Consolidated financial reporting is appropriate when one entity has a controlling financial interest in another entity. The usual condition for a controlling financial interest is ownership of a majority voting interest. But in some circumstances, control does not rest with the majority owner—especially when noncontrolling owners are contractually provided with approval or veto rights that can restrict the actions of the majority owner. In these cases, the majority owner employs the equity method rather than consolidation.
Required
Address the following by searching the FASB ASC Topic 810 on consolidation.
1. What are protective noncontrolling rights?
2. What are substantive participating noncontrolling rights?
3. What noncontrolling rights overcome the presumption that all majority-owned investees should be consolidated?
4. Zee Company buys 60 percent of the voting stock of Bee Company with the remaining
40 percent noncontrolling interest held by Bee’s former owners, who negotiated the following noncontrolling rights:
• Any new debt above $1,000,000 must be approved by the 40 percent noncontrolling shareholders.
• Any dividends or other cash distributions to owners in excess of customary historical amounts must be approved by the 40 percent noncontrolling shareholders.
According to the FASB ASC, what are the issues in determining whether Zee should consolidate Bee or report its investment in Bee under the equity method?
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