 Hello. In this session we will discuss the non-controlling interests, a concept that's covered in advanced accounting courses as well as the CPA exam. Especially on the CPA exam it's an important topic because you could be getting multiple choice questions or a simulation to compute non-controlling interests. So in this session I will explain what is non-controlling interests. Once you understand it, it will be easier for you to integrate this information into a consolidation problem. So whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. No, I don't replace your CPA review course. You can keep it. I am a useful addition. I explain the material differently. I give you alternative explanation. I give you alternative resources to help you understand concepts such as the non-controlling interests. As a result you'll be able to understand your CPA review course. As a result you'll be able to pass. My resources are aligned with your CPA review course and to try me you have to risk one month of subscription. That's your risk. Your potential gain is passing the exam. Are you willing to take that risk? And if not for anything take a look at my website to find out how well or not well your university doing on the CPA exam. Take a look at my other resources for other accounting and CPA courses. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording. Share it with other. Connect with me on Instagram, Facebook, Reddit and Twitter. So what is the non-controlling interest? What is this concept? When does it get created or when does it exist? Well it exists when you own, when one company own, more than 50%. It means you have controlled but less than 100%. So it's like 50% 0.001 to 99.999%. So you don't own 100%. So why would the company only own between 50% and 100%. There are many reasons why they would do so. I mean why would you think that's the case? Well for one thing you may not have enough funds or stocks to buy the other company. So you can only buy 60% or you can only buy 90% because to buy the other company you have to have the resources. Well if you don't have enough resources then you cannot buy the whole thing. Another reason for this that could happen is not everyone that you are purchasing the stocks from are willing to sell. So some stockholders they may want to hold. They don't want to sell the company. They don't want to sell their shares or they might think they're going to get a better price down the road. So if they're not going to sell you're going to have to account for their interests. In their interests the people that don't sell, they're called the non- controlling and sometime it's called you might see it in other textbook. They used the word minority. It means they're not the majority. The majority is assumed to be 50% plus they belong to the minority group. So they don't want to sell. They want to hold out. That's fine. Okay now you have to keep in mind when we consolidate and you should know this from the previous session. We consolidate the 100% of the company. The control company must always consolidate the whole regardless of the parent company level of ownership. Hold on a second. Are you saying although I own 60% I consolidate 100% and the answer is yes. You do consolidate 100% but you have to account for something new called the non-controlling interest. So this is basically what it looks like from a physical or from a picture perspective. So you have to have the parent company's asset 100% the subsidiary's asset 100% although you own only 80%. The parent's liability will be recorded at 100%. The subsidiary's liability will be recorded at 100%. Parent company ownership equity which is net asset 100% of the company you're going to see you're going to account for 80% of the subsidiary's net asset. In addition to that so not 100% of the net asset of the subsidiary only 80% notice here. In addition you're going to have something new on the balance sheet called non-controlling interests and this goes under the equity section of the balance sheet. No it goes under the equity section. Okay and we have to account for the 20% why 20% because we only own 80% 20% of the subsidiary net assets. So now we have to account for their assets on our balance sheet in the equity section and don't worry we're going to work an example seeing how this all flows through. All what we have to learn in this session is what is non-controlling interests? How do we compute non-controlling interests? Remember a few things you have to be aware of one is 100% of the assets and liabilities are listed on the balance sheet as I just showed you. Non-controlling interest is at fair value computed at fair value and if we have goodwill we have to record the goodwill whether we have a gain or a bargain purchase. Now when we buy a company when we when when a parent company buys a subsidiary so how do we account? How do we find out what is the proceeds? How do we find out how much should we pay for this? Well we're going to pay for two things when we buy a company. We're going to pay for the fair value of the controlling interests obviously we're going to have to pay for this and we have to find out the fair value of the non-controlling interests. So those two components the sum of those two components okay it's going to give you the firm fair value the fair value of the controlling interest and the fair value of the non-controlling interest. Now if the sum of these two if the sum exceeds the collective fair value so if the sum of those two things exceed the fair value of the net identifiable asset and liabilities then you have goodwill and guess what if not then you have a bargain purchase if they collect the fair value of the identifiable net assets and liabilities are greater than the fair value than the acquirer recognize again simply put you either have a gain or a goodwill and you should know how to do this from the prior session. Now the best way to illustrate this is to work an example to show you how do we account how do we create non-controlling interests. So assume the parent company pays $50 per share for 9 000 shares of a sub and let's assume that represent 90% interest to simply put the sub has 10 000 shares we purchased 9 000 which is what's what remain is a thousand so we purchase 90% also assume that the remaining 1000 non-controlling interest continue to trade at $50 so we paid $50 for the stock that we purchase and the non-controlling interest the people that did not sell also paid also their shares also trading at $50 why