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In this scenario, it is proposed to consider an example of consolidated income in which the parent company has purchased a portion of the subsidiary’s stock. The main issue in the scenario is to determine the net income distributed between the parent and the subsidiary. Specifically, the subsidiary reported a profit of $60,000 for the reporting year, and the parent’s net income was $140,000, excluding the subsidiary’s income. According to the assignment, the fair value of the subsidiary exceeded its book value by $100 thousand. This implies that the real market value of the company is greater than the documented value: the difference of $100 thousand was attributed to the ten-year patent, which allowed the net income of the subsidiary to be adjusted. However, this information is not directly relevant to the calculation of consolidated income because the parent company does not claim a share of the subsidiary’s retained earnings, but this information should be displayed in the financial documents (Deloitte, 2020). All of this can be displayed in a table:
When a company owns more than 50% of the shares of another brand, it becomes the controlling company and acquires parent company status. In this case, the consolidated income is determined by summing the net income of the two companies: as the table shows, the consolidated net income of both companies is $200,000 ($140,000 + $60,000). Since the parent organization owns up to 80% of the subsidiary brand, it claims 80% of the consolidated income, or $160 thousand ($200,000×0.8). At the same time, 20% of the stock remains with the subsidiary, so it receives $40,000 of consolidated income ($200,000×0.2). As one can see from the table, the consolidated income condition is met because the total amount of income to the parent and subsidiary is held constant after the income is reallocated. The new Allocated Income values are those values that should be shown in the companies’ financial statements.
Reference
Deloitte. (2020). IFRS 3 — business combinations. Deloitte. Web.
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