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Copyright 2010 McGraw-Hill Australia Pty LtdPPTs to accompany Deegan, Australian Financial Accounting 6e 30-1

Chapter 30Further consolidation

issues II: Accounting fornon-controlling interests

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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, andcurrent period profit

Understand how to calculate goodwill (or bargaingain on purchase) in the presence of non-controlling

interests Understand how non-controlling interests should bedisclosed within consolidated financial statements

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Non-controlling interestsExample 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 orindirectly, to a parent.

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Non-controlling interests

Where subsidiary partly owned by parent entity (i.e. less than100% interest), both the parent entity and the non-controllinginterests will have an ownership interest in the subsidiarysprofits, dividend payments, and share capital and reserves

As part of consolidation process, need to work out the amount tobe attributed to non-controlling interests

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Disclosure requirementsDisclosure requirements: non-controlling interests AASB 127 requires separate disclosure of the non-controlling

interests share of capital, retained profits or accumulatedlosses

AASB 127 (par. 27) non-controlling interests shall be presented in the consolidated

statement of financial position within equity, separately from theequity of the owners of the parent.

par. 28 of AASB 127 explains: Profit or loss and eachcomponent of other comprehensive income are attributed to theowners 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 thenon-controlling interests having a deficit balance .

refer to Exhibits 30.1, 2 & 3 on pages 943 and 944 for sampledisclosures

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7/31. Copyright 2010 McGraw-Hill Australia Pty LtdPPTs to accompany Deegan, Australian Financial Accounting 6e 30-7

Calculating non-controlling interests A key step in preparing consolidated financial statements iscalculating non-controlling interestsin 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 andexpenses. 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 consolidatedsubsidiaries for the reporting entity are identified; and

(c) non-controlling interests in the net assets of consolidatedsubsidiaries are identified separately from the parentshareholders equity in them . Non-controlling interests inthe net assets consist of

(i) the amount of those non-controlling interests at the dateof the original combination calculated in accordancewith AASB 3

(ii) the non- controllings share of changes in equity sincethe date of combination

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Calculating non-controlling interests (cont)

non- controlling interests are identified but noteliminated 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 thesubsidiarys owners equity at acquisition date.

The non- controlling interests share of equity is noteliminated, but is separately identified so that thenon- controlling interests share can be specificallyshown in the consolidated financial statements

The dividends paid and payable by the subsidiary tothe non-controlling interest will be included within theconsolidated financial statements

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Calculating non-controlling interests (cont)

The inclusion of non-controlling interests in theconsolidated statement of financial position isconsistent with the entity concept, according to whichnon-controlling interest is viewed as an owner withinthe group, in the same way as the shareholders ofthe parent entity.

where there are intragroup transactions any relatedprofit or loss should be eliminated in full as part ofthe consolidation process, not merely the percentageof the profit or loss equal to the parent entitysinterest in the subsidiary.

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Calculating non-controlling interests (cont) As a result of recent amendments, AASB 3 provides preparers

of financial statements with a choice in the measurement ofthe non-controlling interest .

According to paragraph 19 of AASB 3, for each businesscombination the acquirer shall measure any non-controllinginterest 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 anynon-controlling interest in the acquiree either at fair value or atthe non- controlling interests proportionate share of theacquirees identifiable net assets.

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Calculating non-controlling interests (cont) If the non-controlling interests are calculated on the basis of the

fair value of the subsidiary , then an amount representing thenon- controlling interests share of goodwill will be calculated.

This will be in addition to the amount of goodwill allocated to theparent entitys interest.

This means, in effect, that the full amount of the goodwill of thesubsidiary is being recognised which is in basic accordance

with the entity concept of consolidation, as discussed inChapter 28. This approach is referred to by some people as the full goodwill

method and does represent a significant change to pre-existingaccounting practice wherein only the goodwill acquired by theparent entity was included within the consolidated financialstatements

Pursuant to the entity concept of consolidation, all the assetsand liabilities of the subsidiary are included within theconsolidated financial statements.

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Calculating non-controlling interests (cont) By contrast, if the parent entity elects to account for the non-

controlling interest in accordance with the second option this

being the non- controlling interests proportionate share of theacquirees identifiable net assets then no additional goodwillwill be calculated as being attributable to the non-controllinginterests (which is perhaps somewhat obvious given that thissecond option explicitly refers to the non- controlling interests

proportionate share of identifiable net assets which explicitlyexcludes 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 consolidatedfinancial statements, which is not consistent with a pureapplication of the entity concept of consolidation.

This is often referred to as the partial goodwill method.

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. Copyright 2010 McGraw-Hill Australia Pty LtdPPTs to accompany Deegan, Australian Financial Accounting 6e 30-14

Calculating non-controlling interests thechoice In relation to the choice between using the full goodwill method

and the partial goodwill method, it is interesting to considerhow the joint convergence work being undertaken by the IASBand 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 asthe revised version of the US accounting standard, Statementof Financial Standards No. 141 Business Combinations .

