Other Expenses (450) (100)
Net Income 350 200

Beginning Balance 150 (100)
Net Income 350 200
Less: Dividends Declared (100) (50)
Ending Balance 400 50
Balance Sheet
Cash 250 100
PP&E (net) 900 600
Total Assets 1,700 700
Liabilities 300 150

Common Stock 200 50
Additional Paid-in Capital 800 450
Retained Earnings 400 50
Total Liabilities & Equity 1,700 700
Prof. Dr. Tami Dinh

Eliminations, Sub-Totals, Carry Down
Elimination Entries
Income Statement
Sales 1,200 600
Less: COGS (600) (300)
Less: Other Expenses (450) (100)
Income from Soup Corp. 200 200
Net Income 350 200 200 0

Beginning Balance 150 (100) 100
Net Income 350 200 200 0
Less: Dividends Declared (100) (50) 50
Ending Balance 400 50 200 150
Balance Sheet
Cash 250 100
Investment in Soup Corp. 550 550
PP&E (net) 900 600
Total Assets 1,700 700 0 550
Liabilities 300 150

Common Stock 200 50 50
Additional Paid-in Capital 800 450 450
Retained Earnings 400 50 200 150
Total Liabilities & Equity 1,700 700 700 150
Prof. Dr. Tami Dinh

Add across and complete
Elimination Entries
Income Statement
Sales 1,200 600 1,800
Less: COGS (600) (300) (900)
Less: Other Expenses (450) (100) (550)
Income from Soup Corp. 200 200 0
Net Income 350 200 200 0 350

Beginning Balance 150 (100) 100 150
Net Income 350 200 200 0 350
Less: Dividends Declared (100) (50) 50 (100)
Ending Balance 400 50 200 150 400
Balance Sheet
Cash 250 100 350
Investment in Soup Corp. 550 550 0
PP&E (net) 900 600 1,500
Total Assets 1,700 700 0 550 1,850
Liabilities 300 150 450

Common Stock 200 50 50 200
Additional Paid-in Capital 800 450 450 800
Retained Earnings 400 50 200 150 400
Total Liabilities & Equity 1,700 700 700 150 1,850
Prof. Dr. Tami Dinh

Things to Remember
Consolidated net income EQUALS the parent’s net income.
Parent Consolidated
$350 = $350
Consolidated retained earnings EQUALS the parent’s retained earnings.
Parent Consolidated
$400 = $400
Prof. Dr. Tami Dinh

Group Exercise
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales 840,000 300,000 REQUIRED
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000) • Assume Pinkett
Less: Other Expenses (192,000) (98,000) acquired Smith on
Income from Smith, Inc. 36,000
1/1/11
Net Income 156,000 36,000

• Prepare all
Beginning Balance 132,000 72,000 elimination
Net Income 156,000 36,000 entries as of
Less: Dividends Declared (108,000) (12,000)
12/31/11.
Ending Balance 180,000 96,000
Balance Sheet
• Prepare a
Cash 54,000 48,000 consolidation
Accounts Receivable 114,000 66,000 worksheet at
Inventory 204,000 90,000
12/31/11.
Investment in Smith, Inc. 156,000
Property, Plant, & Equipment 336,000 210,000
Less: Accumulated Depreciation (144,000) (30,000) • Assume Smith’s
Total Assets 720,000 384,000 accumulated
depreciation on
Accounts Payable 168,000 84,000
1/1/11 was
Long-term Debt 360,000 144,000
Common Stock 12,000 60,000 $20,000.
Retained Earnings 180,000 96,000
Total Liabilities & Equity 720,000 384,000
Prof. Dr. Tami Dinh

Group Exercise
Objective:
▪ Eliminate equity accounts of Sub
▪ Eliminate equity method accounts of Parent.
Total Common Retained

Book Value = Stock + Earnings
Original Book Value )
+ Net Income
− Dividends
Ending Book Value )
Common Stock
Retained Earnings (BB)
Income from Smith, Inc.
Dividends Declared
Investment in Smith, Inc.
Prof. Dr. Tami Dinh

Group Exercise - Solution
Objective:
▪ Eliminate equity accounts of Sub Note that the “blue”

numbers appear in the basic
▪ Eliminate equity method accounts of Parent elimination entry.
Total Common Retained

Book Value = Stock + Earnings
Original Book Value 132,000) 60,000 72,000
+ Net Income 36,000 36,000)
− Dividends (12,000) (12,000)
Ending Book Value 156,000 60,000 96,000)
Common Stock 60,000

