I am using the Schweser notes and I noticed a peculiarity regarding the noncontrolling (minority) interest. I have checked the forum and I see a good amount of posts regarding this matter but nothing related to my question. On page 80 of book 2 (Schweser) they go through a problem identifying how to account using the Equity method vs. Acquisition. In the Balance Sheet, the ‘Minority Interest’ item is simply the Equity (common stock + retained earnings) * the portion that the acquirer does not own. Simple. Later on, as they are covering the Goodwill aspect they note " If the full goodwill method is used, noncontrolling interest is based on the acquired company’s fair value. IF partial, etc." The calc is easy and it is FV subsidiary * portion that the acquirer does not own. My question is, are there two items that they are referring to ‘noncontrolling (minority) interest’ vs. ‘noncontrolling interest’ or is it one (in which case how do I know whether to use Equity vs. FV subsidiary as the base)? I’m a bit confused because they sound the same, sometimes they say minority interest while other times they say noncontrolling (minority) interest. Would anyone comment on what this is all about? Thanks
They are the same - noncontrolling = minority interest - by default, you are consolidating so you have the “control” and someone else has a “nontcontrolling” interest.
Can’t understand your second question re; “how do I know whether to use Equity vs FV subsidiary as the base”. …
Please note that I am referring to the Schweser notes book 2. On page 79 of that book they posit the following scenario:
"Assume that on January 1, 2010, Company P acquires 80% of the common stock of Company S by paying $8,000 in cash to the shareholders of Company S. The preacquisition balance sheets of Company P and Company S are shown below
Preacquisition Balance Sheets January 1, 2010 Company P Company S Current assets $48,000 $16,000 Other assets 32,000 8,000 Total $80,000 $24,000 Current liabilities $40,000 $14,000 Common stock 28,000 6,000 Retained earnings 12,000 4,000 Total $80,000 $24,000 "
They proceed to do a Balance Sheet comparison between the Equity and Acquisition Methods. There are a few details I think I can overlook and give you the following gist:
Under the Acquisition Method, company P reports the following:
Current Assets = 56k (48 + 16 -8[cash payment]) Other Assets = 40K (32 + 8) Total = 96k
Current Liabilities = 54k (40 + 14) Common Stock = 28k (you do not count the acquirer’s stock) Retained Earnings = 12k (you do not count acquirer’s retained earnings) Minority Interest = 2k (minority equity, i.e. [common stock + retained earnings] X proportion NOT owned by acquirer)
So in this case, the minority interest calculation is driven by the equity of the acquired and some proportion figure. For the sake of completeness, the reading states, “The minority interest is created by multiplying the subsidiary’s equity by the percentage of the subsidiary not owned by the parent.”
Later on in the reading, they cover the Goodwill method used for Acquisitions. As part of that reading they state, “The value of noncontrolling interest also depends on which method is used. If the full goodwill method is used, noncontrolling interest is based on the acquired company’s fair value. If the partial goodwill method is used, noncontrolling interest is based on the fair value of the acquired company’s identifiable assets.”
And they proceed with a quick example where if company A purchases 75% of company B for 450M, then (their words, not mine), “In the example above, noncontrolling interest using the full goodwill method is 25% of Wood’s fair value of $600 million, or $150 million. Using the partial goodwill method, noncontrolling interest is 25% of the fair value of Pine’s identifiable net assets[I can confirm that identifiable net Assets is 560M], or $140 million. The difference of $10 million balances the $10 million difference in goodwill.”
Notice how they just calculated minority interest using two different figures are the base, i.e. 1. Equity or 2. Fair Value. What am I missing?
Yes - the first example is just to show the entries made if you acquire a firm at book value. This isn’t very likely in reality, but Schweser is trying to dumb it down. This isnt very likely in reality, because the acquirer should at least pay fair value for the assets.
When a firm is acquired using the acquisition method, the identifiable assets are written up to fair value on the acquirers balance sheet. If they pay any more than this amount, it is attributable to goodwill. So, now that all of the assets are marked to fair value, the value of the minority interest must be established using fair value, otherwise A = L+E is out of balance.
With full goodwill, the goodwill on the asset side of the balance sheet reflects the goodwill attributable to both the acquirer and the minority interest, while the value of the minority interest reflects their share of goodwill (total goodwill = 40, and minority interest = 150)
With partial goodwill, the goodwill on the asset side is stripped of the goodwill attributable to the minority interest (partial goodwill = 30 and minority interest = 140). Not sure what the thinking is, but this is the way IFRS calculates it. So, an exam question might revolve around which method shows higher assets, etc
The First example has assumed that the firm has been acquired at the book value hence the calculation of goodwill(which will be 0) & Minority interest can be done taking the Equity+Retained earnings as the base whereas in the second example the acquisition has been done at the fair value of the assts hence the Goodwill & minority calculations are based on the Fair value of subsidiary(if all of the outstanding stock is purchased)/Fair value of Net assets(if a part of the outstanding stock,i.e, 75% in the example, is purchased).