In: Accounting
Suppose, Thompson Inc. purchased 70% of outstanding shares of Panna Corporation for $ 120,000 on January 1, 2018.
For non-wholly owned subsidiary, the consolidation of financial statements is a complex system. There will be two groups of shareholders – Controlling and non-controlling. There are many theories for the determination of non-controlling interest (NCI). One acceptable method of consolidating subsidiaries after January 1, 2011, is “Entity Theory”. Under this theory, the full fair value of the subsidiary is determined by combining the fair value of the controlling interest and the fair value of NCI.
Another theory for the determination of NCI value is “Parent Company Extension Theory” which is also acceptable method for the valuation of NCI after January 1,2011. Under IFRS, either entity theory or parent company extension theory can be used. It is also stated in IFRS that a gain on a bargain purchase can only be recognized by the acquirer. It means NCI must be measured at its share of fair value of the identifiable net assets.
In this situation, you are required to –
Explain the appropriate theory applicable for NCI valuation.(3)
First image shows the explanation of both the theory i.e. Entity Theory and Parent Company Extension Theory.
And the second image shows the better / Appropriate theory applicable for NCI Valuation.