Consolidated Net Income
Consolidated net income is the sum of net income of the parent company excluding any income from subsidiaries recognized in its individual financial statements plus net income of its subsidiaries determined after excluding unrealized gain in inventories, income from intra-group transactions, etc.
Consolidated net income is reported on the consolidated income statement for periods after acquisition. When the subsidiary is not wholly owned, the consolidated net income is bifurcated into two components: consolidated net income attributable to controlling interest and consolidated net income attributable to non-controlling interest.
Three adjustments are very critical in arriving at the correct determination of consolidated net income. The first is adjustment for excess amortization due to difference between the fair value of net asset of the subsidiary and their book values at the time of acquisition. The second is elimination of any investment income from subsidiary recognized in the individual financial statements of the parent using the cost method (fair value method) or equity method must be subtracted. The third adjustment relates to exclusion of the unrealized income recognized on inter-company sale of inventories.
The following template can be used to work out consolidated net income:
|100% of parent’s income||P|
|Less: income from investment in subsidiary||I|
|Less: unrealized income from downstream sales||DS|
|Relevant parent’s income||PI|
|100% of subsidiary’s income||S|
|Less: amortization of fair value differential||FVD|
|Less: unrealized income from upstream sales||US|
|Consolidated net income||CNI|
Company P purchased 80% stake in Company S by paying $100 million for net assets of Company S whose fair value was $90 million and book value $80 million. The fair value differential is amortized over a 5-year period.
During the first year after acquisition, Company B included $8 million as income from investment in Company S.
Individual net income of Company P and Company S during the year is $15 million and $10 million respectively.
During the year, Company P sold inventories worth $4 million to Company S, 25% of which remains unsold. The gross profit on the inventories is 25%.
Let’s use the schedule given above to work out the consolidated net income and attribute it the parent and non-controlling interest:
|100% of parent’s income||P||$15 million|
|Less: income from investment in subsidiary||I||($8 million)|
|Less: unrealized income from downstream sales||DS||($1 million)|
|Parent’s relevant income||PI||$6 million|
|100% of subsidiary’s income||S||$10 million|
|Less: amortization of fair value differential||FVD||($5 million)|
|Less: unrealized income from upstream sales||US||-|
|Subsidiary’s relevant income||SI||$5 million|
|Consolidated net income||CNI = PI + SI||$11 million|
The consolidated net income attributable to non-controlling interest equals the product of the percentage held by non-controlling shareholders and the consolidated net income. The rest of the consolidated net income accrue to controlling interest.
|Total consolidated net income||CNI||$11 million|
|Attributable to NCI||NCI = 20% × CNI||($2.2 million)|
|Attributable to parent||80% × CNI or CNI - NCI||$8.8 million|