Retained Earnings (BB) 72,000
Dividends Declared 12,000
Investment in Smith, Inc. 156,000
Prof. Dr. Tami Dinh

The optional accumulated depreciation elimination entry:
Accumulated Depreciation 20,000

Buildings and Equipment 20,000
Property, Plant & Equipment Accumulated Depreciation
210,000 20,000
20,000 20,000
190,000 0
Shows the Buildings and Equipment “as if” they have been
recorded on the Sub’s books as new assets at book value.
Prof. Dr. Tami Dinh

Pinkett, Smith, Elimination Entries
Inc. Inc. DR CR Consolidated
Income Statement
Sales 840'000 300'000 1'140'000
Less: COGS -516'000 -156'000 -672'000
Less: Depreciation Expense -12'000 -10'000 -22'000
Less: Other Expenses -192'000 -98'000 -290'000
Income from Smith, Inc. 36'000 36'000 0
Net Income 156'000 36'000 36'000 0 156'000

Beginning Balance 132'000 72'000 72'000 132'000
Net Income 156'000 36'000 36'000 0 156'000
Less: Dividends Declared -108'000 -12'000 12'000 -108'000
Ending Balance 180'000 96'000 108'000 12'000 180'000
Balance Sheet
Cash 54'000 48'000 102'000
Accounts Receivable 114'000 66'000 180'000
Inventory 204'000 90'000 294'000
Investment in Smith, Inc. 156'000 156'000 0
Property, Plant, & Equipment 336'000 210'000 20'000 526'000
Less: Accumulated Depreciation -144'000 -30'000 20'000 -154'000
Total Assets 720'000 384'000 20'000 176'000 948'000
Accounts Payable 168'000 84'000 252'000

Long-term Debt 360'000 144'000 504'000
Common Stock 12'000 60'000 60'000 12'000
Retained Earnings 180'000 96'000 108'000 12'000 180'000
Total Liabilities & Equity 720'000 384'000 168'000 12'000 948'000
Prof. Dr. Tami Dinh

Week 2
Prof. Dr. Tami Dinh

Non-controlling Interest
▪ Only a controlling interest is needed for the parent to consolidate the subsidiary—not 100% interest.
▪ Shareholders of the subsidiary other than the parent are referred to as “non-controlling”
shareholders.
▪ Non-controlling interest refers to the claim of these shareholders on the income and net assets of the
subsidiary.
NCI Parent
<50% >50%
Sub
Prof. Dr. Tami Dinh

Non-controlling Interest
What is a non-controlling interest (NCI)?
▪ Voting shares not owned by the parent company
▪ NCI was formerly called the “Minority Interest”
NCI Parent Two Issues:
(1) Should 100% of the financial

statements be consolidated?
<50% >50% (2) Where to report NCI in the financial
statements?
Sub
Prof. Dr. Tami Dinh

Issue 1: Should 100% be consolidated?
Proportional Full
Consolidation Consolidation
Percent
< 100% 100%
Consolidated?
Reports NCI
No Yes
Amounts?
Complies with
No Yes
US GAAP/IFRS?
Relative
Easy Hard
Complexity?
Full consolidation required by IFRS

This means two special accounts appear in consolidated statements:
▪ NCI in Net Income of Sub
➢ Like an “expense” in the consolidated income statement
➢ “Reported income that doesn’t belong to us.”
▪ NCI in Net Assets of Sub
➢ Equity of unrelated owners
➢ “Net assets on our balance sheet not belonging to us.”
Prof. Dr. Tami Dinh

Issue 2: Where to report NCI in Net Assets?
Old rules: Could report it in equity, liabilities, or “no man’s land” between liabilities and equity.
New rules: Must report in equity (IFRS 3, Appendix A, Definitions)

Valuation of the non-controlling interest (IFRS 3.19)
▪ (a)fair value; or
▪ (b)the present ownership instruments' proportionate share in the recognised amounts of the
acquiree's identifiable net assets
Presentation
IAS 1 requires that
▪ The profit or loss and other comprehensive income available to all stockholders shall be
presented separately showing the income attributable to controlling and non-controlling
stockholders in the statement of profit or loss (IAS 1, 81b)
▪ IAS 1 (106) further requires a statement of changes in equity which includes the total
comprehensive income for the period, showing separately the total amounts attributable to
owners of the parent and to non-controlling interests
Prof. Dr. Tami Dinh
Summary of Differences in Consolidation
Wholly Owned Partially Owned