Both Boards had issued exposure drafts on the revisedstandards, and within both of the exposure drafts only the fullgoodwill method was supported.

However, when the accounting standards were ultimatelyreleased, the FASB retained only the full goodwill method,whereas the IASB introduced the option to use either the fullgoodwill method, or the partial goodwill method.

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Justifying the choice in relation tocalculating 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 BC210 states:

Introducing a choice of measurement basis for non-controlling interestswas not the IASBs first preference. In general, the IASB believes thatalternative accounting methods reduce the comparability of financialstatements. However, the IASB was not able to agree on a singlemeasurement basis for non-controlling interests because neither of thealternatives considered (fair value and proportionate share of theacquirees identifiable net assets) was supported by enough boardmembers to enable a revised business combinations standard to beissued. The IASB decided to permit a choice of measurement basis for

non-controlling interests because it concluded that the benefits of theother improvements to, and the convergence of, the accounting forbusiness combinations developed in this project outweigh thedisadvantages of allowing this particular option.

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Justifying the choice in relation tocalculating goodwill on consolidation (cont)

Hence, the choice of two options within the IASBstandard was the outcome of a political exercise tomake sure the standard was approved, rather than onthe basis that the approach was conceptually sound.

We really have to ponder the impacts such decisionshave on the ultimate quality of financial informationbeing generated in compliance with accountingstandards.

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Elimination of pre-acquisition capital and reservesin 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 theparent entitys investment. This is necessary to prevent the amount of goodwill calculated on

consolidation from being wrongly stated, as the equity (net assets) ofthe subsidiary would be undervalued (where the fair value of the netassets exceeds their carrying amount).

The existence of non-controlling interests does not change therequirement for the assets and liabilities of a subsidiary to be measuredat fair value as at acquisition date.

If the parent entity does not acquire all of the shares of the subsidiary itdoes not acquire an interest in all the share capital and reserves. Therewill be a non-controlling interest.

Consider Worked Examples 30.1 and 30.2 (pp 948 and 949) whichconsider and contrast situations where non-controlling interests aremeasured 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 theproportionate share of the acquirees identifiable net assets

On 1 July 2012, Parent Entity acquired 70 per cent of the share capitalof Subsidiary Ltd for $800 000, which represented the fair value of theconsideration paid, when the share capital and reserves of SubsidiaryLtd were:

Share capital $700 000Revaluation surplus $200 000Retained 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 thanits carrying amount.

The cost of the plant was $250 000 and it had accumulateddepreciation of $180 000.

The tax rate is 30 per cent. Required

Prepare the consolidation eliminations and adjustments to recognisethe pre-acquisition capital and reserves of Subsidiary Ltd, assumingthat the non-controlling interest was measured at the proportionateshare of the acquirees identifiable net assets .

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Worked example 30.1: Non-controlling interest measured at theproportionate share of the acquirees identifiable net assets (cont)

30% Non-Subsidiary Parent Ltds controlling

Ltd 70% interest interest($) ($) ($)

Fair value of consideration transferred 800 000

less Fair value of identifiable assets acquiredand liabilities assumed:Share capital on acquisition date 700 000 490 000 210 000Revaluation surplus on acquisition date 200 000 140 000 60 000Retained earnings on acquisition date 100 000 70 000 30 000Fair value adjustment ($50 000

(1 tax rate)) 35 000 24 500 10 5001 035 000 724 500

Goodwill on acquisition date 75 500 Non-controlling interest 310 500

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Worked example 30.1: Non-controlling interest measured at theproportionate share of the acquirees identifiable net assets (cont)

The consolidation journal entries would be:Dr Accumulated depreciation plant 180 000Cr Plant 180 000

(to close off accumulated depreciation in accordance with the net method of asset revaluation)

Dr Plant 50 000Cr Revaluation surplus 35 000Cr Deferred tax liability 15 000(to recognise the revaluation increment after tax)

Dr Share capital (70% of 700 000)) 490 000Dr Revaluation reserve (70% of 235 000) 164 500Dr Retained earnings (70% of 100 000) 70 000Dr Goodwill 75 500Cr Investment in Subsidiary Ltd 800 000(to recognise the goodwill acquired by Parent Entity and to eliminate the parents interest in pre -

acquisition capital and reserves)

Dr Share capital 210 000Dr Revaluation surplus 70 500Dr Retained earnings 30 000Cr 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 atfair value

Assume the same information as in Worked Example30.1 above, except this time we will apply the otheroption available within the accounting standard andvalue the non-controlling interest in the acquiree atfair value.

