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CORPORATE ACCOUNTING
Lecture 6 Accounting for non-controlling interests

Objectives of this lecture

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Understand the nature of non-controlling interests Understand why and what we calculate for noncontrolling interests

Understand how to calculate goodwill (or gain on bargain purchase) in the presence of noncontrolling interests
Prepare consolidated statements that include disclosures of non-controlling interest and the parent entity interest

References
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Text Chapter 5 AASB 10/AASB 127 Consolidated Financial Statements AASB 3 Business Combinations AASB 12 Disclosure of Interests in Other Entities AASB 101 Presentation of Financial Statements

AASB 136 Impairment of Assets

AASB 132 Financial Instruments : Presentation

Contents
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1. 2. 3. 4. 5. 6.

What are Non-Controlling Interests (NCI) Disclosure Requirements Calculation of NCI

NCI and Goodwill

Effect on Goodwill Impairment Losses NCI and adjustments for inter-entity transactions

1. Non-controlling interests (NCI)

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A parent entity may have a subsidiary in which the ownership interest is less than 100% (a partly owned subsidiary) Non-controlling interest is defined in AASB 10 as: the equity in a subsidiary not attributable, directly or indirectly, to a parent Generally, most subsidiaries are wholly owned Wesfarmers owns most of its subsidiaries 100% But we must know the consolidation techniques for the situation where there is an NCI

Non-controlling interests
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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 subsidiarys profits, dividend payments, and share capital and reserves
As part of the consolidation process, we need to work out the amount to be attributed to the non-controlling interests

2. Disclosure requirements
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AASB 10 (para. 22) states:

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
Paragraph B94 and B95 requires that the entity attribute the profit or loss of each component of other comprehensive income be attributed to the owners of the parent and to the non-controlling interests.

Para. 12 of AASB 12 requires disclosure the profit or loss allocated to the NCI and the accumulated NCI at the end of the reporting period.

Paragraph B10 of AASB 12 requires disclosure of dividends paid to the NCI plus summarised financial information about the assets, liabilities, profit or loss and cash flows.

This is all subject to the NCI being material to the reporting entity

Refer to the accounts of Wesfarmers. There is no disclosure of NCI yet you can see there are subsidiary entities not 100% owned. Why might this be?

Disclosure (cont.)
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AASB 101 Presentation of Financial Statements supports the disclosures required by AASB 10 AASB 101.54(r) requires separate disclosure of the Parent Interest (PI) in issued capital and reserves

Therefore, to sum up.....

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We need to calculate the NCIs share in the subsidiarys:

issued

capital retained earnings

reserves opening profit

(or loss) for the period

dividend

distribution for the period

to or from reserves for the period

transfers

3. Calculating non-controlling interests

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Non-controlling interests are identified (calculated) for disclosure purposes but not eliminated as part of the consolidation process The parents investment in the subsidiary is now eliminated only against the parents share of the subsidiarys equity at acquisition date

4. NCI and goodwill

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AASB 3 gives a choice in the measurement of the non-controlling interest Specifically, paragraphs 18 and 19 of AASB 3 state:
[para. 18] The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values
[para. 19] For each business combination, the acquirer shall measure any non-controlling interest in the acquiree either at fair value or at the noncontrolling interests proportionate share of the acquirees identifiable net assets

NCI and goodwill (cont.)

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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 NCIs share of goodwill will be calculated This will be in addition to the amount of goodwill allocated to the parent entitys interest This approach is often referred to as the full goodwill method

NCI and goodwill (cont.)

