- Minority interest in the subsidiary reflects the minority interest’s share of the
book value of the stockholders’ equity. - Minority interest in the subsidiary generally appears in the noncurrent liability
section of the consolidated statement of financial position. The consolidated
stockholders’ equity relates only to the controlling interest.
ENTITY THEORY OF CONSOLIDATED FINANCIAL STATEMENTS. The entity theory of consoli-
dated financial statements is referred to by the FASB as the economic unit ap-
proach/full consolidation method. The is the principal alternative to the parent com-
pany approach. The viewpoint of this theory is that consolidated financial statements
should reflect the total business entity. The resources of the subsidiary controlled by
the consolidated entity relate to both the controlling and to the minority sharehold-
ers. All of the assets acquired and liabilities acquired in the purchase transaction are
valued at their values. Major characteristics of the entity theory of consolidated fi-
nancial statements may be summarized as follows:
- Fair values are assigned to all of the subsidiary’s assets and liabilities including
the portion attributed to the minority (noncontrolling) interest. - Goodwill is derived from the total fair value that is inferred from the price paid
by the parent for its fractional interests, and pertains to both the controlling and
noncontrolling shareholders. - Minority interest in the subsidiary reflects the minority’s share of the total fair
value of the subsidiary’s stockholders’ equity. - Minority interest in the subsidiary is separately disclosed and is included within
the consolidated stockholders’ equity.
MODIFIED ENTITY THEORY. This theory is also known as the economic unit
approach/purchased goodwill method. Under this theory, the identifiable assets and
liabilities of the subsidiary are recorded at their fair value in the consolidated state-
ment of financial position, and the appropriate portion is reflected in the minority in-
terest. Goodwill, however, is viewed as a premium paid by the parent for the value
of the control over the subsidiary. When viewed in this way, goodwill accrues only
to the parent, not to the noncontrolling shareholders, thus no goodwill is attributed to
the minority interest. The goodwill calculated under this theory would be the same as
the goodwill calculated under the parent company approach.
(ii) Elimination of Intercompany Profits. Under both the parent company and eco-
nomic entity approaches, all intergroup transactions and related profits are eliminated
in consolidation. If the subsidiary is not wholly owned, the profit elimination may be
allocated between the majority and minority shareholders. There is, however, con-
troversy over when the allocation of the profit elimination is appropriate. Most ac-
countants believe that in the sale from the parent to the subsidiary (downstream sale),
all of the eliminated profit should be charged to the majority owners and that alloca-
tion is appropriate only in sales from the subsidiary to the parent (upstream sales).
(iii) Push-Down Accounting. Controversy also exists over how purchased sub-
sidiaries should report in their separate financial statements. The general rule is that
the adjustments to the fair value of assets and liabilities are made only on consoli-
18.5 ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES 18 • 13