Subsidiary Subsidiary
Investment = Book Value Week 2 Week 2 No Differential
Investment > Book Value Week 3 Week 3 Differential
No NCI Shareholders NCI Shareholders
Prof. Dr. Tami Dinh

Consolidation of less-than-wholly-owned Subsidiaries
The entity theory requires that the entity’s entire income and value be reported.
▪ The subsidiary’s income is divided between the parent (controlling interest) and the NCI
shareholders.
▪ The subsidiary’s net assets are divided between the parent (controlling interest) and the NCI
shareholders.
▪ Basic elimination entry is modified to split both:
Sub Equity Accounts 100%

Income from Sub XXX
NCI in Net Income of Sub XXX
Dividends Declared by Sub 100%
Investment in Sub XXX
NCI in Net Assets of Sub XXX
Prof. Dr. Tami Dinh

Week 2
Poll 4
Poll Question #4
Prof. Dr. Tami Dinh

Group Exercise: Basic Elimination Entry
The following information is given:

1. Photo owns 70% of Snap
2. Snap’s net income for 20X4 is $160,000
3. Photo’s net income for 20X4 from its own separate operations is $500,000.
4. Snap’s declares dividends of $12,000 during 20X4.
5. Snap has 10,000 shares of $4 par stock outstanding that were originally issued at $14 per share.
6. Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
Account = Common Paid-in Retained
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance
+ Net Income
− Dividends
Ending Balance
Prof. Dr. Tami Dinh

Group Exercise: Basic Elimination Entry
Investment Additional
Account = Common Paid-in Retained
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
Dividends (3,600) (8,400) (12,000)
Ending Balance $122,400 $285,600 $40,000 $100,000 $268,000

Investment in Snap Common Stock 40,000
Add PIC – CS 100,000
Beg. Bal. 182,000 Retained Earnings, BB 120,000
70% NI 112,000 70% Div. 8,400 Income from Snap 112,000
End. Bal. 285,600 NCI in Net Income 48,000
Investment in Snap 285,600
NCI in Net Assets 122,400
Prof. Dr. Tami Dinh

The worksheet is modified when the parent owns less than 100% of the subsidiary.
The total “Net Income” is divided between:
▪ the non-controlling interest (NCI shareholders) and
▪ the controlling interest (the parent company)
Elimination Entries
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400 32,400
Net Income $ 152,400 $ 36,000 32,400
NCI in Net Income 3,600
CI In Net Income $ 152,400 $ 36,000 36,000
Prof. Dr. Tami Dinh

Group Exercise 2: Consolidation < 100%
Elimination Entries
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation expense (12,000) (10,000)
Net Income $ 152,400 $ 36,000 Assume Pinkett only purchases
NCI in Net Income
CI in Net Income $ 152,400 $ 36,000
90% of Smith.

Balances, 1/1/X8 $ 124,800 $ 72,000
REQUIRED
Add: Net Income 152,400 36,000
Less: Dividends (108,000) (12,000) • Prepare an analysis of the
Balances, 12/31/X8 $ 169,200 $ 96,000
investment for 20X8.
Balance Sheet
Cash $ 58,800 $ 48,000 • Prepare all consolidation
Accounts Receivable 114,000 66,000 entries as of 12/31/X8.
Inventory 204,000 90,000
Investment in Sub 140,400 • Prepare a consolidation
Property & Equipment 336,000 210,000
Accumulated Depreciation (144,000) (30,000) worksheet at 12/31/X8.
Total Assets $ 709,200 $ 384,000
Payables & Accruals $ 168,000 84,000

Common Stock 12,000 60,000
Retained Earnings 169,200 96,000
NCI in Net Assets
Total Liabilities & Equity $ 709,200 384,000
Prof. Dr. Tami Dinh

Group Exercise 2: Consolidation < 100% - Solution

Parent’s Subsidiary’s Equity Accounts
NCI Investment = Common Retained
(10%) Account (90%) Stock Earnings
Balances, 1/1/X8 13,200 118,800 60,000 72,000
+ Net Income 3,600 32,400 36,000
− Dividends (1,200) (10,800) (12,000)
Balances, 12/31/X8 15,600 140,400 60,000 96,000

Common Stock 60,000
Retained Earnings, BB 72,000
Income from Smith 32,400
Investment in Smith 140,400
Prof. Dr. Tami Dinh
Don’t forget the accumulated depreciation elimination entry:
Accumulated Depreciation 20,000

