Question

Per the textbook, no official FASB guidance exists on the assignment of income effects on non-controlling interest in the consolidation process, when either the parent transfers a depreciable asset to the subsidiary or vice versa. Suggest one (1) method of accounting for the income effects on the non-controlling interest that you consider most appropriate. Provide a rationale for your response. Assume that company P (parent) uses the equity method to account for its investment in company S (subsidiary). Company P purchases inventory items from company S. According to FASB’s guidance, the accountant must remove the inter-company profit from Company S’s net income. Determine if the process permanently eliminates the profit from the non-controlling interest or merely shifts the profit from one period to the next. Provide support for your rationale.

Answer 1

1.The Equity method of accouting is perfectly suited for the income effects on the non controlling interest. This accounting falls under the business entity concept of Consolidated Financial Statements (CFS). The business entity concept, also known as the economic entity assumption, states that all business entities should be accounted for separately. In simple words, businesses, related businesses, and the owners should be accounted for separately. All excess business interest holders in a company have an equity interest in the consolidated figure ,even if the excess interest is related to a small portion of the entity. Hence a non controlling interest should be shown in the consolidated balance sheet as a separate component of the equity.

2.Accountants try to inflate the cost of goods sold in order to remove unverified profits from the buyers closing stock.So, the value of profits are removed from the closing stock. This process pushes the profits to the next financial period , the returns will be pushed as an opening inventory.