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By contrast, if the parent entity elects to account for the non-controlling interest via the second option in AASB 3then no additional goodwill will be calculated as being attributable to the non-controlling interests This approach represents the approach that was required prior to the recent amendments

This is often referred to as the partial or proportionate interest goodwill method

Examples of both methods

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Example 1: partial goodwill method see text page 298 Example 2: full goodwill method see text page 305

Proportionate Interest Goodwill Method (page 298)

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Yarra Park acquired 75% (and control) of Corio Ltd on 1/1/X0 Pre-acquisition Equities:
100% 75% 2,625,000 1,200,000 525,000 4,350,000 5,000,000 650,000 25% 875,000 400,000 175,000 1,450,000 3,500,000 1,600,000 700,000 5,800,000

Share Capital Retained Earnings 1/1/x0 FVAR (land) Consideration Goodwill

Additional information
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Corio Ltd leases facilities from Yarra Park Ltd for $120,000 p.a. Corios interest revenue from Yarra Park Ltd is $65,000

Corios land carried at $1,000,000 below fair value

No impairment of goodwill to date Dividends $345,000 Tax rate is 30%

Consolidation journal entries:

Date
31/12/x2
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Particulars
Land Fair Value Adjustment Deferred Tax Liability

Debit
1,000,000

Credit
700,000 300,000

Revaluation of land to FV
31/12/x2 Share Capital Fair Value Adjustment Retained Earnings Goodwill Investment in Corio Ltd
Elimination of Investment account (75%)

2,625,000 525,000 1,200,000 650,000 5,000,000

31/12/x2

Dividend Revenue Dividend Paid

345,000 345,000

Elimination of inter-entity dividend

Consolidation journal entries (cont.):

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Date

Particulars

Debit

Credit

31/12/x2 Lease Revenue

Other Expenses

120,000
120,000

Elimination of inter-company rental

31/12/x2 Interest Revenue
Other Expenses

65,000
65,000

Elimination of inter-company rental

31/12/x2 Payable to Corio Ltd Receivable from Yarra Park Ltd 670,000 670,000

Elimination of inter-company receivable/payable

Consolidation journal entries:

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Date

Particulars

Debit

Credit

31/12/x2

Share Capital
Fair Value Adjustment Retained Earnings 1/1/X2 NCI

875,000
175,000 400,000 1,450,000

Recognition of NCI in preacquisition equities

31/12/x2 Retained Earnings 1/1/X2 NCI 130,000 130,000

Allocation to NCI post-acquisition share of increase in RE

Consolidation journal entries:

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Date

Particulars NCI

Debit

Credit 217,500

31/12/x2 NCI Share of Current Profit

217,500

Allocation to NCI of share of profit for the year

31/12/x2 NCI Dividend Paid 115,000 115,000

Allocation to NCI of current dividend

NCI memorandum account

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Corio Ltd Retained Earnings 1/1/X0 Post-acqn increase Retained Earnings 1/1/X2 $ 1,600,000 520,000 2,120,000 870,000

NCI $

NCI @ 25% NCI @ 25%

530,000 217,500 (460,000) (115,000) 3,500,000 875,000 700,000 175,000 1,682,500

Profit for the year Dividend Paid

NCI @ 25% NCI @ 25% NCI @ 25%

TOTAL NCI

Issued Capital

Fair Value Adjustment

100% goodwill method

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Same data as for previous example, except that the fair value of the NCI at the control date is given as $1,500,000

So where does this $1,500,000 come from? In this example it is simply a given, but we should look at AASB 3 for guidance

AASB 3 paragraph B44

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This Standard allows the acquirer to measure a noncontrolling interest in the acquiree at its fair value at the acquisition date. Sometimes an acquirer will be able to measure the acquisition-date fair value of a non-controlling interest on the basis of active market prices for the equity shares not held by the acquirer. In other situations, however, an active market price for the equity shares will not be available. In those situations, the acquirer would measure the fair value of the non-controlling interest using other valuation techniques.

Consolidation journal entries:

Date
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Particulars Land Fair Value Adjustment

Debit 1,000,000

Credit 700,000

31/12/x2

Deferred Tax Liability

300,000
2,625,000 525,000 1,200,000 700,000 50,000 5,000,000 345,000 345,000

Revaluation of land to FV
31/12/x2 Share Capital Fair Value Adjustment Retained Earnings Goodwill NCI equity Investment in Corio Ltd

Elimination of Investment account

31/12/x2 Dividend Revenue Dividend Paid

Elimination of inter-entity dividend

Consolidation journal entries:

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Date

Particulars Other Expenses

Debit

Credit 120,000

31/12/x2 Lease Revenue

120,000

Elimination of inter-company rental

31/12/x2 Interest Revenue Other Expenses 65,000 65,000

Elimination of inter-company rental

31/12/x2 Payable to Corio Ltd Receivable from Yarra Park Ltd 670,000 670,000

Elimination of inter-company receivable/payable

Consolidation journal entries:

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Date

Particulars Fair Value Adjustment Retained Earnings 1/1/X2 NCI

Debit 875,000 175,000 400,000

Credit

31/12/x2 Share Capital

1,450,000

Recognition of NCI in preacquisition equities

31/12/x2 Retained Earnings 1/1/X2 NCI 130,000 130,000

Allocation to NCI post-acquisition share of increase in RE

Consolidation journal entries:

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Date

Particulars NCI

Debit

Credit 217,500

31/12/x2 NCI Share of Current Profit

217,500

Allocation to NCI of share of profit for the year

31/12/x2 NCI Dividend Paid 115,000 115,000

Allocation to NCI of current dividend

NCI memorandum account

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Corio Ltd
Retained Earnings 1/1/X0 Post-acqn increase Retained Earnings 1/1/X2

NCI
$

NCI @ 25% Profit for the year NCI @ 25%

Dividend Paid

$ 1,600,000 520,000 2,120,000 870,000

530,000 217,500 (460,000) (115,000) 3,500,000 875,000 700,000 50,000 175,000 50,000 1,732,500

NCI @ 25% NCI @ 25% NCI @ 25%

Issued Capital

Fair Value Adjustment NCI Equity TOTAL NCI

5. Effect on goodwill and impairment losses

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If using the proportionate method, the carrying amount of goodwill is to be grossed up so that the NCI in goodwill is included with the PI interest in goodwill and that 100% of the recoverable assets of the subsidiary can be used in the recoverable amount test The impairment losses are then apportioned so that only the PI in the impairment loss is recorded in the consolidated accounts See AASB 136 example 7A

Effect on goodwill and impairment losses (cont.)

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If the 100% goodwill method is used Any related impairment losses are split between the PI and the NCI on the same proportional basis as the profit etc. is split See AASB 136 example 7B

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6. Adjustments for intra-group transactions

AASB 127 Paragraph 20 stipulates that:

Intragroup balances, transactions, income and expenses shall be eliminated in full

The requirement to eliminate the effects of intra-group transactions holds whether or not there are non-controlling interests Because if control exists, it is complete, it is control over 100% of the assets and liabilities

Intra-group payment of dividends

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The consolidation journal entries will eliminate the proportion of the dividends that relates to the parent entitys entitlement The non-controlling interests 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 non-controlling interests represent flows away from the economic entity

Intra-group sale of inventory

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When we calculate the NCIs share of the profits of the subsidiary, we need to calculate the subsidiarys profit after eliminating income and expenses of the subsidiary that are unrealised from the economic entitys perspective So, adjustments to the calculation of the NCIs share of the subsidiarys 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 (an upstream transaction)

Intra-group sale of inventory (cont.)

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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. So, in that financial period we need to adjust the NCIs share of Opening Retained Earnings (by reducing it) and provide a corresponding increase in the NCIs share of that periods profits

Intra-group sale of non-current assets

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If a subsidiary sells a non-current asset (e.g., an item of property, plant and equipment) to another entity within the group, the gain or loss on sale is not recognised from the groups perspective and the NCIs share of profits will need to be adjusted
The gain or loss is realised across the life of the asset as the asset is used up (depreciated/amortised).

Intra-group services and interest payments

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No adjustments are necessary for these in calculating the NCI in the subsidiarys profit Text page 314 if consolidation adjusting journal entries only affect specific accounts in the consolidated statement of comprehensive income and have no effect on consolidated net assets, they should be ignored in the NCI allocation

Consolidation adjustments are of course still required

Intra-group transactions that create gains or losses for the parent entity
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When calculating NCI, we do not need to adjust for gains or losses in the parent entitys accounts that are unrealised
It is only the unrealised intra-group profits or losses accruing to the subsidiary that we need to take into our calculation of NCI