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Accounting for changes in ownership interests when the parent retains control

Accounting for changes in ownership interests when the parent retains control. John Hathorn Presentation at the Allied Academies Conference April 17, 2010. Purpose. SFAS 160 focus - fair value group – single economic entity changes in ownership interests If parent retains control

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Accounting for changes in ownership interests when the parent retains control

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  1. Accounting for changes in ownership interests when the parent retains control John Hathorn Presentation at the Allied Academies Conference April 17, 2010

  2. Purpose • SFAS 160 • focus - fair value • group – single economic entity • changes in ownership interests • If parent retains control then equity transaction (para 33) • Clarify method to account for these transactions

  3. SFAS 160 • Appendix A paragraph h states journal entry to record sale when parent retains control is: Dr. Cash Dr. AOCI (parent) Cr. NCI Cr. PIC (parent)

  4. Problem • Neither a journal entry in parent’s books nor consolidation journal entry (CJE) • Depicts sale consequences for group • Text books (Hoyle et al and Beam et al) incorrectly show the following for parent Dr. Cash Dr./Cr. PIC Cr. Investment

  5. Entries • Parent • separate legal entity • sale results in realized gain or loss • captures economic consequences • CJE • adjusts parent’s entry so sale is accounted for as equity transaction

  6. Illustration Dunlop acquired 7,000 of the 10,000 outstanding shares of Wilson on January 1, 2003 for $805,000. Dunlop uses the equity method to account for this investment. On December 31, 2007, Dunlop sold 1,000 shares of its investment in Wilson for $191,000.

  7. Entry to record sale –Parent’s books Dr. Cash $191,000 Cr. Investment $152,929 Cr. Gain on sale 38,071

  8. CJE Dr. Investment $152,929 Dr. Gain on sale 38,071 Cr. NCI $152,929 Cr. PIC 38,071

  9. SFAS 160 Entry Combining these two entries yields the entry in SFAS 160 Dr. Cash $191,000 Cr. NCI $152,929 Cr. PIC 38,071

  10. Parent uses cost basis • Parent’s books Dr. Cash $191,000 Cr. Investment $115,000 Cr. Gain on sale 76,000 • CJE Dr. Investment $115,000 Dr. Gain on sale 76,000 Cr. NCI $152,929 Cr. PIC 38,071

  11. Summary • Under the proposed approach • CJE debit offsets credit recorded by parent • CJE conceptually the same regardless of method used by parent to record investment • Parent is a separate legal entity • This dictates that gain/loss be recorded when sale takes place • No economic rationale to defer recognition of a realized gain/loss

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