Direct non-controlling interest

ACCT3011 Week 7 Maria Belfrage, Denise Fong, Jessica Lim-Rhodes

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Topic overview and relevance to course ACCT3011

We know from previous chapters that control is the basis of consolidation. We also know that control not is equal to 100% of the share capital. Wholly-owned subsidiary = The parent has acquired 100% of the share capital. Partly-owned subsidiary = The parent owns less than 100% but has control. Therefore we need to know how to adjust our consolidated financial statements to show our shareholders a true and fair view of the group. This include adjusting for non-controlling interest.

What is minority/ non-controlling interest?

Parent 51% 49% Subsidiary Noncontrolling Interest

Parent entity controls a subsidiary but owns less than 100% of its voting shares, i.e there are other shareholders than those of the parent company. AASB 127.4 defines it as: the equity in a subsidiary not attributable, directly or indirectly, to a parent Today s focus is on direct non-controlling interest.

Disclosure and measurement of non-controlling interest

According to AASB 127.27 non-controlling interest shall be presented in the consolidated balance sheet within equity, separately from the parent s shareholders equity. According to AASB 127.28 total comprehensive income are attributed to the owners of the parent and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.

Two ways to measure non-controlling interest:

Full consolidation - according to the entity concept. 100% of the subsidiary is 1 consolidated and the non-controlling interest is treated as equity.

2 Proprietary concept proportional consolidation where only the part owned by

the parent is consolidated. Doesn t show any non-controlling interest.

Q5.4: Ownership interest and full consolidation

it for a of 51% Q: inExplain why isto appropriate 100%parent entity withsan ownership interestassets, a subsidiary consolidate of the subsidiary revenues, expenses, liabilities and equities (subject to any consolidation eliminations and adjustments). Suppose the parent entity increased its ownership interest from 51% to 80%. How would this impact on the allocation of the equities of the group between PI and NCI?

A:

Recall that the underlying concept for consolidation is the entity concept. (AASB 127) The entity concept states that the purpose of consolidation is to show the financial performance of many single entities as one economic entity. Under the entity concept it doesn t matter what proportion of a subsidiary s equity is held by the parent. If the parent has control full consolidation . Full amount of subsidiary s income, expenses, asset, liabilities and equities are included in the consolidated financial statement.
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Q5.4: Ownership interest and full consolidation cont d

We can also look at it logically: The parent controls ALL of the resources within the subsidiary. Not just 51% of the assets, equity etc. This because control is not based on ownership. So the decisions that the top management in the parent makes will affect all 100% of the sub s resources. Logically we reach the conclusion that the parent is the one responsible for the sub s financial performance. Therefore we must apply full consolidation.

Q5.4: Ownership interest and full consolidation

Q: A: Q: A:

Suppose the parent entity increased its ownership interest from 51% to 80%. How would this impact on the allocation of the equities of the group between PI and NCI? Using full consolidation the consolidated financial statements for the group ought to be the same as before. The only thing that differ is that the amount attributable to parent now is higher (80%) and the equivalent amount for non-controlling interest is less (20%). Group = 100% Group = 100% Parent= 51% Parent = 80% NCI= 49% NCI= 20%

Do you think the change in the accounting standards in 2009 from calling interest other than the parent s minority interest to now calling it non-controlling interest is an improvement? Why? Yes, because: 1. Non-controlling interest better states the relationship between parent and other shareholders. 2. On some occasions control can occur even when the parent holds less than 50% of the share capital. Then minority interest would be misleading since they, as a group, actually owns more than the parent.
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E5.2: FV issue, calculation of NCI, presentation of NCI.

FACTS: 1 Jan 20x5: A Ltd acquired 80% voting shares of B Ltd. Consideration: $ 1,800,000 Control established: obtained the capacity to dominate the financial and operating policies of B Ltd.

Parent: A Ltd 20% 80% Partly owned Subsidiary: B Ltd NCI

NCI

E5.2: FV issue, calculation of NCI, presentation of NCI.

