Further Consolidation Issues II: Accounting For Non-Controlling Interests

Chapter 30
Further consolidation issues II: Accounting for non-controlling interests
Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e
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Objectives
Understand the nature of non-controlling interests (previously referred to as minority interests) Understand why we calculate non-controlling interests Understand how to calculate non-controlling interests share in share capital and reserves, and current period profit Understand how to calculate goodwill (or bargain gain on purchase) in the presence of non-controlling interests Understand how non-controlling interests should be disclosed within consolidated financial statements
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Non-controlling interests
Example Company A (parent entity) owns 75% of Company B Remaining 25% held by investors who are not part of the economic entity The outside investors are referred to as non-controlling interests
Non-controlling interest is defined in AASB 127 as:
the equity in a subsidiary not attributable, directly or indirectly, to a parent.
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Non-controlling interests
Where subsidiary partly owned by parent entity (i.e. less than 100% interest), both the parent entity and the non-controlling interests will have an ownership interest in the subsidiarys profits, dividend payments, and share capital and reserves As part of consolidation process, need to work out the amount to be attributed to non-controlling interests
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Disclosure requirements
Disclosure requirements: non-controlling interests AASB 127 requires separate disclosure of the non-controlling interests share of capital, retained profits or accumulated losses AASB 127 (par. 27)
non-controlling interests shall be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. par. 28 of AASB 127 explains: Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the and non-controlling interests. Total comprehensive income is attributed to the owners of the parent and the non-controlling interests even if this results in the non-controlling interests having a deficit balance. refer to Exhibits 30.1, 2 & 3 on pages 943 and 944 for sample disclosures
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Calculating non-controlling interests

A key step in preparing consolidated financial statements is calculating non-controlling interests in relation to the steps in preparing consolidated financial statements, AASB 127 (par. 18) states:
In preparing consolidated financial statements, an entity combines the
financial statements of the parent and its subsidiaries line by line by

adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single economic entity, the following steps are then taken: (a) the carrying amount of the parents investment in each subsidiary and the parents portion of equity of each subsidiary are eliminated (AASB 3, which describes the treatment of any resulting goodwill);
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Calculating non-controlling interests (cont.)

(b) non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting entity are identified; and
(c) non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent shareholders equity in them. Non-controlling interests in the net assets consist of (i) the amount of those non-controlling interests at the date
of the original combination calculated in accordance with AASB 3 (ii) the non-controllings share of changes in equity since the date of combination
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Calculating non-controlling interests (cont)

non-controlling interests are identified but not eliminated as part of the consolidation process They are identified for disclosure purposes the parents investment in the subsidiary is eliminated only against the parents share of the subsidiarys owners equity at acquisition date. The non-controlling interests share of equity is not eliminated, but is separately identified so that the non-controlling interests share can be specifically shown in the consolidated financial statements The dividends paid and payable by the subsidiary to the non-controlling interest will be included within the consolidated financial statements
.
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The inclusion of non-controlling interests in the consolidated statement of financial position is consistent with the entity concept, according to which non-controlling interest is viewed as an owner within the group, in the same way as the shareholders of the parent entity. where there are intragroup transactions any related profit or loss should be eliminated in full as part of the consolidation process, not merely the percentage of the profit or loss equal to the parent entitys interest in the subsidiary.
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As a result of recent amendments, AASB 3 provides preparers of financial statements with a choice in the measurement of the non-controlling interest. According to paragraph 19 of AASB 3, for each business combination the acquirer shall measure any non-controlling interest in the acquiree either:
at fair value (including goodwill), or at the non-controlling interests proportionate share of the acquirees identifiable net assets (excluding goodwill).
Specifically, paragraphs 18 and 19 of AASB 3 state: 18 The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. 19 For each business combination, the acquirer shall measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquirees identifiable net assets.
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If the non-controlling interests are calculated on the basis of the fair value of the subsidiary, then an amount representing the non-controlling interests share of goodwill will be calculated. This will be in addition to the amount of goodwill allocated to the parent entitys interest. This means, in effect, that the full amount of the goodwill of the subsidiary is being recognised which is in basic accordance with the entity concept of consolidation, as discussed in Chapter 28. This approach is referred to by some people as the full goodwill method and does represent a significant change to pre-existing accounting practice wherein only the goodwill acquired by the parent entity was included within the consolidated financial statements Pursuant to the entity concept of consolidation, all the assets and liabilities of the subsidiary are included within the consolidated financial statements.
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By contrast, if the parent entity elects to account for the noncontrolling interest in accordance with the second option this being the non-controlling interests proportionate share of the acquirees identifiable net assetsthen no additional goodwill will be calculated as being attributable to the non-controlling interests (which is perhaps somewhat obvious given that this second option explicitly refers to the non-controlling interests proportionate share of identifiable net assets which explicitly excludes goodwill). This approach represents the approach that was required prior to the 2008 amendments. Hence, if this option is taken then only a portion of the subsidiarys goodwill will be reflected in the consolidated financial statements, which is not consistent with a pure application of the entity concept of consolidation. This is often referred to as the partial goodwill method.
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Calculating non-controlling interests the choice

