The FASB ASC paragraph 810-10-45-16 states: “The noncontrolling interest shall be reported in the consolidated statement of financial position within equity, separately from the parent’s equity. That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries.”
However, prior to issuing this current reporting requirement, the FASB considered several alternative display formats for the noncontrolling interest. Access the precodification standard, SFAS 160,
“Noncontrolling Interest in Consolidated Financial Statements,” at www.fasb.org to answer the following:
• What alternative financial statement display formats did the FASB consider for the noncontrol- ling interest?
• What criteria did the FASB use to evaluate the desirability of each alternative?
• In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation of these alternatives?
CPAskills
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Chapter 1 analyzes the deferral and subsequent recognition of gains created by inventory transfers between two affiliated companies in con- nection with equity method accounting. The central theme of that dis- cussion is that intra-entity1 profits are not realized until the earning process culminates in a sale to an unrelated party. This same account- ing logic applies to transactions between companies within a business combination. Such sales within a single economic entity create neither profits nor losses. In reference to this issue, FASB ASC paragraph 810-10-45-1 states,
As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, such statements should not include gain or loss on transactions among the entities in the consolidated group. Accordingly, any intra-entity income or loss on assets remaining within the consoli- dated group shall be eliminated; the concept usually applied for this purpose is gross profit or loss.
The elimination of the accounting effects created by intra-entity transactions is one of the most significant problems encountered in the consolidation process. The volume of transfers within many enterprises can be large. A recent annual report for the Ford Motor Company, for example, shows the elimination of intersegment revenues amounting to
$2.461 billion.
Such transactions are especially common in companies organized as a vertically integrated chain of organizations. These entities reduce their
chapter
5
Consolidated Financial
Statements—
Intra-Entity Asset Transactions
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO1 Understand that intra-entity asset transfers often create accounting effects within the financial records of affil- iated companies that must be eliminated or adjusted in preparing consolidated financial statements.
LO2 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intra- entity transfer of inventory.
LO3 Prepare the consolidation entry to eliminate any intra- entity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the begin- ning of the subsequent period.
LO4 Understand that the consoli- dation process for inventory transfers is designed to de- fer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.
LO5 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.
LO6 Prepare the consolidation entry to remove any unreal- ized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.
LO7 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities. 195
1The FASB Accounting Standards Codification (ASC) recently began using the term intra-entityto describe transfers of assets across business entities affiliated though common stock ownership or other control mechanisms. The phrase indicates that although such transfers occur across separate legal entities, they are nonetheless made within a consolidated entity. Prior to the use of the term intra-entity,such transfers were routinely referred to as intercompanytransactions.
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196 Chapter 5
costs by developing affiliations in which one operation furnishes products to another. As Mergers & Acquisitions observed,
Downstream acquisitions . . . are aimed at securing critical sources of materials and compo- nents, streamlining manufacturing and materials planning, gaining economies of scale, entering new markets, and enhancing overall competitiveness. Manufacturers that combine with suppliers are often able to assert total control over such critical areas as product quality and resource planning.2
Intra-entity asset transactions take several forms. In particular, inventory transfers are especially prevalent. However, the sale of land and depreciable assets also can occur between the parties within a combination. This chapter examines the consolidation procedures for each of these different types of intra-entity asset transfers.
2“Acquiring along the Value Chain,” Mergers & Acquisitions,June–July 1996, p. 8.
3For all intra-entity transactions, the two parties involved view the events from different perspectives.
Thus, the transfer is both a sale and a purchase, often creating both a receivable and a payable. To indicate the dual nature of such transactions, these accounts are indicated within this text as sales/purchases, receivables/payables, and so on.