Valuation of Inventory—Minority Interests
An interesting problem arises in handling the consolidated inventories and other similar items when there are minority interests to be taken into account. To write down the inventory to a cost basis for the consolidated companies involves a valuation below cost for the subsidiary companies which purchased the commodities from their allied companies. This is hardly equitable to the minority interests in those companies, for they are concerned not with what is the proper basis for valuation on the consolidated balance sheet but rather on their own balance sheet. Their company as a distinct legal organization has the right to show all the profits arising out of a valuation of its inventory on its own purchase-cost basis. Recognizing this right, some accountants advocate carrying the portion of the inventory represented by the ratio of the minority interests to the whole interests, at the cost price to the subsidiary and writing down the rest of it to a true cost basis for the consolidated companies. The effect of this is to leave undisturbed the portion of the subsidiary’s surplus belonging to, or, more strictly, representing the minority interests. Such a method results in the valuation of the inventory on two different bases for the consolidated balance sheet—a practice which is objectionable. The more conservative policy is to write down the whole inventory to a consolidated cost basis, charging the amount written off against the consolidated company’s surplus. This will leave the minority interest surplus unaffected by the changed basis of valuation—a desirable thing from the standpoint of equity to the minority.
Valuation of Liabilities
So far as the liabilities of the corporation are concerned, the values at which these will be carried on the consolidated balance sheet will be the combined values of all the liabilities of the subsidiaries, aside from the intercompany accounts payable and other similar items which have been canceled against the accounts receivable of the subsidiaries and holding company.
Showing of Capital Stock
The showing of the capital stock item on the consolidated balance sheet will depend somewhat on the degree of ownership of the holding company. If the ownership is partial, in addition to the capital stock of the holding company a statement must appear of the consolidated minority interests of the various subsidiaries. This should, of course, be shown separately from the capital stock of the holding company. This becomes necessary because of the fact that items which do not belong in full to the holding company have been incorporated with the assets on the consolidated balance sheet. It is seldom if ever feasible to attempt a separation of the various asset items on the basis of the degree of ownership of the holding company; hence, the only offset to the inclusion of asset values not belonging to the holding company is by showing the outside interest in those assets by means of the minority holdings of capital stock.
Showing of Surplus
The other element of net worth, i.e., the surplus, will also have to be adjusted in order to give the best showing of the interest of the various parties therein. This is, of course, the operating surplus referred to above. The portion of the surplus belonging to the holding company as indicated by its proportion of ownership in the allied companies will be shown separately from the portion of surplus belonging to the minority interests. Sometimes when this is relatively insignificant it is shown as a liability rather than as an item of net worth, on the ground that the minority has a claim on that surplus and will very probably, in the near future, receive it by way of dividends. It would seem to be, however, a truer index of the exact status of affairs at the time of the consolidation, to show the item separately as a portion of surplus in the net worth section of the balance sheet.
Showing of Deficit
When it becomes necessary to incorporate a deficit rather than a surplus, conservative practice usually demands that the entire deficit be shown as belonging to the holding company rather than merely its proportionate share as indicated by its share of ownership in the subsidiary. This is advisable because an initial deficit is often an indication of the inability of the company to be operated profitably, in which case the holding company may have to stand practically the entire deficit.