Week 6: Partly owned subsidiaries: Direct non-controlling

interest (DNCI) and brief introduction to indirect non-

controlling interests

Lecture objectives
- Describe the nature of non-controlling interests (NCI), direct NCI in
particular
- Explain the components of total NCI
- Explain allocation of consolidated equities between NCI and parent
interest or controlling interest (PI)
- Explain effect of intra-group transactions on calculation of NCI
- Understand definition of goodwill AASB3
- For partly-owned subsidiaries, explain full method versus partial
method of goodwill
- Calculate NCI using (i) residual interest method and (ii) adjusting
consolidation journal entries method where parent has direct ownership
interest
- Prepare consolidated comprehensive income statement, statement of
changes in equity and statement of financial position (or balance sheet)
with disclosures of NCI
- Brief overview of indirect NCI

Introduction: the nature of NCI how does it emerge?
- If parent entity directly or indirectly derives ALL the benefits from the
ordinary voting share capital of another entity then this subsidiary is
wholly owned
- Recall AASB10 is premised upon control (not ownership) to define the
parent-subsidiary relationship
- Therefore it is possible for a parent to hold less than 100% of shares
(even less than 50%) in another entity (the partly-owned subsidiary) and
the subsidiary will be included in the consolidation
- Partly owned refers to share ownership in the subsidiary when it is less
than 100%; and we assume control was assessed to exist regardless of
<100% ownership
- For a partly owned subsidiary, the parent controls the subsidiary but
owns less than 100%. The ownership interests in the group include:
o The parent entity as shareholder
o The non-
controlling shareholders
Note that we call the 30% the
direct NCI and the 70%
parent shareholders equity
(parent interest)
If there are more than one
partly owned subsidiary in
the group, we aggregate the
NCI

The alternative concepts of consolidation
Recall AASB 10 follows the entity concept and requires preparation of
consolidated financial statements for the group irrespective of whether it
comprises wholly owned or partly owned subsidiaries.
So a natural consequence of the AASB 10 entity concept is that equity of the
economic entity comprises parent entity interest (PI) and direct NCI
The entity focus means that consolidated financial statements are presented for
the group entity.

The alternative concepts of consolidation: three approaches
Entity concept (AASB10: the group entity it does not matter what proportion of
subsidiarys equity that parent holds; as long as parent controls the subsidiary, it
is consolidated in full and NCI included in the group)
Parent concept full consolidation except the NCI is treated as a liability by the
parent
Proprietary concept - uses proportional consolidation so that I parent control
60% of voting shares of subsidiary, it would consolidate only 60% of subsidiarys
income, expense, assets and liabilities (so there is no NCI)


The consolidation process we have learnt so far does not change significantly
when ownership is <100% (recall control is our criterion to define the group)
So we have to determine a meaningful split between PI and Direct NCI of:
- total group equity and
- total group profit
3. Disclosure & measurement: the allocation of consolidated
equities between NCI and PI
Brief summary of consolidation process:
1. Obtain trial balances of parent and subsidiary
2. Line by line aggregation in full on a consolidation worksheet
3. Do consolidation adjustments/eliminations in full to determine
consolidated group revenues, expenses, assets, liabilities and equity
4. Examine group equity and group profit and apply a consistent rule to
determine a reasonable split of these two consolidated amounts between
direct NCI and PI for disclosure in the financial statements
5. The consolidation adjustment journal entries we already know alter only
if the parent owns <100%
Some implication when P owns <100%
1. When, at acquisition date, we eliminate Subs OE against the cost of the
investment in S (to P), we only eliminate Ps share of Subs share capital,
retaind earnings, reserves (etc) i.e. the DNCI in those items is not
eliminated
2. When we eliminate dividends subsequently paid by Subs we only
eliminate Ps share
3. Intra group transactions
a. Note when we allocate group OE to DNCI we are effectively group
numbers between PI & DNCI. Group numbers may include
Consolidation Journal entries e.g. unrealised profits/gains
resident in subsidiarys books.
b. Because the DNCI is in S only, we base our calculations on
Subsidiarys numbers (the Subs column of the CWS) but we
modify them on the basis of the Consolidation Journal entries
applicable to Subsidiary. That is, to calculate NCI, we need to
determine NCI contribution to profit and equity of the group, AND
also make adjustments for any unrealised profits/losses that affect
subsidiary
AASB127:
(4) Non-controlling interest is the equity in a subsidiary not attributable, directly
or indirectly, to a parent NCI must be separately identified including 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.
(18)c) 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; and
(ii) the NCIs share of changes in equity since the date of the combination

