Equity transactions of consolidated subsidiaries (US)


M

Manhattaner32

All,

Hoping for input on a question. How does a parent company account for new
stock issuances to outsiders (principally as a result of stock option
exercises) by its consolidated subsidiary that occur at a price that exceeds
the parent company's cost basis. (Parent is private, subsidiary is public).
My belief is that the entry on the parent books would be to debit Investment
in Subsidiary and credit Gain. The alternative would be to debit Investment
in Subsidiary and credit Additional Paid in Capital. However, this second
option would be more appropriate in a situation such as where the increases
in APIC at the subsidiary level arise from treasury stock transactions (i.e.
reissuing share held in treasury at a cost that exceeds the treasury stock
cost basis).

Thanks.

Regards,

Matt P., CPA
 
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C

Chris Luper

Hoping for input on a question. How does a parent company account for new
stock issuances to outsiders (principally as a result of stock option
exercises) by its consolidated subsidiary that occur at a price that exceeds
the parent company's cost basis. (Parent is private, subsidiary is public).
My belief is that the entry on the parent books would be to debit Investment
in Subsidiary and credit Gain. The alternative would be to debit Investment
in Subsidiary and credit Additional Paid in Capital. However, this second
option would be more appropriate in a situation such as where the increases
in APIC at the subsidiary level arise from treasury stock transactions (i.e.
reissuing share held in treasury at a cost that exceeds the treasury stock
cost basis).

Thanks.

Regards,

Matt P., CPA
I think accounting for it as revenue would be even less appropriate in the
stock option situation because the gain is completely a "paper gain" in
providing equity to outsiders, while in the treasury stock situation, you are
actually receiving cash for the increased market value of the stock. The
increased equity ownership in the stock option situation isn't really a revenue
event.

I would debit investment and credit APIC for the "paper gain" in ownership of
the sub from the issuance of stock options.
 
J

John_B

Chris said:
I think accounting for it as revenue would be even less appropriate in the
stock option situation because the gain is completely a "paper gain" in
providing equity to outsiders, while in the treasury stock situation, you are
actually receiving cash for the increased market value of the stock. The
increased equity ownership in the stock option situation isn't really a revenue
event.

I would debit investment and credit APIC for the "paper gain" in ownership of
the sub from the issuance of stock options.
I spent a week or two thinking about this during the period 1965 -
1970 when I was in the accounting theory consulting department of a
"big eight" firm. The transaction I was looking at was caused by a
Canadian tax law which made it better for a US company to own 80% of
a Canadian company than 100%, so they had a public offering of
shares in the subsidiary which diluted the parent's interest to the
80% mark and had the subsidiary remit the entire net proceeds to the
US parent. I thought income treatment was the answer since the net
effect was the same as if the parent had sold 20% of the stock in
the Canadian subsidiary to the public, but the SEC did not agree on
the basis that if it is a capital transaction to the subsidiary it
must be a capital transaction in the consolidated financial
statements. The SEC now may allow income treatment per SAB 103,
topic 5H:
http://www.sec.gov/interps/account/sab103codet5.htm#5h

You probably don't care because the entity you are working on is
private, but who knows what the future will bring if the subsidiary
is already subject to SEC rules.
 
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M

Manhattaner32

Thank you for the responses.
John_B said:
I spent a week or two thinking about this during the period 1965 -
1970 when I was in the accounting theory consulting department of a
"big eight" firm. The transaction I was looking at was caused by a
Canadian tax law which made it better for a US company to own 80% of
a Canadian company than 100%, so they had a public offering of
shares in the subsidiary which diluted the parent's interest to the
80% mark and had the subsidiary remit the entire net proceeds to the
US parent. I thought income treatment was the answer since the net
effect was the same as if the parent had sold 20% of the stock in
the Canadian subsidiary to the public, but the SEC did not agree on
the basis that if it is a capital transaction to the subsidiary it
must be a capital transaction in the consolidated financial
statements. The SEC now may allow income treatment per SAB 103,
topic 5H:
http://www.sec.gov/interps/account/sab103codet5.htm#5h

You probably don't care because the entity you are working on is
private, but who knows what the future will bring if the subsidiary
is already subject to SEC rules.
 

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