Consolidation Theories,

Push-Down Accounting, and Corporate Joint Ventures

Puji Rahayu
pujirahayu06@ugm.ac.id
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
Learning Objectives

11.1 Compare and contrast the elements of

consolidation approaches under parent-company
and contemporary/entity theories.
11.2 Adjust subsidiary assets and liabilities to fair values
using push-down accounting.
11.3 Account for corporate and unincorporated joint
ventures.
 11.1: Consolidation Theories
Consolidation Theories, Push-Down Accounting, and Corporate Joint
Ventures
Three Theories
Parent-company theory
– Viewpoint of parent company shareholders
Contemporary/entity theory
– Takes the viewpoint of the total consolidated
entity
Traditional theory
– Viewpoint of the parent’s shareholders and
creditors
– Statements are from the viewpoint of the total
consolidated entity
Income Reporting

Consolidated net income:

● Parent-company theory and traditional theory

– Income to the parent company shareholders
● Contemporary/entity theory
– Income to be shared between the controlling
and noncontrolling interests
Asset Valuation

Parent-company theory and traditional theory

– Subsidiary assets and liabilities are adjusted to
fair value only to the extent of the parent's
share.
● Land with a book value of $50 and fair value
of $80 would be consolidated at $80 if the
parent owned 100%, but at $71 [$50 +
70%(80-50)] if the parent owned 70%.
Contemporary/entity theory
– Subsidiary assets and liabilities are
consolidated at fair value.
● Land would be consolidated at $80
regardless of ownership percentage.
Unrealized Gains and Losses

Parent-company theory
– Eliminate unrealized gains and losses
attributable to the subsidiary based on parent's
ownership
● 80% of the $10 unrealized gains on upstream
sales would be eliminated if the parent owned
80% of the subsidiary.
Contemporary/entity theory and traditional theory
– Unrealized gains and losses are eliminated.
● Eliminate 100% of unrealized gains on
upstream sales regardless of parent’s share
All theories eliminate downstream gains and losses.
Constructive Gains and Losses
Parent-company theory
– Recognize constructive gains and losses
attributable to the subsidiary based on parent's
ownership
Contemporary/entity theory and traditional theory
– Recognize constructive gains and losses
● Include 100% of constructive gains and
losses regardless of parent’s share
All theories recognize 100% of constructive gains
and losses attributable to the parent.
Consolidated Stockholders' Equity

Contemporary theory
– Noncontrolling interest is a single amount and
a part of stockholders' equity.
Entity theory
– Noncontrolling interest is also part of
stockholders' equity.
– It would be decomposed into paid in capital,
retained earnings, etc.
Other Ideas on Consolidation
– Use footnote disclosure for CI and NCI shares
of consolidated income
● Consolidated net income is on the income
statement with the distribution between CI
and NCI in the notes.
● Total consolidated equity is on the balance
sheet with CI and NCI equity components in
the notes.
– Use proportional consolidation, excluding NCI
from the statements
 11.2: Push-Down Accounting
Consolidation Theories, Push-Down Accounting, and Corporate Joint
Ventures
SEC Requires Push-Down
SEC requires push-down accounting for SEC filings
when the subsidiary:
– Is substantially wholly owned (usually 90%),
and
– Has substantially no publicly-held debt or
preferred stock
Establishes a new basis for the assets and
liabilities:
– Based on acquisition price
Arguments against:
– Subsidiary is not party to the acquisition
– Subsidiary receives no new funds, sells no
assets
Push-Down Procedure
● Assets and liabilities are revalued.
● Goodwill, if any, is recorded.
● Retained earnings (prior to acquisition) are
eliminated.
● Push-down capital
– Is an additional paid-in capital account
– Includes old retained earnings
– Any adjustments to assets and liabilities,
including goodwill
● A new retained earnings account is used
subsequent to the business combination
Push-Down Example

Pop buys 90% of Son. Son's book and fair values

are:
  BV FV   BV FV
Cash $5 $5   Liabilities $25 $25
Accounts rec. 30 35  
Inventory 40 50   Capital stock 100
Other current 10 10   Retained earnings 20
Plant assets 60 80  
Goodwill 0 65  
Total $145 $245   Total $145

If Son applies push-down accounting, it would

revalue its accounts receivable, inventory, and plant
assets, and record goodwill.
Son Uses Parent Company Theory
Son revalues assets and liabilities only to the extent
of Pop's ownership. Only 90% of the
increases/decreases are recorded.

Accounts receivable (+A) 4.5

Inventory (+A) 9.0
Plant assets (+A) 18.0
Goodwill (+A) 58.5
Retained earnings (-SE) 20.0
Push-down capital (+SE) 110.0
Son Uses Contemporary/Entity Theory
Son fully revalues assets and liabilities. 100% of
the increases/decreases are recorded.

Accounts receivable (+A) 5

Inventory (+A) 10
Plant assets (+A) 20
Goodwill (+A) 65
Retained earnings (-SE) 20
Push-down capital (+SE) 120
Push-Down Differences
The example used 90% ownership by the parent.

SEC requires push-down accounting when the firm is substantially

owned.
– May be applied in other instances
Leveraged Buyouts with a change in controlling interest
– Changing accounting basis may be appropriate
 11.3: Joint Ventures
Consolidation Theories, Push-Down Accounting, and Corporate Joint
Ventures
Joint Ventures (definition)
A joint venture is a business entity that is owned, operated,
and jointly controlled by a small group of investors for a
specific business undertaking that provides mutual benefit for
each of the venturers.

Forms:
– Incorporated
– General or limited partnerships
– Domestic or foreign
– Undivided interest
Corporate Joint Ventures
Investors who participate in the overall management of the
joint venture
– Use equity method (one-line consolidation) for the joint
venture
– If significant influence is not present, use the cost
method.

Investors with more than 50% of the voting stock have a

subsidiary, not a joint venture.
– Consolidate the subsidiary
Unincorporated Joint Ventures
Application of the equity method to unincorporated
joint ventures is appropriate.

Industry-specific practice
– Pro rata (proportionate) consolidation in oil &
gas
– SEC recommends against proportionate
consolidation for undivided interests in real
estate ventures under joint control.
Thank You