A parent buys 80% of a subsidiary for $400,000. On consolidated day-one, the parent's "Investment in Sub" account vanishes, $100,000 of noncontrolling interest appears in equity, and goodwill of $50,000 lands on the balance sheet. None of those amounts existed five minutes earlier. The acquisition method creates them all from one purchase price.
A parent and its subsidiaries are separate legal entities, but financially they are one economic unit. Consolidation tells the user what the combined enterprise looks like: what assets it controls, what it owes, what it earned. ASC 810 requires consolidation whenever a parent has control over a subsidiary.
Two control models exist.
Voting interest model. Control is presumed when the parent owns more than 50% of the outstanding voting common stock of the subsidiary. This is the default test and applies to most operating subsidiaries. Even a 51% stake triggers full consolidation, with the remaining 49% reported as noncontrolling interest.
Variable interest entity (VIE) model. Control can exist without majority voting power. A VIE is an entity whose equity is too thin to absorb expected losses, or whose equity holders...
Common mistakes
- Forgetting to eliminate 100% of an intercompany sale when ownership is less than 100%. A parent owns 80% of the sub and sells $200,000 of inventory to it. The intercompany sale is eliminated at $200,000 (full amount), not $160,000 (parent's share).
- Computing goodwill without the NCI fair value. Less-than-100% acquisition with NCI fair value of $100,000. Goodwill = Consideration $400,000 − FV identifiable net assets $375,000 = $25,000 is wrong. Correct: $400,000 + $100,000 − $375,000 = $125,000. Trap answer: $25,000 (omits NCI in the formula and applies the partial-goodwill IFRS approach without authority).
- Allocating downstream unrealized profit to NCI. Parent (80%) sold inventory to sub. Unrealized profit at year-end = $24,000. Allocating $4,800 (20%) to NCI is wrong, since downstream profit is 100% parent. Trap answer: NCI of $116,200 instead of $121,000.
Bottom line
- Consolidate when the parent has control: >50% voting interest under ASC 810, or primary beneficiary of a VIE
- Acquisition method (ASC 805): on the acquisition date, recognize identifiable net assets at fair value (not book carrying amount), NCI at fair value (full goodwill) or proportional share (partial goodwill)
- Goodwill = Consideration transferred + NCI fair value + previously held interest fair value − fair value of identifiable net assets acquired
- Annual eliminations: parent's investment against sub's equity; intercompany receivables/payables; intercompany sales/purchases; intercompany unrealized profit until realized
Exam shortcut
The most-tested numerical mechanic is goodwill at acquisition: Consideration + NCI FV − FV of identifiable net assets. If the question gives you NCI fair value, the formula must include it. Leaving NCI out is the most common trap answer. For income splits, downstream unrealized profit is 100% parent; upstream splits by ownership ratio.
The full lesson (about 4,008 words, 27 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A6
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