After studying this chapter, you should be able to do the following:

1. Prepare a consolidated cash flow statement by applying concepts learned in prior courses and unique consolidation concepts discussed here.
2. Prepare consolidated financial statements in situations where the parent’s ownership has increased (step purchase).
3. Prepare consolidated financial statements after the parent’s ownership has decreased.
4. Prepare consolidated financial statements in situations where the subsidiary has preferred shares in its capital structure.
5. Calculate consolidated net income attributable to the shareholders of the parent and non-controlling interest in situations where a parent has direct and indirect control over a number of subsidiary companies.
6. Analyze and interpret financial statements involving ownership issues.
7. Identify some of the differences between IFRSs and ASPE involving ownership issues.

In this chapter we examined four topics that present special problems in consolidated financial statement preparation: consolidated cash flow statement, situations where the parent’s ownership interest changes (either increases or decreases), situations where the subsidiary has preferred shares in its capital structure, and situations where a parent has direct and indirect control over a number of subsidiary companies.

Consolidated Cash Flow Statement
While this statement could be prepared by combining the separate cash flow statements of the parent and its subsidiaries, this would involve eliminating all intercompany transactions, including intercompany transfers of cash. It is much easier to prepare the cash flow statement using comparative consolidated balance sheets and the consolidated income statement, because these statements do not contain any intercompany transactions. The consolidated cash flow statement can be prepared using either the indirect method or direct method and is based on the same basic principles taught in introductory and intermediate accounting courses with some special considerations for consolidation issues including: (1) acquisition-date fair value differences are amortized in the consolidated income statement, (2) dividends paid by subsidiaries to the parent company do not change the entity’s cash, whereas, dividends paid by the parent to its shareholders, and dividends paid by the subsidiaries to non-controlling shareholders, reduce the cash of the consolidated entity, (3) a change in the parent’s ownership percentage during the year requires a careful analysis to determine its effect on consolidated assets, liabilities, and equities, and (4) in the year that a subsidiary is acquired, special disclosures are required in the cash flow statement (only the net change in cash is presented on the consolidated cash flow statement; the details of the changes in non-cash items are disclosed in the notes to the consolidated cash flow statement).

Changes in Parent’s Ownership Interest
The next topic was concerned with changes in the parent’s percentage ownership and the effect that such changes have on the non-controlling interest and particularly on unamortized acquisition differentials. These ownership changes also require special attention when the consolidated cash flow statement is prepared.

The parent’s percentage of ownership can change when the parent buys or sells shares of the subsidiary or when the subsidiary issues or repurchases shares. Any time the parent’s percentage of ownership increases, we will account for the transaction as a purchase. Any time the parent’s percentage decreases, we will account for the transaction as a sale. Fair value through profit or loss (FVTPL) investments are reported at fair value at each reporting date. The equity method is used once the investor obtains significant influence. The investment is not reported at fair value under the equity method. The subsidiary is valued at fair value on the consolidated balance on the date the parent obtains control. The investment account is adjusted to fair value when the investor first obtains control of the investee (i.e., only on the first instance of control, not on each subsequent purchase to acquire more control of the subsidiary). However, only the parent’s share of the amortization of the acquisition differential is recorded in the parent’s books. A separate allocation of the acquisition differential should be prepared for each incremental investment. Any previous purchase price allocations are replaced by a new purchase price allocation on the date of a business combination. It is important to note that the subsidiary’s net assets are not revalued on the consolidated financial statements when the parent’s percentage ownership increases if the parent previously already had control of the subsidiary and is only purchasing another block of shares (thus was in a control and consolidation position before the most recent block purchase, and remains in a control and consolidation position after the most recent block purchase). It is interesting to note that numerous small purchases over a short period of time can be grouped into one block purchase when calculating and allocating the acquisition differential.

Recall that the consolidation concepts from previous chapters have not changed, they have just been extended. The investment account can be reconciled to the subsidiary’s equity at any point in time when the parent uses the equity method. Non-controlling interest on the balance sheet comprises the non-controlling interest’s share of the subsidiary’s equity and the unamortized acquisition differential at the balance sheet date. The parent’s retained earnings under the equity method are equal to consolidated retained earnings. Both the parent’s and the non-controlling interest’s shares of the unamortized acquisition differential appear on the consolidated balance sheet.

Some things to remember when a parent sells some of its holdings in subsidiary:

• Gains (losses) on transactions with shareholders are credited (charged) directly to shareholders’ equity.
• Non-controlling interest is increased by the carrying value of the shares sold by the parent.
• The subsidiary’s net assets are not revalued when the parent sells a portion of its investment in the subsidiary.
• The proceeds from selling shares in the subsidiary should be reported in financing activities on the consolidated cash flow statement.

Some things to remember when a subsidiary issues additional shares to the public:

• The parent’s percentage interest decreases when the subsidiary issues additional shares and the parent does not purchase any of the additional shares.
• Gains (losses) on transactions with shareholders are not reported in net income, but rather, are credited (charged) directly to shareholders’ equity.
• The unamortized acquisition differential is not revalued when the parent’s percentage ownership changes as long as the parent still has control.

Subsidiary with Preferred Shares Outstanding
Preferred shares in the capital structure of subsidiary companies present unique problems in calculating non-controlling interest if the parent’s ownership of the preferred shares is not the same as its ownership of the common shares. The problem is solved by allocating shareholders’ equity and any changes therein to preferred and common share components.

Some points to remember when a subsidiary has preferred shares outstanding:

• Any calculations involving the subsidiary’s equity must be split between common and preferred shareholders.
• The preferred shareholders’ claim on income is one year’s worth of dividends in any given year, whether or not dividends are declared in that year.
• The amount of income, dividends, and equity belonging to the preferred shareholders depends on the rights of the preferred shareholders.
• When the parent company owns the preferred shares of the subsidiary, any acquisition differential related to the preferred shares should be treated similar to a retirement of the preferred shares by the subsidiary itself.

Indirect Shareholdings
Control by a parent company can be achieved through direct ownership of the subsidiary’s voting shares or through indirect ownership by other subsidiaries or investees. If the equity method is used for all of the investment accounts, the consolidation process is fairly easy, because the major problem involved with indirect holdings is how to determine the amount for non-controlling interest. If the cost method is used to account for the investments, we apply the basic procedure of adjusting from cost to equity, and then continue preparing the consolidated statements in the normal manner. This adjustment from cost to equity can be very involved when the affiliation structure is complex.

Some points to remember for direct and indirect shareholdings:

• The principles applied when consolidating directly controlled subsidiaries apply equally well when consolidating indirectly controlled subsidiaries.
• The amortization of the acquisition differential is allocated to the subsidiary to which it pertains.