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

30% No n-

Subsidiary Parent Ltds Control l ingLtd 70% interest interest

($) ($) ($)Fair value of consideration transferred 800 000 800 000

plus Non-controlling interest measuredat fair value ($800 000 30/70) 342 857 342 857

1 142 857less Fair value of identifiable assets

acquired and liabilities assumedShare capital on acquisition date 700 000 490 000 210 000Revaluation surplus on acquisition date 200 000 140 000 60 000Retained earnings on acquisition date 100 000 70 000 30 000Fair value adjustment ($50 000

(1 tax rate)) 35 000 24 500 10 5001 035 000 724 500 310 500

GOODWILL ON ACQUISITION DATE 107 857 75 500 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 asWorked example 30.1):

Dr Accumulated depreciation plant 180 000Cr Plant 180 000(to close off accumulated depreciation in accordance with the net method of asset revaluation)

Dr Plant 50 000Cr Revaluation surplus 35 000Cr Deferred tax liability 15 000(to recognise the revaluation increment after tax)

Dr Share capital (70% of 700 000)) 490 000

Dr Revaluation reserve (70% of 235 000) 164 500Dr Retained earnings (70% of 100 000) 70 000Dr Goodwill 75 500Cr Investment in Subsidiary Ltd 800 000(to recognise the goodwill acquired by Parent Entity and to eliminate the parents interest in pre -

acquisition capital and reserves)

Dr Share capital 210 000Dr Revaluation surplus 70 500Dr Retained earnings 30 000Dr Goodwill 32 357Cr 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 consolidatedfinancial statements are presented. Specifically,paragraph 20 stipulates that

Intragroup balances, transactions, income andexpenses 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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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 ordeclared by the subsidiary will not be eliminated on consolidation

This is appropriate because the dividends paid to the non-controlling 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 thesubsidiary.

The consolidated statement of financial position will show anydividends payable to the non-controlling interests as a liabilitytogether 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 subsidiarysprofit after adjustments to eliminate income and expenses ofthe subsidiary that are unrealised from the economic entitysperspective.

If the gains or losses have been realised no adjustment isnecessary 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 toexternal parties, the non- controlling interests share of profitwould not need to be reduced as the related gain would bedeemed to have been realised from the perspective of thegroup.

Adjustments to the calculation of the non- controlling interestsshare of the subsidiarys profits will be needed where some orall of the inventory sold by the subsidiary is still on hand withthe 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 therewill be unrealised profits in opening inventory. In thenext financial period we would need to adjust thenon- controlling interests share of opening retainedearnings (by reducing it) and provide acorresponding increase in the non-controllinginterests 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 entitywithin the group, to the extent that the asset stays within thegroup the gain or loss on sale has not been recognised from thegroups perspective and the non -controlling interests share ofprofits 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 isdepreciated. As the assets, such as plant, are used, perhaps toproduce inventory, the intragroup profit is considered to berealised as the service potential of the plant becomes embodiedin goods produced by the plant, for example, in inventory.

Therefore, if a subsidiary sold an item of plant to another entityat the beginning of the financial year at a profit of $1000 and ifthat asset is to be depreciated over 10 years, only $100 of thegain could be recognised in the first year and $900 would bedeemed to be unrealised. It would be realised over the nextnine years.

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Intragroup services and interest payments

To the extent that there is no related asset that is retained in theeconomic entity upon which any profit has accrued, noadjustments are necessary in calculating the non-controllinginterest in the subsidiarys profit (of course, consolidationadjustments will still be required but this discussion is aboutcalculating the non- controlling interests share of profits forpresentation purposes and not for the purpose of generatingconsolidation journal adjustments).

There is no adjustment for such things as management feeswhen we are determining non-controlling interests as they areconsidered to be realised .

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.Copyright 2010 McGraw-Hill Australia Pty LtdPPTs to accompany Deegan, Australian Financial Accounting 6e 30-30

Intragroup transactions that create gains orlosses 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 areunrealised as non-controlling interests have an interest only inthe subsidiarys profit contribution.

It is only the unrealised intragroup profits or losses accruing tothe subsidiary that need to be eliminated before we calculate

non-controlling interests. Hence, if a subsidiary has acquired inventory from the parententity no adjustment is required if the inventory is still on hand(and hence the profit is unrealised from the perspective of theeconomic entity) when calculating non-controlling interests asthe purchase of inventory has no implications for the equity ofthe subsidiary as they are simply acquiring one asset inexchange for another (if paid for by cash), or acquiring oneasset by incurring a liability (accounts payable).

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Copyright 2010 McGraw-Hill Australia Pty LtdPPTs to accompany Deegan Australian Financial Accounting 6e 30-31

Summary of some general principles forcalculating non-controlling interests in profitsor losses We only need to make adjustments to non- controlling interestsshare 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 economicentitys perspective, that is, the respective asset is still on handat reporting date.

For profits relating to transactions that do not involve thetransfer 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 orlosses made by the parent entity when calculating the non-controlling interest in profits.

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