Chapter 30
Further consolidation
issues II: Accounting for
minority interests
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-1
Objectives
• Understand the nature of minority interests
• Understand why we calculate minority interests
• Understand how to calculate minority interests’ share
in share capital and reserves, and current period profit
• Understand how minority interests should be disclosed
within consolidated financial statements
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-2
Minority interests
Example
• Company A (parent entity) owns 75% of Company B
• Remaining 25% held by investors who are not part of the
economic entity
• Outside investors referred to as ‘minority interests’
Minority interests (under AASB 127)
That portion of the profit or loss and net assets of a subsidiary
attributable to equity interests that are not owned, directly or
indirectly through subsidiaries, by the parent
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Minority interests
• Where subsidiary partly owned by parent entity (i.e. less than
100% interest), both the parent entity and the minority interests
will have an ownership interest in the subsidiary’s profits,
dividend payments, and share capital and reserves
• As part of consolidation process, need to work out the amount to
be attributed to minority interests
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Disclosure requirements
Disclosure requirements: minority interests
• AASB 127 requires separate disclosure of the
minority interest’s share of capital, retained profits
or accumulated losses
• AASB 127 (par. 33)
– minority interests shall be presented in the consolidated
balance sheet within equity, separately from the parent
shareholders’ equity. Minority interests in the profit or loss
of the group shall also be separately disclosed
– par. 34 of AASB 127 explains: ‘The profit or loss is
attributed to the parent shareholders and minority
interests. Because both are equity, the amount attributed
to minority interests is not income or expenses’.
– refer to Exhibits 30.1, 2 & 3 on pages 1025 and 1026 for
sample disclosures
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-6
Calculating minority interests
A key step in preparing consolidated financial statements is calculating
minority interests
AASB 127 (par. 22) in relation to the steps in preparing a consolidated
financial report
In preparing a consolidated financial report, an entity combines the financial
reports 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 report presents 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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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Calculating minority interests (cont.)
(b) minority interests in the profit or loss of consolidated
subsidiaries for the reporting entity are identified; and
(c) minority interests in the net assets of consolidated
subsidiaries are identified separately from the parent
shareholders’ equity in them. Minority interests in the net
assets consist of
(i) the amount of those minority interests at the date of the
original combination calculated in accordance with
AASB 3
(ii) the minority’s share of changes in equity since the date
of combination
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-8
Calculating minority interests (cont)
• Minority interests are ‘identified’ but not eliminated as
part of the consolidation process
• They are calculated 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 minority interest’s share of equity is not
eliminated, but is separately identified so that the
minority interest’s share can be specifically shown in
the consolidated financial statements
• The dividends paid and payable by the subsidiary to
the minority interest will be included within the
consolidated financial statements
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-9
Calculating minority interests (cont)
• The minority interest is determined as the minority interest’s
proportion of the fair value of the recognised identifiable assets,
liabilities and contingent liabilities at the date of the original
acquisition.
• Post-acquisition minority interest in the identifiable assets and
liabilities of a subsidiary comprises the minority interest’s share of
movements in equity since the date of the original controlling
acquisition, after eliminating intragroup transactions.
• The inclusion of minority interests in the consolidated balance
sheet is consistent with the entity concept, according to which
minority 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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Slides prepared by Craig Deegan
30-10
Elimination of pre-acquisition capital and
reserves in the presence of minority interests
• 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 acquired by
the parent entity 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 minority 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 minority interest.
• Consider Worked Example 30.1 (page 1029)
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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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 24 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 minority
interests.
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Slides prepared by Craig Deegan
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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 entity’s entitlement.
• The minority interest’s share of the dividends paid by the
subsidiary will be shown in the consolidated financial statements.
That is, the minority interest’s share in the dividends paid or
proposed by the subsidiary will not be eliminated on consolidation
• This is appropriate because the dividends paid to the minority
interests represent flows away from the economic entity
• The dividends distributed to the minority interests will act to
reduce the minority interests’ share in the equity of the subsidiary.
• The consolidated balance sheet will show any dividends payable
to the minority interests as a liability together with those payable
to the shareholders of the parent entity
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Slides prepared by Craig Deegan
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Intragroup sale of inventory
• When we calculate the minority 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 minority 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
minority 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 minority 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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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 minority
interest’s share of opening retained earnings (by
reducing it) and provide a corresponding increase in
the minority interest’s share of that period’s profits
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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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 group’s
perspective and the minority 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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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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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 minority interest in the subsidiary’s
profit (of course, consolidation adjustments will still be
required but this discussion is about calculating the
minority 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 minority
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 minority interests we do not need to adjust for gains
or losses in the parent entity’s accounts that are unrealised as
minority 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 minority
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 minority 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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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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Summary of some general principles for
calculating minority interests in profits or
losses
• We only need to make adjustments to minority 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 minority
interest in profits.
• Consider Worked Example 30.2 (pp. 1033 – 45)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
30-19