is that relevant that's relevant because here there's we did not pay a premium so we were able to buy 50 9 000 shares at $50 and the remaining shareholders are trading their stocks at $50 now let's find out what is the fair value of the sub well the fair value will be we purchase 9 000 shares at $50 450 that's the fair value of the controlling interest we have to find out the fair value of the non-controlling interest which is $50 per share times 1000 shares $50 000 the acquisition date fair value is half a million now let's assume the company have a net identifiable asset that we are purchasing at $400 000 what does that mean it means we paid more the fair value is worth more than the than the book value what do we have to do now we have to allocate and specifically it's the we have a good will of $100 000 just in case you're not aware of this because the fair value is a half a million the book value is $400 000 we have good will now we have to do we have to allocate this good will to the controlling and non-controlling interest now now how do we do so let me show you how do we allocate the good will we have 90 controlling interest and 10 percent non-controlling interest the acquisition fair value the date fair value of the parent is $450 the acquisition date fair value of the non-controlling interest is $50 total of $500 000 now we have to find out the book value the book value of the of the whole company the net book value net identifiable asset is $400 000 90 percent is for the 90 90 percent of it goes to the controlling interest allocated to the controlling interest so $450 000 minus $360 000 the good will of the $100 000 90 000 goes to the controlling interest then the non-controlling interest they have a fair value at the acquiring date of $50 000 the fair value of the net identifiable asset is $40 000 which is $400 000 times 10 percent of interest $50 minus $40 equal to $10 000 so notice here the $100 000 the good will was allocated proportionally 90 percent to the controlling interest 10 percent to the non-controlling interest now this happens i'm going to tell you this why because we did not pay a premium simply put we paid $50 and the non-controlling interest or stock is valued at $50 that's not always the case which we're going to see in the next example that it may not be the case here there is no premium we did not pay any premium so the good will is recognized proportionally now let's change the scenario a bit and assume that the parent company pays a control premium to purchase the parent the sub and they end up paying rather than $50 they end up paying $55 so to buy the the 9 000 shares they end up paying $55 per share in other words they paid $495 000 well this 495 000 is greater than 45 percent a 45 000 not 45 45 000 then the prior price of $50 per share the 450 now we're going to assume that the remaining shares of this company are kept trading at $50 $50 per share so they were not affected now what's the fair value of the sub at the acquisition well the fair value consists basically of two different figures in other words 9 000 shares were purchased at $55 which are worth 495 000 the remaining 1000 shares they kept on trading for $50 now in the real world that doesn't happen but we're going to assume that's the case for private companies it could happen because they don't want to sell and no one wants to buy their shares therefore they will kept trading at 50 they're worth 50 000 all in all the fair value of the acquisition company is 545 000 now remember in the from the prior slide we said that the net identifiable asset is 400 000 so we have a good will here of 145 000 now we're going to allocate the goodwill to the controlling interests and to the non-controlling interests what we did in the prior on the prior slide how do we do so well the fair value of the controlling interests 495 if we take 400 000 times 90 percent that's going to give us 360 495 minus 360 we're going to allocate 135 000 to the controlling interests goodwill the non-controlling interests the fair value is 50 400 000 times 10 percent is 40 000 it's 10 000 so notice here the goodwill is not is not distributed proportionally okay simply put we did not take the 145 gave 90 percent to the controlling and 10 percent to the non-controlling we did not do that obviously if you want to know the percentage i can show you percentage wise 135 divided by 145 the so the controlling interests this represent around 93 i'm just gonna round it 93 percent approximately 93 percent and this account for seven percent of the goodwill okay seven percent together 100 percent which is represent 145 well the reason is basically if you really think about it the difference between if we take if we look at this number 135 135 135 goodwill in the prior example where we paid the same amount where we paid the same amount of money same amount for both the controlling and non-controlling we come up with with 90 000 so the difference between 90 000 and 135 the difference between 135 the goodwill now when we pay a premium and 90 000 when we did not pay a premium equal to 45 000 which is if you remember i told you we paid a premium of 45 000 therefore the premium that we paid is allocated entirely entirely to the controlling interest because we're valuing the controlling interest we paid the premium for the controlling interest therefore the non-controlling interest should not be getting should not be allocated any goodwill and hopefully this makes sense if i'm valuing you at a higher rate i'm gonna have to give my investment a higher goodwill now the non-controlling interest was still trading at how much at 50 dollars so i hope by looking at this recording you'll understand a little bit better the concept of non-controlling interest and how do we compute non-controlling interest now this is the beginning we're gonna have to allocate income to the non controlling and controlling interest we're gonna have to account for a dividend we're gonna have to account to the ending balance of the non-controlling interest but again at the end of this recording if you like this recording all what i'm gonna ask you to do is subscribe give my material a chance i can help you pass the exam in addition to your CPA review course i cannot help you pass the exam by myself you need additional resources i don't have everything but i have enough that i can be a boost to your CPA preparation my my material is aligned to go with your course keep 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