Under this theory, only the parent’s ownership percentage of subsidiary accounts is adjusted to fair value. For example, when consolidating, a parent purchasing an 80% interest in a subsidiary would adjust subsidiary accounts for only 80% of the difference between recorded book and fair value. The 20% noncontrolling interest in subsidiary accounts would remain at book value. The currently used parent company theory produces a mixture of values on the consolidated balance sheet that is not easily understood or totally defendable. The consolidated balance sheet contains the following values for an 80%-owned subsidiary:
Accounts Valuation
Parent company accounts ---->Recorded book value
Subsidiary company accounts:
80% controlling interest portion ----- .Fair value on date of parent company purchase
20% non-controlling interest portion ----->Recorded book value
The FASB proposals would provide consistency for subsidiary accounts by requiring that all subsidiary accounts except possibly goodwill be recorded at full fair value regardless of the size of the non-controlling interest. No agreement has been reached on whether goodwill should be recorded on the non-controlling interest.
Both the FASB Exposure Draft and the later Working Draft applied variations of the economic unit concept to purchases of a subsidiary. Under the economic unit concept, all subsidiary accounts would be adjusted to 100% of their fair value, no matter what the level of parent ownership.
Goodwill would also be recorded as it applied to the entire entity. Suppose that after all other accounts were adjusted to fair value on an 80% purchase, an excess on the 80% interest of $80,000 remained. Under the parent company theory, goodwill would be limited to $80,000. Under the economic unit concept, the $80,000 excess would be divided by 0.80 to impute total goodwill for the entity of $100,000.