Measure and disclosure of NCI (AASB127.27): 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. Non-controlling interest
in the profit or the loss of the group shall also be separately disclosed. That is
AASB 127 does not give us much in the way of a precise NCI calculation method
there is no stipulated rule to calculate how much of total group equity and profit
is reasonably attributable to interests other than PI

AASB101 presentation of financial statements requires allocation of NCI in
subsidiary to be disclosed in groups financial statement as follows:
- NCI in equity (equity section of consolidated balance sheet)
- NCI in profit or loss (on face of consolidated income statement)
- NCI in total income and expense for the period (on face of consolidated
statement of changes in equity)
Our starting point is the equity and profits of the subsidiary entity (as the
NCI only can only be attributed with a share in the subsidiarys result; not
the parents)

Note that even though NCI are aggregated for all party owned subsidiaries, need
split-up of closing retained earnings across opening RE, contribution to group
profit or loss and appropriations such as dividends and transfer for the period.

To summarise, need to measure the NCIs share of the partly owned
subsidiaries:
o Share capital
o Reserves
o Contributed opening retained earnings to the group
o Contributed profit or loss for the period to the group
o Dividend distribution for the current period, and
o Transfers to or from reserves for the current period
The objective is to show much of the net assets of the group is
represented by shareholders equity balances attributable to the NCI and
PI

Different methods to calculate the NCI:
1. On winding-up
2. Ownership basis of equities in parent and subsidiary
3. Residual interest method
4. Consolidation adjusting journal entries to allocate the NCI
Note: we will focus only on the residual interest method

Residual interest method: treat PI as the residual interest after deducting NCI
using final column from consolidation worksheet to pick up share capital, profit
for the period, opening RE and dividends etc.,
- these calculations done in separate allocation worksheet referred to as
the memorandum account
- then, to prepare consolidated financial statements, use consolidation
worksheet plus data from memorandum account
- textbook says the residual interest method is more efficient

Overview step by step process of doing the memorandum
account
1. Detail components of subsidiarys equity e.g. profit for year, opening
retained earnings, closing retained earnings, issued capital
2. Insert balances per the subsidiarys financial statements or subs column
from the Consolidated Work Sheet (CWS)
3. Adjust for upstream unrealised profit and depreciation adjustments (no
need to adjust for downstream transactions)
4. Add and then multiply by NCI%






The effect of intra-group transactions and the allocation process
Equity balances of subsidiary used in calculation of NCI should be those to
prepare consolidated financial statements (calculation of NCI focuses on
equity and not revenue, expenses, assets and liabilities)
Because consolidated figures exclude intra-group transactions, some
figures may differ from those in subsidiarys records
o We need to adjust for upstream profit ONLY because the
underlying profit is in subsidiary account
o (downstream profit is contained in parents account and we are
not interested in that)

Lets consider an example-page 315 of the textbook



Effect of allocation of NCI on goodwill and impairment loss
AASB 3 (19) allows a choice between measuring non-controlling interests using
either the partial method or the full method of goodwill:
1. Partial method: prior to 2009, only record purchased goodwill by parent
on consolidation
2. Full or 100% goodwill method: goodwill now calculated as the excess of
the sum of the consideration transferred and the fair value of the NCI, of
the fair value of the identifiable net assets of the subsidiary acquired.
The above method of calculating goodwill is called the full method because it
recognised both NCI & PI interest in goodwill; in contrast to the former partial
method which only recognised PI interest in goodwill






Acquisition analysis using the partial method for goodwill ex
5.4 (a)



Exercise 5.4 (b) full method of goodwill

















6. Indirect non-controlling interests
Until now, considered only a group compromising the parent and a single
(partly) owned subsidiary
If we consider the situation where the group comprises a parent and more than
one level of subsidiaries (either fully or partly owned), we introduce indirect
NCI. That is, indirect NCI arise because one subsidiary (level one) holds shares in
another subsidiary (level 2). The parent entity has an indirect interest in this
second level of subsidiaries; and the non-controlling interest has an indirect
interest.
This gives rise to the potential ownership interests being either:
o Parent direct ownership
o Parent indirect ownership
o Non-controlling direct ownership
o Non-controlling indirect ownership