Buildings and Equipment 20,000
Property, Plant & Equipment Accumulated Depreciation

210,000 20,000
20,000 20,000
190,000 0
Shows the Buildings and Equipment “as if” they have been recorded on the
Subsidiary’s books as new assets at book value.
Prof. Dr. Tami Dinh

Elimination Entries
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000)
Net Income $ 152,400 $ 36,000 32,400 0
CI in Net Income $ 152,400 $ 36,000 36,000 0

Balances, 1/1/X8 $ 124,800 $ 72,000 72,000
Add: Net Income 152,400 36,000 36,000 0
Less: Dividends (108,000) (12,000) 12,000
Balances, 12/31/X8 $ 169,200 $ 96,000 108,000 12,000
Balance Sheet
Cash $ 58,800 $ 48,000
Accounts Receivable 114,000 66,000
Inventory 204,000 90,000
Investment in Sub 140,400 140,400
Property & Equipment 336,000 210,000 20,000
Accumulated Depreciation (144,000) (30,000) 20,000
Total Assets $ 709,200 $ 384,000 20,000 160,400
Payables & Accruals $ 168,000 84,000

Common Stock 12,000 60,000 60,000
Retained Earnings 169,200 96,000 108,000 12,000
Total Liabilities & Equity $ 709,200 384,000 168,000 27,600
Prof. Dr. Tami Dinh

Elimination Entries
Income Statement
Sales $ 840,000 $ 300,000 $ 1,140,000
Less: COGS (516,000) (156,000) (672,000)
Less: Depreciation Expense (12,000) (10,000) (22,000)
Less: Other Expenses (192,000) (98,000) (290,000)
Net Income $ 152,400 $ 36,000 32,400 0 $ 156,000
NCI in Net Income 3,600 (3,600)
CI in Net Income $ 152,400 $ 36,000 36,000 0 $ 152,400

Balances, 1/1/X8 $ 124,800 $ 72,000 72,000 $ 124,800
Add: Net Income 152,400 36,000 36,000 0 152,400
Less: Dividends (108,000) (12,000) 12,000 (108,000)
Balances, 12/31/X8 $ 169,200 $ 96,000 108,000 12,000 $ 169,200
Balance Sheet
Cash $ 58,800 $ 48,000 $ 106,800
Accounts Receivable 114,000 66,000 180,000
Inventory 204,000 90,000 294,000
Investment in Sub 140,400 140,400
Property & Equipment 336,000 210,000 20,000 526,000
Accumulated Depreciation (144,000) (30,000) 20,000 (154,000)
Total Assets $ 709,200 $ 384,000 140,400 $ 952,800
Payables & Accruals $ 168,000 84,000 $ 252,000

Long-term Debt 360,000 144,000 504,000
Common Stock 12,000 60,000 60,000 12,000
Retained Earnings 169,200 96,000 108,000 12,000 169,200
NCI in Net Assets 15,600 15,600
Total Liabilities & Equity $ 709,200 384,000 168,000 27,600 $ 952,800
Prof. Dr. Tami Dinh

Week 2
Prof. Dr. Tami Dinh

SIC 12 Consolidation - Special Purpose Entities
Special Purpose Entities
▪ Corporations, trusts, or partnerships created for a single specified purpose.

▪ Creator is called “sponsor”
▪ Usually have no substantive operations and are used only for financing purposes.
▪ Used for several decades for asset securitization, risk sharing, and taking advantage of tax statutes.
Main issue: Under what circumstances should SPEs be consolidated?
→ A SPE is required to be consolidated when the substance of the relationship between an entity and
the SPE indicates that the SPE is controlled by that entity
Various indicators of control including:

• Activities of the SPE and whether they are in substance being conducted on behalf of another party;
• Decision taking concerning the SPE – and whether a party has effective control of the SPE or its assets,
whether or not through contractual rights;
• Benefits arising from the SPE’s activities and whether a single party has the majority of those benefits;
• Risks and whether a single party is exposed to the majority of the residual or ownership risks related
to the SPE
Prof. Dr. Tami Dinh
Special Purpose Entities - IFRS and U.S. GAAP Differences
U.S. GAAP and IFRS requirements are largely similar with respect to SPEs. However U.S. GAAP is slightly
more specific with respect to related parties and disclosure:
Topic U.S. GAAP IFRS

