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In parent company financial statements, investments in consolidated subsidiaries are presented as investments using the parent’s proportionate share of the investee or subsidiary.

31.4.1 Investments in noncontrolled entities

A parent company’s investment in a noncontrolled entity is accounted for on the same basis applied in preparing the consolidated financial statements. Therefore, investments measured at fair value or accounted for using the equity method should be accounted for in a similar manner in the parent company financial statements. As a result, the carrying amount of an investment is the same in both the consolidated and parent company financial statements.

31.4.2 Investments in consolidated subsidiaries

In consolidated financial statements, the net carrying amount of a subsidiary attributable to the parent equals the carrying amounts of the subsidiary’s assets and liabilities measured using the parent’s basis less any noncontrolling interest. In parent company financial statements, the net carrying amount of a subsidiary attributable to the parent should equal the amount reported in the parent company’s balance sheet as its investment in the underlying net assets of the subsidiary measured using the parent’s basis less any noncontrolling interest. In addition, total stockholders’ equity, net income and comprehensive income amounts presented in the parent company financial statements should equal the corresponding amounts attributable to the parent in the consolidated financial statements.
Although the presentation of consolidated subsidiaries in parent company financial statements is similar to the equity method guidance prescribed by ASC 323, Investments—Equity Method and Joint Ventures, it may not yield the same result because certain items are handled differently under ASC 323 than they are in consolidation. In other words, recording subsidiaries at the net amount attributable to the parent does not always result in presentation of the parent company’s investment as if the consolidated subsidiary were accounted for under the equity method.
Figure FSP 31-2 outlines selected differences in subsidiary presentation in parent company financial statements versus the equity method of accounting.
Figure FSP 31-2
Selected differences in subsidiary presentation in parent company financial statements versus the equity method of accounting
Transaction
Equity method investment in accordance with ASC 323
Subsidiary presented in parent company financial statements
Impairment losses
Recognize if the investment’s carrying amount exceeds its fair value and the decline in fair value is deemed to be other-than-temporary.
Recognize proportionate share of the consolidated subsidiary’s impairment losses.
Acquisition costs
Include in consideration transferred to acquire an equity method investment and capitalize as a component of the cost of the assets acquired.
In a business combination, expense and do not include as part of the consideration transferred.
Capitalized interest on investee’s qualifying assets
Capitalize interest on the investment only to the extent that the investee has qualifying activities as described in ASC 835-20.
As long as qualifying assets and interest cost exist within the consolidated group, record proportionate share of the consolidated subsidiary’s capitalized interest.
Losses in excess of investment
Discontinue recording losses when the investment (and net advances) is reduced to zero unless the investor has committed to provide further financial support to the investee.
Continue recording losses, as discontinuation would result in the carrying amount of the investment not equaling the parent company’s share of the subsidiary’s net assets.
Change in previously held equity interest
Treat a change in interest (e.g., increase in an equity method investment from 30% to 40%) as a step acquisition or as a disposition with the gain or loss recognized in the income statement.
If a reporting entity sells a portion of a foreign entity that is accounted for using the equity method, and its retained interest will also be accounted for using the equity method, it should recognize a pro rata portion of the accumulated CTA account attributable to the equity method investment when measuring the gain or loss on the sale.
Treat a change in interest (not constituting a change in control) as an equity transaction.
If the consolidated subsidiary represents an entire foreign entity, none of the CTA balance is reclassified unless the parent company ceases to have a controlling financial interest.
View table
Example FSP 31-1 illustrates the differences between the equity method of accounting and accounting for investments in consolidated subsidiaries in parent company financial statements when there is a change in ownership during the period.
EXAMPLE FSP 31-1
Increase in ownership in a less than wholly owned consolidated subsidiary
Company A owns a 70% interest in Subsidiary B which is consolidated in Company A’s general purpose financial statements. Company A is also required to prepare parent company financial statements. At 12/31/20X1, Subsidiary B has net assets of $100. In the consolidated financial statements, Company A reflects 100% of the assets and liabilities of Subsidiary B and a noncontrolling interest of $30. In the parent company financial statements Company A reflects its investment in Subsidiary B of $70.
During 20X2, Company A purchases an additional 10% interest in Subsidiary B for its fair value of $30. Subsidiary B is consolidated in Company A’s general purpose financial statements before and after the transaction (i.e., there is no change in control as a result of the transaction).
How should this transaction be reflected in Company A’s parent company financial statements?
Analysis
In its parent company financial statements, Company A should reflect an investment in Subsidiary B of $80, reflecting its proportionate share of Subsidiary B’s net assets of $100. In the consolidated financial statements, the additional cash paid to acquire a portion of the noncontrolling interest is an equity transaction as the transaction does not result in a change of control (see BCG 5.4). Since the total stockholders’ equity, net income, and comprehensive income amounts presented in the parent company financial statements should equal the corresponding amounts attributable to the parent in the consolidated financial statements, the difference of $20 should be recorded as an adjustment to Company A’s APIC.
The journal entry in Company A’s parent company financial statements is as follows:
Dr. Investment in Subsidiary B
$10
Dr. Company A Equity/ APIC
$20
Cr. Cash
$30
In contrast, under the equity method of accounting, Company A’s additional investment in Subsidiary B would be recorded at the cost of the additional investment. Any basis differences between the cost of the investor’s incremental share of the investee’s net assets and its interest in the investee’s carrying value of those net assets should be identified and recorded in the memo accounts and subsequently accounted for based on its respective characterization (see EM 5.3.2).
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