There are three ways to account for the ownership interest: cost, equity and acquisition methods.
The type of method depends on how much of the second company the first company owns.
The result, in FASB’s own words, was that “GAAP had no clear accounting and reporting guidance for the noncontrolling interest in a subsidiary” (Statement no. This lack of guidance led to an unclear and inconsistent concept of NCI that, in turn, created diverse and unproductive reporting.
Most major corporations comprise numerous companies bought along the way to create their empires.
If a company owns between 0 and 20 percent of another company's stock, then the company uses the cost method for the investment.
If a company owns between 20 percent and 50 percent of another company's stock, the company uses the equity method.
The result will be more informative financial statements that reflect how the existence of and changes in noncontrolling interests (NCI) can affect cash flow potential for the consolidated entity and its shareholders. 160 is the name change from “minority interest” to “noncontrolling interest.” The problem with the old terminology was that it did not encompass the full range of combination scenarios.
160 was issued as a separate standard because the original Statement no.
These two methods do not lead to consolidating the financial statements.
Once the company owns 50 percent of another company, then the company uses the acquisition method and must consolidate the financial statements.
The financial statement reflects the financial results for all the entities it bought as well as the original assets of the company.
After a stock acquisition by the parent company, the subsidiary continues to maintain separate accounting records.