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Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle,Thomas Schaefer,Timothy Doupnik
Edition 5ISBN: 978-1260575910Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle,Thomas Schaefer,Timothy Doupnik
Edition 5ISBN: 978-1260575910 Exercise 1
Consolidated financial reporting is appropriate when one entity has a controlling financial interest in another entity. The usual condition for a controlling financial interest is ownership of a majority voting interest. But in some circumstances, control does not rest with the majority owner-especially when noncontrolling owners are contractually provided with approval or veto rights that can restrict the actions of the majority owner. In these cases, the majority owner employs the equity method rather than consolidation.
Required
Address the following by searching the FASB ASC Topic 810 on consolidation.
1. What are protective noncontrolling rights
2. What are substantive participating noncontrolling rights
3. What noncontrolling rights overcome the presumption that all majority-owned investees should be consolidated
4. Zee Company buys 60 percent of the voting stock of Bee Company with the remaining
40 percent noncontrolling interest held by Bee's former owners, who negotiated the following noncontrolling rights:
• Any new debt above $1,000,000 must be approved by the 40 percent noncontrolling shareholders.
• Any dividends or other cash distributions to owners in excess of customary historical amounts must be approved by the 40 percent noncontrolling shareholders.
According to the FASB ASC, what are the issues in determining whether Zee should consolidate Bee or report its investment in Bee under the equity method
Required
Address the following by searching the FASB ASC Topic 810 on consolidation.
1. What are protective noncontrolling rights
2. What are substantive participating noncontrolling rights
3. What noncontrolling rights overcome the presumption that all majority-owned investees should be consolidated
4. Zee Company buys 60 percent of the voting stock of Bee Company with the remaining
40 percent noncontrolling interest held by Bee's former owners, who negotiated the following noncontrolling rights:
• Any new debt above $1,000,000 must be approved by the 40 percent noncontrolling shareholders.
• Any dividends or other cash distributions to owners in excess of customary historical amounts must be approved by the 40 percent noncontrolling shareholders.
According to the FASB ASC, what are the issues in determining whether Zee should consolidate Bee or report its investment in Bee under the equity method
Explanation
Verified
Verified
1. Protective Rights (ASC Topic 810, Consolidation 810-10-25-10)
Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder to block corporate actions would be considered protective rights and would not overcome the presumption of consolidation by the investor with a majority voting interest in its investee. The following list is illustrative of the protective rights that often are provided to the noncontrolling shareholder but is not all-inclusive:
a. Amendments to articles of incorporation of the investee
b. Pricing on transactions between the owner of a majority voting interest and the investee and related self-dealing transactions
c. Liquidation of the investee or a decision to cause the investee to enter bankruptcy or other receivership
d. Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary course of business (noncontrolling rights relating to acquisitions and dispositions of assets that are expected to be made in the ordinary course of business are participating rights; determining whether such rights are substantive requires judgment in light of the relevant facts and circumstances [see paragraphs 810-10-25-13 and 810-10-55-1 ])
e. Issuance or repurchase of equity interests.
2. Substantive Participating Rights (ASC Topic 810, Consolidation 810-10-25-11)
Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder to participate in determining certain financial and operating decisions in the ordinary course of business shall be considered substantive participating rights and would overcome the presumption that the investor with a majority voting interest shall consolidate its investee.
3. (FASB ASC Topic 810, Consolidation 810-10-25-11)
Substantive participating rights would overcome the presumption that the investor with a majority voting interest shall consolidate its investee. The following list is illustrative of substantive participating rights, but is not necessarily all-inclusive:
a. Selecting, terminating, and setting the compensation of management responsible for implementing the investee's policies and procedures
b. Establishing operating and capital decisions of the investee, including budgets, in the ordinary course of business.
4. Assessing Individual Noncontrolling Rights (FASB ASC Topic 810, Consolidation 810-10-55-1 b and c)
b. Existing facts and circumstances should be considered in assessing whether the rights of the noncontrolling shareholder relating to an investee's incurring additional indebtedness are protective or participating rights. For example, if it is reasonably possible or probable that the investee will need to incur the level of borrowings that requires noncontrolling shareholder approval in its ordinary course of business, the rights of the noncontrolling shareholder would be viewed as substantive participating rights.
c. The rights of the noncontrolling shareholder relating to dividends or other distributions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, rights to block customary or expected dividends or other distributions may be substantive participating rights, while rights to block extraordinary distributions would be protective rights.
Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder to block corporate actions would be considered protective rights and would not overcome the presumption of consolidation by the investor with a majority voting interest in its investee. The following list is illustrative of the protective rights that often are provided to the noncontrolling shareholder but is not all-inclusive:
a. Amendments to articles of incorporation of the investee
b. Pricing on transactions between the owner of a majority voting interest and the investee and related self-dealing transactions
c. Liquidation of the investee or a decision to cause the investee to enter bankruptcy or other receivership
d. Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary course of business (noncontrolling rights relating to acquisitions and dispositions of assets that are expected to be made in the ordinary course of business are participating rights; determining whether such rights are substantive requires judgment in light of the relevant facts and circumstances [see paragraphs 810-10-25-13 and 810-10-55-1 ])
e. Issuance or repurchase of equity interests.
2. Substantive Participating Rights (ASC Topic 810, Consolidation 810-10-25-11)
Noncontrolling rights (whether granted by contract or by law) that would allow the noncontrolling shareholder to participate in determining certain financial and operating decisions in the ordinary course of business shall be considered substantive participating rights and would overcome the presumption that the investor with a majority voting interest shall consolidate its investee.
3. (FASB ASC Topic 810, Consolidation 810-10-25-11)
Substantive participating rights would overcome the presumption that the investor with a majority voting interest shall consolidate its investee. The following list is illustrative of substantive participating rights, but is not necessarily all-inclusive:
a. Selecting, terminating, and setting the compensation of management responsible for implementing the investee's policies and procedures
b. Establishing operating and capital decisions of the investee, including budgets, in the ordinary course of business.
4. Assessing Individual Noncontrolling Rights (FASB ASC Topic 810, Consolidation 810-10-55-1 b and c)
b. Existing facts and circumstances should be considered in assessing whether the rights of the noncontrolling shareholder relating to an investee's incurring additional indebtedness are protective or participating rights. For example, if it is reasonably possible or probable that the investee will need to incur the level of borrowings that requires noncontrolling shareholder approval in its ordinary course of business, the rights of the noncontrolling shareholder would be viewed as substantive participating rights.
c. The rights of the noncontrolling shareholder relating to dividends or other distributions may be protective or participating and should be assessed in light of the available facts and circumstances. For example, rights to block customary or expected dividends or other distributions may be substantive participating rights, while rights to block extraordinary distributions would be protective rights.
Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle,Thomas Schaefer,Timothy Doupnik
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