Examples of Changes in Ownership Interest in Consolidated Statements

Explore practical examples of changes in ownership interest within consolidated financial statements for better understanding.
By Jamie

Introduction

In the realm of consolidated financial statements, changes in ownership interest can significantly impact how a company presents its financial results. These changes can arise from acquisitions, sales, or adjustments in ownership stakes in subsidiaries. Understanding how these changes are reflected in financial statements is crucial for investors, analysts, and management. Below, we provide three diverse examples that illustrate different scenarios of ownership interest changes in consolidated statements.

Example 1: Acquisition of a Controlling Interest

Context

Company A, a tech firm, acquires an additional 40% stake in Company B, which it already owns 30% of. This acquisition raises Company A’s total ownership interest in Company B to 70%, granting it control over the subsidiary.

Company A needs to reflect this change in its consolidated financial statements to reflect the new controlling interest.

Company A’s previous investment in Company B was recorded using the equity method. After acquiring the additional shares, Company A must consolidate Company B’s financial statements fully.

Example

  1. Initial Investment: Company A originally invested $3 million for a 30% stake in Company B. This investment was recorded as an equity investment.
  2. Additional Acquisition: Company A pays $7 million for the additional 40% stake.
  3. Total Investment in Company B: After the acquisition, the total investment in Company B is $10 million.
  4. Consolidation: Company A will consolidate Company B’s financial statements, including all assets, liabilities, and equity.

Notes

  • The previous equity investment will be derecognized upon consolidation.
  • Goodwill may arise if the purchase price exceeds the fair value of Company B’s net identifiable assets.

Example 2: Sale of Ownership Interest

Context

Company C owns 100% of Company D. Due to market conditions, Company C decides to sell 30% of its interest in Company D to a private equity firm while retaining 70% ownership.

This transaction requires Company C to adjust its consolidated financial statements to reflect the change in ownership interest and the corresponding effects on its equity.

Example

  1. Initial Ownership: Company C’s investment in Company D is valued at $5 million.
  2. Sale of Interest: Company C sells 30% for $2 million.
  3. New Ownership: Company C now owns 70%, and Company D is treated as a subsidiary for consolidation purposes.
  4. Consolidated Financial Statements: Company C will continue to consolidate Company D’s financial statements, reflecting the 70% ownership.

Notes

  • The sale proceeds of $2 million will be recognized as a gain in Company C’s income statement.
  • The remaining interest of 70% will continue to be consolidated, and Company C will recognize a non-controlling interest for the 30% sold.

Example 3: Step Acquisition

Context

Company E gradually acquires shares of Company F over three years, increasing its ownership from 20% to 60%. This gradual acquisition requires Company E to adjust its accounting treatment as it gains more control.

Initially, Company E applies the equity method but must switch to full consolidation once it surpasses the 50% threshold.

Example

  1. Year 1: Company E purchases 20% for $1 million and applies the equity method.
  2. Year 2: Company E buys an additional 20% for $2 million, increasing ownership to 40% (still equity method).
  3. Year 3: Company E purchases the final 20% for $3 million, resulting in 60% ownership and triggering full consolidation.
  4. Consolidation Transition: In Year 3, Company E consolidates Company F’s financial statements, including all revenues and expenses.

Notes

  • Any previous equity investments will be re-evaluated and derecognized upon consolidation.
  • Goodwill may arise if the total investment exceeds the fair value of the net identifiable assets of Company F.

In conclusion, these examples highlight how changes in ownership interest affect the consolidated financial statements of a parent company. Understanding these scenarios helps stakeholders accurately assess financial performance and position.