Quiz 4: Consolidated Financial Statements and Outside Ownership

Business

In deliberations prior to the issuance of pre-Codification SFAS 160 , "Noncontrolling Interests in Consolidated Financial Statements," the FASB considered three alternatives for displaying the noncontrolling interest in the consolidated balance sheet What were these three alternatives 1. As a liability 2. As equity 3. In the "mezzanine" area between liabilities and owners' equity What criteria did the FASB use to evaluate the desirability of each alternative The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No. 6. In what specific ways did FASB Concept Statement 6 affect the FASB's evaluation of these alternatives From pre-Codification SFAS 160 paragraphs 32-34 If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element-noncontrolling interest in subsidiaries-specifically for consolidated financial statements. The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent. The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity's owners, creditors, and other resource providers. The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board's conceptual framework. Paragraph 35 of Concepts Statement 6 defines liabilities as "probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events" The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent. The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement 6. Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as "the residual interest in the assets of an entity that remains after deducting its liabilities."

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The answer to this multiple choice question is "C". Even if there is a non-controlling interest in a subsidiary, the acquisition method uses 100% of the subsidiary's assets and liabilities. This is because the parent company controls the subsidiary, and that is reflected in the accounting treatment.

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