Related Parties • Interests held by related parties • There is no specific provision for related
and “de facto” agents may be parties or de facto agents.
considered in determining control
of a SPE.
Disclosure • Disclosures required for • No SPE-specific disclosure requirements.
determining control of a SPE. • There are specific disclosure
• Entities must disclose whether or requirements related to consolidation in
not they are the primary general.
beneficiary of related SPEs.
Prof. Dr. Tami Dinh

Special Purpose Entities - The Failure of Enron
Company Overview:
• Energy, natural gas, paper and communications company
• One of the largest companies in the United States (in 2000 the
firm claimed revenues in excess of USD 100 bn.)
• Filed for bankruptcy in late 2001
• Enron used SPEs to obscure its true financial position from investors.
• Specifically Enron used SPEs to 1) accelerate profits, 2) minimize financial statement losses and
volatility (using SPEs to hedge on balance sheet risk) and 3) avoid adding debt to its balance sheet.
• Most of these SPEs were never consolidated and if so insufficient disclosure was provided so that
investors were misled about the true nature of the transactions being done.
• In a typical hedging transaction Enron would issue its own stock to a SPE in exchange for cash or a
note. The SPE would then use this stock to finance hedges to some of Enron’s on balance sheet
investments. However if the value of the investment declined so would Enron’s stock. As a result the
SPE could not carry out the hedge. Investors were left unaware of the fact that the SPEs relied on
Enron’s own stock to set up hedges!
Prof. Dr. Tami Dinh
Next Week
Week ▪ Intercorporate Acquisitions and Block

▪ Deferred Taxes & Wrap-up
1 Investments in Other Entities 1
Week ▪ Reporting Intercorporate Investments Block

▪ Student Presentations
2 and Consolidation I 2
Week Block
▪ Consolidation II ▪ Excursion to PwC in Zurich
3 3
Week ▪ Intercompany Transaction

4
Week
▪ Foreign Currency Translation
5
Prof. Dr. Tami Dinh


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Chair of Accounting

Prof. Dr. Tami Dinh

International Group Accounting

Spring Term 2021

Based on the book:

Week ▪ Intercorporate Acquisitions and Block

Week ▪ Reporting Intercorporate Block

Week ▪ Intercompany Transaction

Prof. Dr. Tami Dinh

Readings in Christensen/Cottrell/Budd (12e) 2019

Prof. Dr. Tami Dinh

Ownership, Control and Theories of Consolidation

Influence of Ownership and Control on Investment Accounting

Accounting for Investments

Further Issues in Consolidation

Prof. Dr. Tami Dinh

Ownership, Control and Theories of Consolidation

Poll Question #1… before we start!

Prof. Dr. Tami Dinh

Control – Definition IFRS 10

link between power

Prof. Dr. Tami Dinh

Does Y control K? Y Z Does Z control K?

Prof. Dr. Tami Dinh

Ability to Exercise Control

➢ Subsidiary is in legal reorganization or bankruptcy

➢ Foreign country restricts remittance of subsidiary profits to domestic parent company

• The unconsolidated subsidiary is reported as an intercorporate investment.

Differences in Fiscal Periods

Prof. Dr. Tami Dinh

Cost method (investments

0% No 20% 50% 100%

Prof. Dr. Tami Dinh

Cost Method Equity Method Consolidation

▪ For reporting ▪ When the investor exercises ▪ Eliminates the investment

Prof. Dr. Tami Dinh

Subsidiary Financial Statements

Prof. Dr. Tami Dinh

Ownership, Control and Theories of Consolidation

Influence of Ownership and Control on Investment Accounting

Accounting for Investments

Further Issues in Consolidation

Prof. Dr. Tami Dinh

▪ Views the firm as an extension of its owners.

Parent Company Theory

▪ Separate recognition is given, in the consolidated financial statements, to the non-controlling

Prof. Dr. Tami Dinh

Prof. Dr. Tami Dinh

Prof. Dr. Tami Dinh

Prof. Dr. Tami Dinh

+ Amount of the non controlling interest*, if any

+ FV of any interest in the acquiree already held by the acquirer

.⁄. FV of the acquiree`s net identifiable assets

Partial Goodwill Full Goodwill

Consideration transferred 990 Consideration transferred 990

NCI (30%x1,100) 330 NCI (measured at FV) 360

Goodwill 220 Goodwill 250

Goodwill of 30 is attributable to NCI

Prof. Dr. Tami Dinh

100% 900 1,100

Prof. Dr. Tami Dinh

Ownership, Control and Theories of Consolidation

Accounting for Investments