Acquisition Analysis:

Acquisition of investment in partly owned subsidiary: (partial method) FV of purchase consideration Less: FV of net identifiable assets Share capital Retained earnings at 1.1.X5 General Reserve Add/less: FV Adjustments Land DTL Interest Acquired Bargain Purchase Gain/Goodwill on Acquisition

$ 1,800,000

$ 1,000,000 $ 800,000 $ 100,000 $500,000 ($150,000) $ 2,250,000 80%

$ 1,800,000 $ 0
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E5.2: Part a)
At the date A Ltd gained control of B Ltd, land held by B Ltd had a recorded CA of $500,000 below FV. Corporate income tax rate: 30% Consolidation journal entries 31.12.X5 i) FV Adjustment to Land and related tax effect DR Land $ 500,000 CR FV Adjustment DR CR FV Adjustment DTL $ 150,000 $ 150,000

$ 500,000

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E5.2: Part a)
Parent ownership interest in B Ltd: 80% ii) Elimination of investment DR Share Capital DR Retained Earnings at 1.1.X5 DR General Reserve DR FV Adjustment CR Investment in B Ltd

$ 800,000 $ 640,000 $ 80,000 $ 280,000 $1,800,000

Calculations: Share Capital: $1,000,000 x 80% = $800,000 R/E 1.1.X5: $800,000 x 80% = $640,000 General Reserve: $100,000 x 80% = $80,000 FV Adjustment (net): $(500,000 150,000) x 80% = $280,000
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E5.2: Part a)

iii) Elimination of intra group dividend from B Ltd to A Ltd DR Dividend Revenue CR Dividend Paid $ 440,000 $ 440,000

Calculations: Dividend paid by B Ltd: 550,000 Therefore, since dividends are BASED ON OWNERSHIP: $ 550,000 x 80% = $ 440,000

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Consolidation worksheet - 31 December 20X5 A Ltd $ Profit before tax Income tax expense Profit for the year Retained earnings 1.1.X5 Total Dividends paid Retained earnings 31.12.X5 Share capital General reserve FVA FVA Shareholders equity 1,780,000 (410,000) 1,370,000 1,280,000 2,650,000 (800,000) 1,850,000 1,600,000 300,000 3,750,000 B Ltd $ 730,000 (120,000) 610,000 800,000 1,410,000 (550,000) 860,000 1,000,000 100,000 1,960,000 280,000 800,000 80,000 ii) ii) iii) (440,000) 640,000 ii) Dr. (440,000) Elimin & Adjustme nts Ref iii) Consolidated Cr. $ 2,070,000 (530,000) 1,540,000 1,440,000 2,980,000 (910,000) 2,070,000 1,800,000 320,000 350,000 70,000
13 4,260,000

i)
ii)

E5.2: Part b)
NCI memorandum account B Ltd $ a) Retained earnings at 1.1.X5 Post-acquisition movement in opening retained earnings Retained earnings at 1.1.X5 NCI @ 20% b) Profit for the year NCI @ 20% c) Dividend Paid NCI @ 20% 800,000 0 800,000 160,000 610,000 122,000 (550,000) (110,000) NCI $

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E5.2: Part b)
B Ltd $ 1,000,000 NCI $ 200,000 100,000 20,000 350,000 70,000

d) Share Capital NCI @ 20% e) General Reserve NCI @ 20% f) FV Adjustments on consolidation NCI @ 20% Total equities attributable to B Ltd Total NCI @ 20%

2,310,000 462,000

Double check accuracy: Total Equity of B Ltd: = 800,000 + 610,000 550,000 + 1,000,000 + 100,000 + 350,000 = 2,310,000 Total NCI = 20% x Total Equity of B Ltd = 20% x 2,310,000 = 462,000

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Ex 5.2 Part c)
$ 1,440,000 (160,000) 1,280,000

Amount of consolidated opening retained earnings as per the consolidated worksheet Less Amount allocated to MI as per the memorandum account Total

