Question

Case 16-9 Consolidation, Entity Theory

Entity theory is one of the two prominent theories of consolidation.

Required:

Under entity theory:
a. How would the value of goodwill be determined? Explain why.
b. How would the initial value of noncontrolling interest be determined? Explain why.
c. How would a company report noncontrolling interest income in the consolidated income statement? Explain why.
d. Where would a company report noncontrolling interest in the consolidated balance sheet? Explain why.

Answer 1

A. Under the entity Theory method, the value of goodwill shall be the difference between the net identifiable assets and the sum of external liabilities and non-controlling Interest (NCI).

B. The Initial value of Non-Controlling Interest under Entity Method shall be the proportionate value of the net assets on the date of initial recognition as Subsidiary because it will be the net asset received by the Non-Controlling Interest if the Company is liquidated on the Same Date.  

C. Non-Controlling Interest share of Profit is separately calculated and the Net Profit is to be shown as two parts

i. Income i.e. attributable to shareholders of the Company.

ii. Income attributable to Non-Controlling Interest

D. Non-controlling Interest is reported under non-Current Liabilities at Fair Value because it will the proportionate share of the realizable value of the Net assets of the Subisidary on the Balance Sheet date i.e attributable to NCI.