Companies often acquire controlling interests in other businesses, and must account for the transactions in their consolidated financial statements. Different views exist on the accounting treatment of the net book value of subsidiary assets, and of the fair market value increments in the controlling shareholders' books. The fair market value increment is the surplus of the fair market value over the net book value of an asset.
The net book value, or net asset value, is the value of an asset on a company's balance sheet. It is equal to the cost of an asset minus the accumulated depreciation. For example, if a company acquires a computer for $5,000, its annual depreciation expense would be $1,000, assuming straight-line depreciation and a useful life of five years. In the straight-line method, the annual depreciation expense is the same over the asset's useful life. Therefore, the net book value of the computer is $4,000 ($5,000 minus $1,000) after year one, $3,000 ($4,000 minus $1,000) after year two, and so on until the net book value equals zero after year five. However, the company might still be using the computer, and it may still have a resale value even if its net book value is zero.
The fair market value is the best price that buyers and sellers can realize for assets. Professional appraisers use comparative market information and other data to calculate the fair market values of assets and businesses. For publicly traded stocks, one fair market value estimate is the share price multiplied by the number of outstanding shares. The value of recent comparable transactions and the net present value of an estimated future cash flow stream are two ways to estimate the fair market value for private companies.
The fair market value increment is equal to the fair market value minus the net book value of an asset. For example, if an office building has a fair market value of $100,000 but a net book value of $80,000 on the company's books, the fair market value increment is $100,000 minus $80,000, or $20,000.
In an April 2007 "CPA Journal" article, Northern Illinois University professors Rebecca Toppe Shortridge and Pamela A. Smith described three perspectives for viewing the controlling shareholder's share of the subsidiary upon consolidation. The proprietary view focuses on the parent's ownership percentage; the entity view recognizes that effective control is possible without 100 percent ownership; and the parent view allocates a percentage of the net book value of the subsidiary's assets to non-controlling shareholders. Generally accepted accounting principles in the U.S. require companies to use the parent view. The International Accounting Standards Board uses a combination of the parent and entity views.