A Ltd Group Consolidated Income statement for the year ended 31 December 20X5 Profit before income tax Income Tax expense Profit for the year Profit attributable to minority interests Profit attributable to equity holders Consolidated ($) 2.070,000 (530,000) 1,540,000 122,000 1,492,000
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Ex 5.2 Part c)
A Ltd Group Extract from consolidated statement of recognised income and expense for the year ended 31 December 0X5 Consolidated ($) 1,540,000 Profit for the year ________Amount recognised directly in equity Total recognised income and expenses for the year 1,540,000 Equity holders 1,418,000 Minority interests 122,000 Total 1,540,000
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Ex 5.2 Part c)
Extract from consolidated retained earnings note for the year ended 31 December 20X5 Consolidated ($) 1,280,000 1,418,000 (800,000) 1,898,000

Retained earnings at 1.1.X5 Profit the year attributable to the equity holders Dividend Paid Retained earnings at 31.1.X5

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Ex 5.2 Part c)
A Ltd Consolidated balance sheet as at 31 December 20X5 Consolidated ($) 1,600,000 1,418,000 3,018,000 462,000 3,480,000

Equity Share capital Retained earnings Total equity attributable to equity holder of Yarra Park Ltd Minority interests Total equity

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Ex 5.2 Part d) 1a)

Acquisition Analysis for A Ltd Using the Partial method for goodwill $000s Cost of acquisition of investment Purchase consideration Carrying amount of identifiable net assets and contingent liabilities at date of acquisition represented by: Share Capital General Reserve Retained earnings Fair Value Adjustments FV of Identifiable net assets Interest acquired Goodwill on acquisition $000s 2,000

1,000 100 800 350 2,250 80%

1800 200
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Ex 5.2 Part d) 2a)

Acquisition Analysis for A Ltd Using the Full method for goodwill $000s Cost of acquisition of investment Purchase consideration Fair value of NCI Carrying amount of identifiable net assets and contingent liabilities at date of acquisition represented by: Share capital General reserve Retained earnings FV Adjustment Identifiable net assets & Cl acquired at fair value Goodwill Goodwill attributable to PI Interest acquired in FV of identifiable net assets (80% * 2,250) Less consideration paid PI Goodwill on acquisition Goodwill attributable to NCI Total goodwill Less PI goodwill NCI attributable Goodwill 2,000 480 $000s

2,480

1,000 100 800 350

(2,250) 230

1,800 2,000 200 230 200

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Ex 5.2 Part d) 1b)

NCI in equity:
NCI memorandum account B Ltd $ a) Retained earnings at 1.1.X5 Post-acquisition movement in opening retained earnings Retained earnings at 1.1.X5 NCI @ 20% b) Profit for the year NCI @ 20% c) Dividend Paid NCI @ 20% d) Share Capital NCI @ 20% e) General Reserve NCI @ 20% 800,000 0 800,000 160,000 610,000 122,000 (550,000) (110,000) 1,000,000 200,000 100,000 20,000 NCI $

f) FV Adjustments on consolidation NCI @ 20% Total equities attributable to B Ltd Total NCI @ 20%

350,000 70,000

2,310,000 462,000

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Ex 5.2 Part d) 2b)

Remember: under the full method our recognition of goodwill
Recognition of Goodwill under full method DR Goodwill CR FV Adjustment $ 230,000 $ 230,000

AND
ii) Elimination of parents investment DR Share Capital DR Retained Earnings at 1.1.X5 DR General Reserve DR FV Adjustment + PI goodwill CR Investment in B Ltd $ 800,000 $ 640,000 $ 80,000 $ 480,000 $2,000,000

Therefore, our FV balance = 350K + 230K 480K = 100K The amount of FV that is to be allocated to NCI = 20% x 350K + NCI goodwill (30K) = 100K

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Ex 5.2 Part d) 2b)

NCI memorandum account B Ltd $ a) Retained earnings at 1.1.X5 Post-acquisition movement in opening retained earnings Retained earnings at 1.1.X5 NCI @ 20% b) Profit for the year NCI @ 20% c) Dividend Paid NCI @ 20% d) Share Capital NCI @ 20% e) General Reserve NCI @ 20% FV Adjustments on consolidation f) + PI goodwill (200K) NCI @ 20% + NCI goodwill (30K) Total equities attributable to B Ltd Total NCI @ 20% 800,000 0 800,000 160,000 610,000 122,000 (550,000) (110,000) 1,000,000 200,000 100,000 20,000 NCI $

550,000 100,000

2,510,000 492,000

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