6.6 Attribution of Income in the Presence of Reciprocal Interests
ASC 810-10
45-5
Shares of the parent held by a subsidiary shall not be
treated as outstanding shares in the consolidated statement
of financial position and, therefore, shall be eliminated in
the consolidated financial statements and reflected as
treasury shares.
As discussed in Section
4.3.2.2, a subsidiary may hold shares
of its parent. In such instances, in a manner consistent
with the single economic entity concept in ASC 810-10-10-1
and the provisions of ASC 810-10-45-5, 100 percent of those
reciprocal interests should generally be presented as
treasury shares on the parent’s consolidated balance sheet
regardless of whether the subsidiary is wholly owned by the
parent.
In the parent’s consolidated income statement, the existence of reciprocal
interests affects the allocation of the consolidated
entity’s earnings between third-party shareholders of the
parent and the subsidiary’s noncontrolling interest holders.
This is because the subsidiary’s noncontrolling interest
holders indirectly own a portion of the parent’s common
stock. In practice, there are two methods of attributing
earnings of the consolidated entity: the treasury stock
method and the simultaneous equations method. Application of
the treasury stock method tends to be more common since, as
demonstrated below, most preparers would have to dust off
their algebra textbook before applying the simultaneous
equations method. Although income attributable to the
parent’s shareholders may differ under the two methods,
consolidated net income will be the same under both methods.
Further, because of accompanying differences in the number
of parent shares that will be included in the computation of
a public parent’s EPS, each method will also produce the
same reported EPS figure. Thus, we believe that either
method is acceptable as long as a reporting entity applies
its selected method consistently to all reciprocal
interests.
The example below illustrates the application of each method.
Example 6-10
Company A is a public entity whose common shares are actively traded on the New
York Stock Exchange. Company A has 10,000 shares
of its common stock issued and outstanding. In
addition, it has an 85 percent controlling
interest in Subsidiary B.
Subsidiary B is a privately held company that has 5,000 shares of its common stock issued and outstanding. Third parties own the remaining 15 percent (750 shares) of B’s common shares.
Subsidiary B purchases 1,000 shares (10 percent) of A’s stock in an open-market transaction at $35 per share.
The diagram below illustrates the respective ownership interests of A, B, and third parties.
In 20X6:
- Company A’s earnings (excluding those arising from its equity interest in B) equaled $100,000.
- Subsidiary B’s earnings (excluding those arising from its equity interest in A) equaled $60,000.
Treasury Stock Method
The table below shows direct income from third-party transactions (i.e., exclusive of A’s and B’s equity interests in each other), consolidated net income, income attributions, and A’s basic EPS under the treasury stock method. For simplicity, intercompany transactions and tax implications have been ignored.
Simultaneous Equations Method
Under the simultaneous equations method, the income of A and B should first be computed as follows:
Let A = income of Company A.
Let B = income of Subsidiary B.
Let 0.85B = Company A’s ownership interest in Subsidiary B.
Let 0.1A = Subsidiary B’s ownership interest in Company A’s common stock issued and outstanding.
A = $100,000 + 0.85B
B = $60,000 + 0.1A
A = $100,000 + [0.85 × ($60,000 + 0.1A)]
A = $100,000 + $51,000 + 0.085A
A – 0.085A = $100,000 + $51,000
0.915A = $151,000
A = $165,027
B = $60,000 + (0.1 × 165,027)
B = $76,503
The table below shows direct income, consolidated net income, income attributions, and A’s basic EPS under the simultaneous equations method.
As illustrated in Example
6-10, the treasury stock method and the
simultaneous equations method produce the same reported EPS
figure.