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• 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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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 ‘noncontrolling 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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• Where a subsidiary is partly owned by a parent entity (i.e. less than 100% interest), both the parent entity and the non-controlling interests will have an ownership interest in the subsidiary’s profits, dividend payments, and share capital and reserves
• As part of the consolidation process, need to work out the amount to be attributed to non-controlling interests
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Disclosure requirements: non-controlling interests
• AASB 127 requires separate disclosure of the non-controlling interest’s 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 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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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 parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated (AASB 3, which describes the treatment of any resulting goodwill)
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( 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 noncontrolling’s share of changes in equity since the date of combination
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• Non-controlling interests are ‘identified’ but not eliminated as part of the consolidation process
• They are identified for disclosure purposes
• The parent’s investment in the subsidiary is eliminated only against the parent’s share of the subsidiary’s owners’ equity at acquisition date
• The non-controlling interest’s share of equity is not eliminated, but is separately identified so that the noncontrolling interest’s 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 entity’s 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 acquiree’s 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 noncontrolling interest’s proportionate share of the acquiree’s 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 noncontrolling interest’s share of goodwill will be calculated
• This will be in addition to the amount of goodwill allocated to the parent entity’s 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 noncontrolling interest’s proportionate share of the acquiree’s identifiable net assets—then 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 noncontrolling interest’s 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 subsidiary’s 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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• 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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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 IASB’s 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 noncontrolling interests because neither of the alternatives considered (fair value and proportionate share of the acquiree’s 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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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 of such decisions 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 entity’s 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 acquiree’s identifiable net assets, or
– fair value
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Worked Example 30.1
—Non-controlling interest measured at the proportionate share of the acquiree’s identifiable net assets
• On 1 July 2012, Parent Entity acquired 70% 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
Revaluation surplus
$700 000
$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 $180 000
• The tax rate is 30%
REQUIRED
Prepare the consolidation eliminations and adjustments to recognise the pre-acquisition capital and reserves of Subsidiary Ltd, assuming that the non-controlling interest was measured at the proportionate share of the acquiree’s identifiable net assets .
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Worked Example 30.1
—Solution
30% Non-
Subsidiary Parent Ltd’s controlling
Ltd 70% interest
($)
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 ($50 000
×
(1 – tax rate)) 35 000
1 035 000
Goodwill on acquisition date
Non-controlling interest
($)
800 000
490 000
140 000
70 000
24 500
724 500
75 500 interest
($)
210 000
60 000
30 000
10 500
–
310 500
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Worked Example 30.1
—Solution (cont.)
The consolidation journal entries would be:
Dr Accumulated depreciation —plant 180 000
Cr Plant 180 000
(to close off accumulated depreciation in accordance with the net method of asset revaluation)
Dr Plant
Cr Revaluation surplus
Cr Deferred tax liability
(to recognise the revaluation increment after tax)
50 000
35 000
15 000
Dr Share capital (70% of 700 000))
Dr Revaluation reserve (70% of 235 000)
490 000
164 500
Dr Retained earnings (70% of 100 000)
Dr Goodwill
70 000
75 500
Cr Investment in Subsidiary Ltd 800 000
(to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in preacquisition capital and reserves)
Dr Share capital
Dr Revaluation surplus
210 000
70 500
Dr Retained earnings
Cr Non-controlling interest
30 000
310 500
(to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)
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Worked Example 30.2
—Non-controlling interest measured at fair value
REQUIRED
Assume the same information as in Worked Example 30.1 above, except this time we will apply the other option available within the accounting standard and value the noncontrolling interest in the acquiree at fair value .
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Worked Example 30.2
—Solution
30% Non-
Subsidiary Parent Ltd’s Controlling
Ltd 70% interest interest
($)
Fair value of consideration transferred 800 000 plus Non-controlling interest measured at fair value ($800 000 × 30/70) 342 857
1 142 857 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 ($50 000 ×
(1
– tax rate))
35 000
1 035 000
GOODWILL ON ACQUISITION DATE 107 857
($)
800 000
490 000
140 000
70 000
24 500
724 500
75 500
($)
342 857
210 000
60 000
30 000
10 500
310 500
32 357
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Worked Example 30.2
—Solution (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 depreciation —plant 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))
Dr Revaluation reserve (70% of 235 000)
Dr Retained earnings (70% of 100 000)
Dr Goodwill
490 000
164 500
70 000
75 500
Cr Investment in Subsidiary Ltd 800 000
(to recognise the goodwill acquired by Parent Entity and to eliminate the parent’s interest in preacquisition capital and reserves)
Dr Share capital 210 000
Dr Revaluation surplus
Dr Retained earnings
70 500
30 000
Dr Goodwill
Cr Non-controlling interest
32 357
342 857
(to recognise the non-controlling interest in contributed equity and reserves at date of acquisition)
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• 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 non-controlling interests
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• 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 entity’s entitlement
• The non-controlling interest’s share of the dividends paid by the subsidiary will be shown in the consolidated financial statements.
That is, the noncontrolling interest’s 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 noncontrolling 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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• When we calculate the non-controlling interest’s share of the profits of the subsidiary we need to calculate the subsidiary’s profit after adjustments to eliminate income and expenses of the subsidiary that are unrealised from the economic entity’s 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 noncontrolling interest’s 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 interest’s share of the subsidiary’s 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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• 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 noncontrolling interest’s share of opening retained earnings (by reducing it) and provide a corresponding increase in the non-controlling interest’s share of that period’s profits
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• 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 group’s 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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• 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 subsidiary’s profit (of course, consolidation adjustments will still be required but this discussion is about calculating the noncontrolling interest’s 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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• In calculating non-controlling interests we do not need to adjust for gains or losses in the parent entity’s accounts that are unrealised as non-controlling interests have an interest only in the subsidiary’s 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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• We only need to make adjustments to non-controlling interests’ share of profits where an intragroup transaction affects the subsidiary’s profit or loss
• We make adjustments for profits or losses made by the subsidiary to the extent they are unrealised from the economic entity’s 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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