Consolidated Cash Flows

1
Chapter 9

• Consolidated Cash Flows
• and
• Ownership Issues
• (Cash flows are not covered in the course)

2
Outline

• Changes in the of ownership interest of the
  parent
• Ownership reduction through sale of shares
• Step purchases of sub
• Parent reduces ownership interest by selling
  shares when shares were acquired through step
  purchases
• Parents ownership is reduced when Sub sells
  additional shares to the public and not to parent
• What happens if the sub has Preferred shares?
• Indirect control over a sub

3
Ownership Changes
4
Ownership Changes

• A parents ownership interest will change if
• The parent purchases additional holdings in its
  subsidiary
• The parent sells some of its holdings in its
  subsidiary
• The subsidiary issues additional common shares to
  the public and the parent does not maintain its
  previous ownership percentage
• The subsidiary repurchases some of its common
  shares from the noncontrolling interest

5
Ownership Changes

• When the parents ownership changes the
  percentage of subsidiary common stock held by the
  noncontrolling interest also changes
• When the parents ownership percentage increases,
  there will be an additional purchase discrepancy
  that must be allocated to revalue the net assets
  of the subsidiary as at that date

6
Ownership Changes

• When the parents ownership percentage decreases,
  a reduction of the unamortized purchase
  discrepancy occurs

7
Example

• P purchases 60 of the common shares of S for
  150,000. On this day, S has common stock of
  100,000 and retained earnings of 90,000. The BV
  are identical to FMV with the exception on
  equipment which is undervalued by 9000 and
  patents worth 51,000 which are not recognized.
• A) Calculate and allocate the PD
• B) Assume that P sells 600 shares for 18,000.
  What is Ps new ownership and what is the new PD?

a
8
Ownership Changes Step Purchases

• Most share acquisitions are made not as a single
  purchase, but through a series of block
  acquisitions (sometimes described as step
  purchases)
• The key to the accounting treatment is that the
  step purchases must be tracked separately, to the
  extent that there are purchase discrepancies
  arising with each layer, and for the computation
  of consolidated retained earnings

9
Ownership Changes Step purchases

• The consolidation problems are basically the same
  whether control was achieved in the first
  purchase or whether control was not present after
  the first purchase but was achieved with
  subsequent purchases
• For each purchase involving significant influence
  or control, a purchase discrepancy is calculated
  and allocated to revalue the net assets of the
  subsidiary

n
10
Ownership Changes

• When an investment is sold, a gain or loss is
  computed as the difference between the proceeds
  received and the net book value of the investment
• The net book value of a portfolio investment is
  the original cost
• The net book value of an affiliate or a
  subsidiary is the book value computed under the
  equity method
• Purchase discrepancy is adjusted to remove
  investments sold (proportionately)

11
Ownership Changes

• In summary, the only new consolidation concept
  involved with block acquisitions is the
  revaluation of the subsidiarys net assets at the
  time each block is acquired
• Paragraph 1600.13 of the Handbook describes the
  process as follows
• Where an investment in a subsidiary is acquired
  through two or more purchases, the parent
  companys interest in the subsidiarys
  identifiable assets and liabilities should be
  determined as follows

12
Ownership Changes

• The assignable costs of the subsidiarys
  identifiable assets and liabilities should be
  determined as at each date on which an investment
  was acquired
• The parent companys interest in the subsidiarys
  identifiable assets and liabilities acquired at
  each step in the purchase should be based on the
  assignable costs of all such assets and
  liabilities at that date

13
Ownership Changes

• The Handbook also suggests that this process
  should commence the first time that the equity
  method becomes appropriate and, in addition, that
  it would be practical to treat numerous small
  purchases, especially those made over short
  period of time, as a single purchase

14
Ownership Changes

• Issue of shares by a subsidiary is always
  accounted for as a partial disposal of the
  investment, as the percentage owned changes
• When the subsidiary issues shares, the interest
  of the parent is diluted
• Accordingly, when shares are issued, a gain or
  loss is computed by computing the difference
  between the proceeds received and the net book
  value of the reduction
• The net book value is computed under the equity
  method

15
Ownership Changes

• When the net book value is computed under the
  equity method, the investment account is updated
  for all earnings since acquisition and all
  dividends paid (i.e. for the change in the
  subsidiary retained earnings), for amortization
  of the purchase price discrepancy, and for
  elimination of unrealized intercompany profits
• This up to date book value is used in all
  calculations necessary to determine the gain or
  loss on the issuance of shares by the subsidiary