In relation to the choice between using the full goodwill method and the partial goodwill method, it is interesting to consider how the joint convergence work being undertaken by the IASB and the US Financial Accounting Standards Board (FASB) ultimately led to this option being available within IFRS 3 (and, therefore, within AASB 3). The revised version of IFRS 3 was issued at the same time as the revised version of the US accounting standard, Statement of Financial Standards No. 141 Business Combinations. Both Boards had issued exposure drafts on the revised standards, and within both of the exposure drafts only the full goodwill method was supported. However, when the accounting standards were ultimately released, the FASB retained only the full goodwill method, whereas the IASB introduced the option to use either the full goodwill method, or the partial goodwill method.
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Justifying the choice in relation to calculating goodwill on consolidation

In understanding the reasoning behind this change, we can refer to the Basis for Conclusions that was released with IFRS 3. Paragraph BC 210 states:
Introducing a choice of measurement basis for non-controlling interests was not the IASBs first preference. In general, the IASB believes that alternative accounting methods reduce the comparability of financial statements. However, the IASB was not able to agree on a single measurement basis for non-controlling interests because neither of the alternatives considered (fair value and proportionate share of the acquirees identifiable net assets) was supported by enough board members to enable a revised business combinations standard to be issued. The IASB decided to permit a choice of measurement basis for non-controlling interests because it concluded that the benefits of the other improvements to, and the convergence of, the accounting for business combinations developed in this project outweigh the disadvantages of allowing this particular option.
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Justifying the choice in relation to calculating goodwill on consolidation (cont)

Hence, the choice of two options within the IASB standard was the outcome of a political exercise to make sure the standard was approved, rather than on the basis that the approach was conceptually sound.
We really have to ponder the impacts such decisions have on the ultimate quality of financial information being generated in compliance with accounting standards.
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Elimination of pre-acquisition capital and reserves in the presence of non-controlling interests
As with 100 % owned subsidiaries, the carrying values of subsidiaries assets must be adjusted to fair value prior to the elimination of the parent entitys investment. This is necessary to prevent the amount of goodwill calculated on consolidation from being wrongly stated, as the equity (net assets) of the subsidiary would be undervalued (where the fair value of the net assets exceeds their carrying amount). The existence of non-controlling interests does not change the requirement for the assets and liabilities of a subsidiary to be measured at fair value as at acquisition date. If the parent entity does not acquire all of the shares of the subsidiary it does not acquire an interest in all the share capital and reserves. There will be a non-controlling interest. Consider Worked Examples 30.1 and 30.2 (pp 948 and 949) which consider and contrast situations where non-controlling interests are measured at either:
the proportionate share of the acquirees identifiable net assets, or, at fair value
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Worked example 30.1: Non-controlling interest measured at the proportionate share of the acquirees identifiable net assets On 1 July 2012, Parent Entity acquired 70 per cent of the share capital of Subsidiary Ltd for $800 000, which represented the fair value of the consideration paid, when the share capital and reserves of Subsidiary Ltd were: Share capital $700 000 Revaluation surplus $200 000 Retained earnings $100 000 $1 000 000 All assets of Subsidiary Ltd were recorded at fair value at acquisition date, except for some plant that had a fair value $50 000 greater than its carrying amount. The cost of the plant was $250 000 and it had accumulated depreciation of $180 000. The tax rate is 30 per cent. Required Prepare the consolidation eliminations and adjustments to recognise the pre-acquisition capital and reserves of Subsidiary Ltd, assuming that the non-controlling interest was measured at the proportionate share of the acquirees identifiable net assets.
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Worked example 30.1: Non-controlling interest measured at the proportionate share of the acquirees identifiable net assets (cont)
30% NonSubsidiary Ltd ($)

Fair value of consideration transferred less Fair value of identifiable assets acquired and liabilities assumed: Share capital on acquisition date 700 000 Revaluation surplus on acquisition date 200 000 Retained earnings on acquisition date 100 000 Fair value adjustment ($50 000 (1 tax rate)) 35 000 1 035 000 Goodwill on acquisition date Non-controlling interest
Parent Ltds 70% interest ($)

800 000
controlling interest ($)
490 000 140 000 70 000 24 500 724 500 75 500
210 000 60 000 30 000 10 500 310 500
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Worked example 30.1: Non-controlling interest measured at the proportionate share of the acquirees identifiable net assets (cont)
The consolidation journal entries would be: Dr Accumulated depreciationplant 180 000 Cr Plant 180 000 (to close off accumulated depreciation in accordance with the net method of asset revaluation) Dr Plant Cr Revaluation surplus Cr Deferred tax liability (to recognise the revaluation increment after tax) 50 000
35 000 15 000
Dr Share capital (70% of 700 000)) 490 000 Dr Revaluation reserve (70% of 235 000) 164 500 Dr Retained earnings (70% of 100 000) 70 000 Dr Goodwill 75 500 Cr Investment in Subsidiary Ltd 800 000 (to recognise the goodwill acquired by Parent Entity and to eliminate the parents interest in preacquisition capital and reserves) Dr Share capital 210 000 Dr Revaluation surplus 70 500 Dr Retained earnings 30 000 Cr Non-controlling interest 310 500 (to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)
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Worked example 30.2: Non-controlling interest measured at fair value
Assume the same information as in Worked Example 30.1 above, except this time we will apply the other option available within the accounting standard and value the non-controlling interest in the acquiree at fair value.
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Worked example 30.2: Non-controlling interest measured at fair value (cont) 30% NonSubsidiary Parent Ltds Controlling Ltd 70% interest interest ($) ($) ($)
Fair value of consideration transferred plus Non-controlling interest measured at fair value ($800 000 30/70) 800 000 342 857 1 142 857 800 000 342 857
less Fair value of identifiable assets acquired and liabilities assumed Share capital on acquisition date Revaluation surplus on acquisition date Retained earnings on acquisition date Fair value adjustment ($50 000 (1 tax rate))
GOODWILL ON ACQUISITION DATE
700 000 200 000 100 000 35 000 1 035 000 107 857
490 000 140 000 70 000 24 500 724 500 75 500
210 000 60 000 30 000 10 500 310 500 32 357
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Worked example 30.2: Non-controlling interest measured at fair value (cont)

The consolidation journal entries would be (and the first 3 sets of entries below are the same as Worked example 30.1): Dr Accumulated depreciationplant 180 000 Cr Plant 180 000 (to close off accumulated depreciation in accordance with the net method of asset revaluation)
Dr Plant Cr Revaluation surplus Cr Deferred tax liability (to recognise the revaluation increment after tax) 50 000
35 000 15 000
Dr Share capital (70% of 700 000)) 490 000 Dr Revaluation reserve (70% of 235 000) 164 500 Dr Retained earnings (70% of 100 000) 70 000 Dr Goodwill 75 500 Cr Investment in Subsidiary Ltd 800 000 (to recognise the goodwill acquired by Parent Entity and to eliminate the parents interest in preacquisition capital and reserves) Dr Share capital 210 000 Dr Revaluation surplus 70 500 Dr Retained earnings 30 000 Dr Goodwill 32 357 Cr Non-controlling interest 342 857 (to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)
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Adjustments for intragroup transactions

AASB 127 requires the elimination of the effects of all intragroup transactions before the consolidated financial statements are presented. Specifically, paragraph 20 stipulates that Intragroup balances, transactions, income and expenses shall be eliminated in full The requirement to eliminate the effects of intragroup transactions holds whether or not there are noncontrolling interests.
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Intragroup payment of dividends

In relation to dividends paid by a subsidiary, the consolidation worksheet journal entries will eliminate the proportion of the dividends that relates to the parent entitys entitlement. The non-controlling interests share of the dividends paid by the subsidiary will be shown in the consolidated financial statements. That is, the non-controlling interests share in the dividends paid or declared by the subsidiary will not be eliminated on consolidation This is appropriate because the dividends paid to the noncontrolling interests represent flows away from the economic entity The dividends distributed to the non-controlling interests will act to reduce the non-controlling interests share in the equity of the subsidiary. The consolidated statement of financial position will show any dividends payable to the non-controlling interests as a liability together with those payable to the shareholders of the parent entity
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Intragroup sale of inventory

When we calculate the non-controlling interests share of the profits of the subsidiary we need to calculate the subsidiarys profit after adjustments to eliminate income and expenses of the subsidiary that are unrealised from the economic entitys perspective. If the gains or losses have been realised no adjustment is necessary when calculating non-controlling interest. For example, if a subsidiary sold inventory to the parent at a gain, and the parent entity has in turn sold all the inventory to external parties, the non-controlling interests share of profit would not need to be reduced as the related gain would be deemed to have been realised from the perspective of the group. Adjustments to the calculation of the non-controlling interests share of the subsidiarys profits will be needed where some or all of the inventory sold by the subsidiary is still on hand with the parent entity at reporting date.
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Intragroup sale of inventory (cont)

If there are unrealised profits in closing inventory, this will mean that in the next financial period there will be unrealised profits in opening inventory. In the next financial period we would need to adjust the non-controlling interests share of opening retained earnings (by reducing it) and provide a corresponding increase in the non-controlling interests share of that periods profits
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Intragroup sale of non-current assets

As with inventory, if a subsidiary sells a non-current asset such as an item of property, plant and equipment to another entity within the group, to the extent that the asset stays within the group the gain or loss on sale has not been recognised from the groups perspective and the non-controlling interests share of profits will need to be adjusted. However, the gain or loss is considered to be realised across the life of the asset as the asset is used up, that is as it is depreciated. As the assets, such as plant, are used, perhaps to produce inventory, the intragroup profit is considered to be realised as the service potential of the plant becomes embodied in goods produced by the plant, for example, in inventory. Therefore, if a subsidiary sold an item of plant to another entity at the beginning of the financial year at a profit of $1000 and if that asset is to be depreciated over 10 years, only $100 of the gain could be recognised in the first year and $900 would be deemed to be unrealised. It would be realised over the next nine years.
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Intragroup services and interest payments

To the extent that there is no related asset that is retained in the economic entity upon which any profit has accrued, no adjustments are necessary in calculating the non-controlling interest in the subsidiarys profit (of course, consolidation adjustments will still be required but this discussion is about calculating the non-controlling interests share of profits for presentation purposes and not for the purpose of generating consolidation journal adjustments). There is no adjustment for such things as management fees when we are determining non-controlling interests as they are considered to be realised.
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Intragroup transactions that create gains or losses for the parent entity
In calculating non-controlling interests we do not need to adjust for gains or losses in the parent entitys accounts that are unrealised as non-controlling interests have an interest only in the subsidiarys profit contribution. It is only the unrealised intragroup profits or losses accruing to the subsidiary that need to be eliminated before we calculate non-controlling interests. Hence, if a subsidiary has acquired inventory from the parent entity no adjustment is required if the inventory is still on hand (and hence the profit is unrealised from the perspective of the economic entity) when calculating non-controlling interests as the purchase of inventory has no implications for the equity of the subsidiary as they are simply acquiring one asset in exchange for another (if paid for by cash), or acquiring one asset by incurring a liability (accounts payable).
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Summary of some general principles for calculating non-controlling interests in profits or losses
We only need to make adjustments to non-controlling interests share of profits where an intragroup transaction affects the subsidiarys profit or loss. We make adjustments for profits or losses made by the subsidiary to the extent they are unrealised from the economic entitys perspective, that is, the respective asset is still on hand at reporting date. For profits relating to transactions that do not involve the transfer of assets, such as those relating to interest, management fees and so forth, no adjustments are necessary. The related profits are deemed to be recognised at the point of the transaction. We do not need to make adjustments for unrealised gains or losses made by the parent entity when calculating the noncontrolling interest in profits.
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Further Consolidation Issues II: Accounting For Non-Controlling Interests

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Further Consolidation Issues II: Accounting For Non-Controlling Interests

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Chapter 30

Further consolidation issues II: Accounting for non-controlling interests

the equity in a subsidiary not attributable, directly or indirectly, to a parent.

Calculating non-controlling interests

financial statements of the parent and its subsidiaries line by line by

Calculating non-controlling interests (cont.)

Calculating non-controlling interests (cont)

Calculating non-controlling interests (cont)

Calculating non-controlling interests (cont)

Calculating non-controlling interests (cont)

Calculating non-controlling interests (cont)

Calculating non-controlling interests the choice

Justifying the choice in relation to calculating goodwill on consolidation

Justifying the choice in relation to calculating goodwill on consolidation (cont)

Elimination of pre-acquisition capital and reserves in the presence of non-controlling interests

30% NonSubsidiary Ltd ($)

Parent Ltds 70% interest ($)

controlling interest ($)

490 000 140 000 70 000 24 500 724 500 75 500

210 000 60 000 30 000 10 500 310 500

Worked example 30.2: Non-controlling interest measured at fair value

490 000 140 000 70 000 24 500 724 500 75 500

210 000 60 000 30 000 10 500 310 500 32 357

Worked example 30.2: Non-controlling interest measured at fair value (cont)

Adjustments for intragroup transactions

Intragroup payment of dividends

Intragroup sale of inventory

Intragroup sale of inventory (cont)

Intragroup sale of non-current assets

Intragroup services and interest payments

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